What happens to a commercial lease when a property is foreclosed upon?

When an owner of commercial property defaults on a mortgage, the lender can proceed with foreclosure seizure. However, in the case of commercial property, there may be tenant leases attached in the form of stores and office space. These leases may be dropped in a foreclosure process. Much is dependant on the rule of "first in time, first in right" rule. This rule states that if a lender recorded the commercial mortgage before any commercial lease is signed, the commercial lease is void. However, some commercial leases contain provisions that protect their existence in case of foreclosure. These provisions are subordination, non-disturbance, and attornment, generally known as SNDA clauses.

Subordination

A subordination clause basically prioritizes the lender's security interest in the property above any pre-existing commercial lease. In exchange, the commercial tenant has the option of exiting the contract without penalty or negotiating new terms with the lender. The leverage is with the tenant if the tenant has shown that is has been performing well; in this case, the lender may want the tenant to remain instead of looking for a replacement tenant.

Non-Disturbance

A non-disturbance clause protects a tenant during a foreclosure.  The clause generally prevents the foreclosing lender from disturbing the tenant’s possession if the tenant has been compliant with the terms of the lease. However, a non-disturbance protection does not extend to any modification of the original agreement if the modification is without the lender's consent.

Attornment

Attornment is a common law principle by which a tenant and a lender enter an agreement that the tenant's lease terms will not be voided by possible foreclosure. Attornment extends the lease's terms and delineates rights and responsibilities of each party in the case of a foreclosure.

In the case that a commercial lease does not contain any of these provisions, the leverage is in favor of the lender and the tenant may lose out. Talk with an attorney regarding commercial tenants and foreclosed properties.