Texas has long been one of the few states which recognizes a legal concept called an “absolute assignment of rents.” This legal structure gives a lender ownership of its borrower’s rents, while the borrowing landlord only holds a license to receive those rents. The borrower’s license is subject to performance under the note, and can be revoked by the lender upon an event of default. Texas courts have upheld the absolute assignment of rents, even though most states have rejected the absolute assignment structure as a legal fiction.

Well, the Texas legislature agrees with the majority of states and has just eliminated the absolute assignment of rents.

New Chapter 64 of the Texas Property Code radically changes the way an assignment of rents works in Texas. The law was signed by Governor Perry in June and was effective immediately upon enactment. It applies to all outstanding assignments, regardless of when such assignment was made.

Some key features of the new law include:

1. All assignments of rents are now “collateral” assignments, meaning that the rents are pledged as security for a loan and not granted to the lender outright.

2. Every commercial deed of trust filed after the statute’s enactment is interpreted as including an assignment of rents, whether or not such document expressly includes an assignment.

3. The assignment of rents is perfected for priority purposes upon the recording of the underlying deed of trust.

The statute also expressly sets forth the procedures by which payments are to be made in the event of a default. These provisions are likely the most relevent aspects of the new law to landlords and tenants. Upon a default, the lender must give notice to both the landlord and tenant of its right to receive rents. Once notice has been delivered, the lender is entitled to all unaccrued rent under the lease. That means that (i) the landlord must pay to the lender all future/advance rent received, but not accrued, and (ii) tenant must direct its payments to the lender going forward, instead of to the landlord.

If a commercial tenant directs payment to the landlord after it has received notice under the statute, the tenant will still be liable for making the scheduled payment to the lender. Thus, tenants must be careful to comply with the notice, or they risk being responsible for double rent. Likewise, if a borrower/landlord receives payments which should be directed to the lender under the notice, the landlord must forward such payments to the lender.

These points are just the tip of the iceberg when evaluating the ins-and-outs of the new statute. Much of how the law will affect parties to commercial leases will be revealed as the statute is interpreted by Texas courts. What is clear, however, is that lenders, landlords and tenants in Texas will have to relearn everything they know about assignments of rents – and need to do so now.

I am not an accountant, and I did not stay at a Holiday Inn Express last night, but I want to highlight how some proposed changes to the FASB (Financial Accounting Standards Board) regulations could affect the commercial leasing market.

The proposed changes, if passed, would affect the way tenants reflect their lease obligations in accounting statements.  From my understanding, instead of accounting for payments as costs, the future payment obligations under a lease would be considered liabilities of the tenant.  Thus, a five-year lease becomes a five-year liability of the company, instead of a monthly expense.  Furthermore, it appears that option terms which are likely to be exercised will only extend the liability.

The net effect could be that tenants want to avoid extended liabilities that will clog their balance sheet and reduce earnings.  Instead, shorter leases could become more common, and thus result in higher tenant turn over.

I will defer any further analysis to an article I recently discovered on the issue by the Vice President of Development for Opus Development Corporation.  You can find the article here.

Many companies are looking for ways to reduce costs associated with their leases.  One common way to accomplish this is to reduce the lease footprint, either by seeking a reduction amendment to the lease or by subleasing a portion of one’s space.  With leasing activity just starting to rebound, many landlords will be reluctant to reduce a tenant’s space, as new tenants are difficult to find.  This combination of factors makes subleasing more attractive to both the tenant and landlord.

As a tenant, there are a number of items you must consider when negotiating a sublease.  Keep in mind that a sublease does not only affect the parties to that agreement, but also the ultimate landlord.  Below is a list of three key considerations all parties should keep in mind.

1. What does the lease have to say? Most commercial leases will directly address a tenant’s ability to sublease its space to third parties.  Landlords may either completely forbid the practice or require that the tenant seek approval of any proposed sublease.  It is important that a tenant gives careful consideration to these provisions so as to avoid going into default under the master lease.

2. Is the subtenant’s proposed use permitted by the lease? Even if the lease permits the subleasing of space, a proposed sublease may still cause the tenant to default on the master lease.  Most leases, particularly in the retail context, have a use clause that specifies what types of business may be carried out in the space.  Furthermore, many leases will list prohibited uses (often based upon exclusive use provisions in the leases of other tenants in the development).  For instance, say a sportsclub wanted to sublease space to a juicebar in its facility.  That tenant must both evaluate whether its allowed use provision would permit such a practice and whether a juicebar is prohibited from leasing space in the center.  Imagine if the use provision read, “Health club facility featuring athletic classes, weight training, sports and fitness activities.”  That use provision does not provide for the sale of juice beverages on the premises.  Further imagine that a Jamba Juice is located two doors down in the shopping center.  It is likely that Jamba Juice has an exclusive use provision that prohibits the landlord from leasing space to competing juicebars.  It is essential that a tenant be mindful of these potential issues before commiting to a sublease .

3. Who pays for modification to the premises? When a tenant enters into a lease, one primary negotiation point is the tenant’s improvement allowance to customize the space to its needs.  Landlords are in the business of entering into new leases and their business model and leasing rates are built to accomodate the costs associated with tenant finish-outs.  However, when a tenant enters into a sublease with a subtenant, the roles are less defined.  Most tenants are not positioned to front build-out costs to a subtenant.  A tenant considering a sublease should consider these costs and its preferred method of addressing construction before seeking a subtenant for its space.  Related to construction, a tenant must also consider how a subtenant’s construction will affect the business operations of the tenant in the space.  Noise, congestion and debris/dust can have a material effect on the productivity of employees or the experience of a retail customer. 

The above list captures just three of the dozens of issues specific to subleases.  The parties have unique criteria for their negotiations, as much is determined by the underlying lease.  While subleasing may be the best path to reducing costs or providing new services to customers, it requires the cooperation of three parties (the landlord, tenant and subtenant) to ensure the sublease’s success.

A commercial lease in which the space leased is a portion of a larger office building, shopping center, or industrial complex will undoubtedly address the attribution of common area costs.  Those costs, generally referred as Common Area Maintenance or “CAM” costs, will most often be calculated by the landlord in gross, then allocated to each tenant based upon its pro rata share of the rentable space within the building or complex.

The calculation and allocation of CAM can be complicated by the differences which will arise in the negotiation of different tenant leases.  As an example, one tenant may successfully negotiate a more limited definition of which costs are included in the CAM calculation than another tenant.  Also, it is possible that a tenant may elect to be specially assessed certain costs which would generally be allocated throughout the building (such as having electricity metered specifically for its space).

The complications which arise from the calculation and allocation of CAM charges lead many tenants to seek a right to audit the landlord’s efforts.  The tenant’s motivation is easy to understand: if the landlord is calculating this difficult formula which determines how much money the tenant must pay the landlord, the tenant wants to be sure its payment is fair under the terms of its lease. 

Like everything else in lease negotiations, whether or not a landlord will grant an audit right is driven by the tenant’s leverage.  A large tenant paying a favorable rent rate will be much more likely to get its requested audit right than the small tenant with a bargain rent rate.  Landlords will need to consider not only the possible fallout of an audit revealing that CAM was miscalculated, but also the added effort and time needed to comply with the audit provision.

Once the landlord agrees to grant an audit right to its tenant, there are considerations within the provision which must be addressed.  Below is a list of the key items which will often prove to be negotiating points in the audit provision.

1. Timing.  Until the CAM determination has been deemed final under the terms of the lease, the landlord has a potential liability tied to that calculation.  Therefore, the landlord should limit the time period in which the tenant may object to and audit CAM.  Most landlords would be best served by requiring an objection to CAM within 6 months of its determination, so any dispute can be resolved before the next year’s determination occurs.

2. Scope. Any audit should limited to the most recent year’s determination.  While tenant may be motivated to look back several years to recapture as much overpaid CAM as possible, the effect of such an audit on the landlord’s accounting efforts would be very detrimental.  By limiting the scope of the audit, landlord can move forward from year to year without the fear of having to re-address past earnings or costs.

3. Confidentiality. Any tenant audit should be held in strict confidence, with the tenant obligated to sign a separate confidentiality agreement.  The tenant should only be concerned with the operation of its lease, and therefore has no motivation to avoid confidentiality.  The landlord could be severely damaged by news of any faulty CAM accounting, or could face the added administrative headache of multiple audits if other tenants discovered that their CAM calculations may be incorrect.

4. Dispute resolution. If tenant’s audit of landlord’s records results in a different calculation for tenant’s CAM liability, a mechanism must be in place to resolve the parties’ differences.  The most common method of resolution, if the parties cannot agree on an acceptable CAM figure, is to employ a mutually acceptable third-party accountant to determine the proper figure.  Both parties should agree in advance that any determination by the third-party accountant shall be final.

5. Costs. An audit provision should indicate which party will bear the cost of the audit.  Generally, the parties will bear the cost of their own audits.  However, it is common for the landlord to require that the tenant pay landlord’s costs if the CAM determination is not overstated by more than a certain percentage (usually between 3 and 5 percent).  This provision is useful to dissuade a tenant from “nickel and diming” the landlord on CAM annually and preserves the audit right for only those instances where landlord has materially erred.

6. Contingency contractors. A tenant may turn to an outside professional to conduct its audit.  Generally, this is not a problem, as the accounting expertise necessary to audit landlord’s CAM records would likely be outside the abilities of many tenants.  However, landlords should protect themselves against those contractors who operate on a contingency fee basis.  Many tenant auditors will seek payment as a percentage of landlord’s overstated CAM.  While attractive to tenants who wish to minimize the risk of paying an auditor with little return, these contractors can be a landlord’s worst nightmare.  Contingency auditors have been known to greatly inflate any overstatement by landlord, questioning every aspect of landlord’s operation of the building or center.  A provision which prohibits any contingency-based contractor should be employed by all landlords.

Landlords and tenants should share the goal of the most accurate CAM calculation possible.  An audit provision may provide a valued tenant the added security of knowing it may challenge landlord’s original determination of CAM.  If landlords carefully consider the numbered items above, including an audit provision in its leases need not be a feared practice.

Have you ever walked by an empty storefront in a popular shopping center, mall, or retail operation and thought, “I can’t believe that space can’t get rented?”  Well, it is possible that a lease is in place, but no one is operating in the space.  The tenant may have simply “gone dark.”

A go dark provision is a tenant-driven term to a retail lease by which the tenant may elect to cease operations in its leased space, but continues to pay rent to landlord.  Therefore, the net economic effect of the provision is that the tenant continues to pay money for a location that is not generating any income.  It sounds like a poor business model, doesn’t it?  However, there are a number of reasons why tenants covet this term in their retail leases.

Why Tenants Want a Go Dark Option

The ability to go dark gives tenants, particularly larger tenants with national operations, maximum flexibility when managing their broader business.  Below are some examples of the flexibility provided by a go dark term:

1. Cut your loses.  In the event the location in question is not profitable for a tenant, the tenant may find that merely paying rent (and not paying to stock inventory, not paying salary and benefits to employees, not paying to advertise the location, etc.) minimizes the loss attributable to an unprofitable store.

2. Block you competition. If a tenant is in a particularly attractive retail location, but internal issues prevent it from operating profitably, that tenant may want to lock down the space and development (possibly through an exclusive use clause) in order to keep a competitor from moving in.  It is the same concept that keeps Tab soda on grocery market shelves: sure, nobody drinks it, but at least Pepsi isn’t getting that shelf space.

3. Temporary closure.  Closing a store for a period of months would undoubtedly run afoul of most leases, leading to a default by tenant.  Therefore, if a tenant requires a restructuring, rebranding, or other activity that would lead to closing the store for an extended period of time, but the tenant intends to reopen in the future, a go dark provision would preserve the time, cost, and advantage already utilized in obtaining the current space.

Why Landlords Dislike Go Dark Provisions

As stated above, go dark provisions are tenant-driven.  You won’t find them in landlord lease forms, and most landlords are very hesitant to agree to a tenant’s right to go dark.

Below is a list of considerations and concerns a landlord should evaluate before agreeing to include a go dark clause in its lease:

1. Effect on the development.  If the tenant in question is an anchor tenant, its operations are essential to the success of the development.  Smaller tenants seek certain anchors when chosing their retail space.  Therefore, if the anchor goes dark, other tenants might start complaining, and future tenants might be scared off.

2. Percentage rent. Landlords seek rent from their tenants in several forms.  For successful tenants, percentage rent (calculated as a percentage of tenant’s profits) can be a significant source of landlord’s income from the property.  Obviously, if the tenant ceases operations, percentage rent is no longer available from that tenant.  Granted, if a tenant is doing well enough to pay percentage rent, it is unlikely to go dark.

3. Location of tenant. Tenants with higher visibility should be less attractive candidates for go dark provisions.  A shopping center is not well served having vacant storefronts fronting major roadways.  An interior tenant might not put such a black mark on the development by going dark.

4. Exclusivity. As mentioned above, a tenant’s decision to go dark, coupled with an exclusive use clause, could prevent landlord from offering a certain type of store to its customers.

5. Default avoidance. A tenant that becomes aware that it might default under the lease, for whatever reason, may choose to go dark as a means to prevent its default.  Tenant’s election to go dark prevents landlord from exercising the full scope of remedies available to it in the event of a default.

As you can see there are a number of negatives to granting a go dark right to a tenant.  Those negatives can amplify given the size and influence of the tenant in question.

Landlord Solutions

If a tenant insists upon a go dark provision (and the landlord insists on leasing to the tenant), there are a number of options available to a landlord to protect itself from some of the above-mentioned risks.

1. Recapture. This is probably the most attractive and most commonly used landlord protection against a tenant’s decision to go dark.  A recapture clause permits the landlord to terminate a lease in which the tenant has gone dark, with no default to either party.  This is useful when the landlord identifies an alternate tenant for the space.  Also, landlord can avoid tenant’s efforts to block competition, as tenant’s exclusive use provision ends upon recapture of the space.

2. Relocation. A relocation provision could allow a landlord to move a visible tenant that has gone dark to a less visible portion of the shopping center, thus reducing the effect of its closure.

3. Notice. Requiring the tenant to give advance written notice of its intent to go dark (say 90 days) allows the landlord time to react to the situation by looking for a replacement tenant or seeking to exercise another option under the lease.  Also, requiring notice prevents tenant from going dark merely as a means to avoid default (unless such default is foreseeable months in advance).

4. One-time right. A tenant should not be able to go dark repeatedly, only to reopen later.  The inconsistency created by repeated dark periods would likely impact landlord’s operations with other tenants and confuse patrons of the subject store.  Thus, landlords should limit the right to go dark to a single occurrence available to tenant.

Conclusion

A go dark provision is a useful tool for large retail tenants to manage their multiple stores.  However, landlords must be careful that tenant’s flexibility is limited so as not to adversely impact the development at large.

A recurring issue in the leases I negotiate for my clients is the back-and-forth surrounding the delivery of notice for a tenant’s monetary default.  There is an easy fix to the satisfy the competing interests of tenants and landlords, but it always seems that the parties need to conduct a three-step dance to reach this logical conclusion.

Step 1: The Standard Provision

Most landlord-drafted leases will provide that a tenant is in default if it fails to timely pay rent (or other monies owed).  Some landlords will concede that timely payment is within 5-10 days of when due, giving the tenant a window in which to make payment before finding itself in default of the lease.  However, even with this window, this is not a very tenant-friendly provision.

Imagine the scenarios in which tenant unknowingly misses a payment deadline: 

• The check is lost in the mail. 
• Two tenant representatives each believe the other has paid the rent that month. 
• A bank error causes the check to bounce. 
• An accounting error leaves the tenant with insufficient funds. 

The list is endless. These ”oops” defaults are not necessarily anyone’s fault.  They are merely human error, and landlords and tenants are both, ultimately, human.

Step 2: Tenant’s Notice Request

To address these concerns, I typically recommend to my tenant clients that they request written notice of monetary default and an opportunity to cure such default.  Otherwise, the tenant could be in default under the lease while believing that rent was timely paid.  Unfortunately, this triggers a problem for landlords.

If a tenant is to receive notice each time it fails to timely pay its rent, and is given a certain number of days to cure its failure to pay, the landlord has essentially granted tenant an extension each month on its rent (and has the administrative headache of notice to go along with it).  This is not an acceptable position for the landlord.

I generally give my landlord clients two options for addressing  a tenant’s request for notice of monetary default.  First, you can reject the request.  This is not a particularly diplomatic approach, but depending upon the financial attractiveness of the potential lease, diplomacy may not be necessary.  The second approach is the compromise which is typically reached in these situations.

Step 3: Limiting the Notices

A reasonable approach for both parties, and that which typically finds its way into leases I negotiate, is to draft the default provision so that landlord gives notice to tenant of a monetary default and an opportunity to cure, but tenant is entitled to only 1 or 2 such notices per 12 month period. 

This solution protects the tenant from an “oops” default under the lease, while still limiting the landlord’s inconvenience created by providing notice.  Multiple “oops” defaults in one 12 month period is unlikely unless the tenant is particularly careless, and thus a good candidate for default.

In an ideal world, landlords and tenants would use this compromise from the start.  However, each party is looking to accomplish a lease that is as favorable to their interests as possible.  The intermediate steps in this process create favorable situations for the party proposing the step, and therefore it appears that the three-step dance will live on.

Landlords rely upon a number of remedies when enforcing payment under a commercial lease.  Most of these remedies are based solely upon the terms of the lease agreement.  In Texas, landlords also enjoy a statutory lien on the tenant’s property within the rented space.

Section 54.021 of the Texas Property Code provides landlords a priority lien on all property of the tenant which is in the leased space securing payment up to the amount of past due rent and some limited future rent.  For any rent more than six months past due, a landlord must file a lien statement with the county clerk for the county in which the leased premises reside.  If a landlord fails to file such lien statement, it forfeits its lien as to such amounts more than six months past due.

While the statutory lien is a useful tool for Texas landlords, there are restrictions and limitations created by the statute which can leave a landlord under-protected.  Therefore, most Texas landlords will include a lien provision in their leases.

A landlord-drafted lien provision should consider the following items:

1. Collateral.  Landlord can expand the collateral covered by the lien.  Items such as accounts, contract rights, chattel paper and other intangible personal property should be considered in addition to the tangible equipment, fixtures, inventory, furniture and the like.

2. Preserve Statutory Rights. Landlord should make its contractual lien rights additional, instead of alternative, to its statutory rights.  The procedures for exercising statutory rights are well settled and may have fewer obstacles than defending contractual rights.  Also, if a lease provision (including the lien provision) were to be deemed invalid and affect the contractual lien, the statutory provision would remain to protect landlord.

3. Timing. A lease provision can address the timing for landlord’s sale of the lien property.  Having a known timeline, and not being subject to statutory limits and timeframes, gives the landlord clearer expectations as to the process of satisfying its lien rights.

4. Scope. A landlord can expand the tenant’s liability covered by the lien in a lease provision.  The statute limits the liability to certain amounts in rent.  A drafted lien provision can include all rent due under the lease, fees, common area charges, reletting costs, and/or other sums owed.

One common issue landlords and tenants encounter when negotiating a lease is whether a third-party lender’s rights might interfere with the landlord’s lien.  Often tenants will secure financing from outside sources to fund their business operations within the leased premises.  These third-party lenders will typically seek a first priority lien on the property, accounts, and contracts of the tenant to secure payment of their loan to the tenant.  Obviously, this causes a conflict with a landlord’s claim to a first priority lien.

Many tenants will request (upon the requirement of their lenders) that a landlord waive its statutory liens and delete any contractual lien from the lease.  A landlord should recognize that third-party financing is often essential for the tenant to operate successfully, leading to a tenant that can pay its rent.  However, a complete waiver of all landlord liens is generally not necessary to protect the third-party lender’s rights under its loan agreement with the tenant.  Subordinating the landlord’s lien to a third-party lender’s lien is a compromise that protects the lender’s priority, while still providing the landlord an option for recovering against the tenant’s property.    

One final suggestion to landlords: generate your own form subordination agreement that considers the third-party lender’s rights and interests.  Lenders’ forms are often very rigid and can unduly burden the premises during a period of default.  Also, the lender is not interested in appeasing the landlord (who is not the lender’s client).  Therefore, it is not advisable to have a heavily “pro-landlord” form which will only serve to damage any discussions with the lender regarding subordination.

Landlord’s liens are only one of several remedies available to Texas landlords, but should be thoughtfully considered and protected in lease negotiations.  When a good tenant turns bad, its property may be the only resource available for collecting unpaid rent.

When entering into a lease, a tenant will need certain partners in the process who can help the tenant avoid future frustration as issues arise down the road.  Below is a list of those parties that should be consulted prior to signing any new lease.

1. Your Lawyer – Most tenants, save the very largest, will have to work from the landlord’s form when negotiating a commercial lease.  You can bet that in most (if not all) situations, that lease was not drafted with the tenant’s best interests in mind.  Having an experienced leasing lawyer guide the tenant through the process will help avoid certain language or provisions that could prove unduly burdensome later on.  Your lawyer will have special knowledge of the legal limits placed upon landlords, the remedies available to the parties should a dispute arise, and how certain language has been interpreted by courts.  Of particular use to a tenant is a lawyer with experience representing landlords, as well.  Knowing the typical give-and-take of negotiations from both perspectives should help the process move along more smoothly.

2. Your Broker – A tenant’s broker is the number one resource for understanding whether your lease is consistent with the market conditions.  Most leases have so many financial variables to consider (basic rent, CAM costs, tenant allowance, security deposit, percentage rent, etc.) that keeping up with the market rate for each factor could prove impossible for the tenant.  However, having a broker experienced in leasing in the local market should put the tenant on equal footing when negotiating these business terms.

3. Your Insurance Guy – Most leases place insurance requirements on tenants in order to protect the parties against potential liability for injuries to visitors, damage to the tenant’s property, or damage to the landlord’s property.  Certain minimum coverages will be required by the landlord.  Tenants should work with their insurance company to ensure that all coverages are available (and determine the cost for such coverages) prior to committing to the lease.

4. Your Contractor/Architect - Most tenants will require improvements to the leased premises prior to moving in and opening for business in the space.  Certain provisions within the lease will govern how that improvement process will take place, and who will be responsible for the associated costs.  Tenants should consult with their design and construction professionals in advance of finalizing their lease so that they can properly budget for the premises improvements and ensure that their preferred contractors are acceptable to the landlord.

5. The Property Manager - A prospective tenant should not be afraid to ask plenty of questions of his future landlord, and probably more so, the property manager.  It is important that the tenant understand how the terms of the lease are applied in the standard course of business for the building or development in which the leased premises reside.  Items such as common area maintenance, security, parking, utilities, signage, repairs, and countless others, will greatly impact how the tenant’s business operates.  It will be much easier to have a good understanding of these practices before entering the lease, rather than to feel out the process once a problem arises under the lease.

As mentioned in my last post, there are some shaky times ahead for property owners who may be upside down in their current loan.  In fact, recent numbers indicate that almost 46 billion in defaulted CMBS loans are outstanding.  Landlords and Tenants can expect to see some significant turnover in ownership of commercial properties in the coming years, particularly through commercial foreclosure actions.

Every commercial lease in these troubled properties almost certainly has another agreement, tying the lender and the Tenant together.  That document is the Subordination, Non-Disturbance and Attornment Agreement (SNDA for short).  While SNDA’s will vary in certain respects, there are several concepts uniform throughout which will be addressed on the most basic level here.  Think of this article as a jumping off point which would be best followed by reviewing your own SNDA and lease with respect to these concepts, and talking them over with your attorney.

SUBORDINATION

The subordination provision of an SNDA essentially provides that the lender’s claims against Landlord under the loan will be paid before any claims Tenant may have against Landlord under the lease.  Rather basic language would look something like this:

“The Lease is and shall be subject and subordinate to the provisions and lien of the Security Instrument and to all renewals, modifications, consolidations, replacements and extensions thereof, to the full extent of the principal amount and other sums secured thereby and interest thereon.”

ATTORNMENT

The attornment provision of an SNDA provides that Tenant agrees, in advance, to continue performing under the lease if the Landlord loses the property pursuant to a default under the loan.  There are essentially three ways a new landlord would be introduced: (1) foreclosure, whereby the lender takes the property, (2) foreclosure, whereby a third-party out-bids the lender for the property, and (3) transfer by deed in lieu of foreclosure, typically resulting in the lender taking over as landlord.  Usually, the attornment provision will apply to all three situations.  Rather basic attornment language would be:

“Tenant agrees that, Tenant will attorn to and recognize:  (A) Lender, whether as mortgagee in possession or otherwise; or (B) any purchaser at a foreclosure sale under the Security Instrument, or any transferee who acquires possession of or title to the Property, or any successors and assigns of such purchasers and/or transferees, as its landlord for the unexpired balance (and any extensions, if exercised) of the term of the Lease upon the terms and conditions set forth therein.”

NON-DISTURBANCE

Why would Tenant agree to sign a document where they are second in line to get paid and have to deal with whatever landlord might result from a foreclosure?  Because the Tenant receives the promise of non-disturbance.

The non-disturbance provision of an SNDA provides that, regardless of a change in landlord under the terms of the loan documents,Tenant’s operations under the lease will not be affected.  This peace of mind is the primary motivation  Tenant has to enter into an SNDA (and because most landlords make it a condition to the lease).  Rather basic non-disturbance language would be:

“So long as Tenant complies with Tenant’s obligations under the SNDA and is not in default under the Lease, Lender will not disturb Tenant’s use, possession and enjoyment of the leased premises nor will Tenant’s rights under the Lease be impaired in any foreclosure action, sale under a power of sale, transfer in lieu of the foregoing, or the exercise of any other remedy pursuant to the Security Instrument.”

Keep in mind that the sample language provided is the most basic form of subordination, attornment and non-disturbance language.  Your SNDA will surely go into much more detail and include additional representations, warranties and covenants between Lender and Tenant.  However, if you are a tenant whose leased property could be subject to foreclosure in the coming years, keep these concepts in mind, as you will likely be needing them.

The Congressional Oversight Panel has released its February report titled “Commercial Real Estate Losses and the Risk to Financial Stability.”  From the title alone, it is clear that this report does not paint a rosy picture for the status of commercial properties.

The bulk of the report focuses on the number of loans which are scheduled to come to term within the next few years, and the expected effect of a mass borrower default on those loans.  The brunt of the problem is that properties were bought on high debt ratios, and those same properties have subsequently decreased significantly in value.  Essentially, the report anticipates increased commercial foreclosures and eventually substantial losses by banks.

Many investment groups are salivating at the prospect of so many bank-owned properties coming available for sale at significant discounts over the next few years.  That means, as landlords and tenants, we can expect a turnover of landlords/property owners several times in the coming months and years.

Now is a good time to familiarize yourself with the terms in your leases regarding assignment of the lease, subordination, non-disturbance, and attornment.  It is important for landlords and tenants to be ready for the changes ahead.  In the coming days, The Commercial Leasing Law Blog will take a look at these key provisions and what these changes can mean for landlords and tenants.

You can read the lengthy report here, or the executive summary here.