What is the first in time, first in right rule for tenants?

In a commercial foreclosure, the owner of commercial property defaults on the mortgage and the lender begins legal steps to seize the property. When the commercial property has tenants with commercial leases, the foreclosure becomes complicated. The rule in these cases is "first in time, first in right" which states that if the lender recorded the commercial mortgage before the tenant's lease was signed, the foreclosure on the mortgage basically nullifies the lease. However if the lease contained provisions on attornment, subordination or non-disturbance, the tenant's rights may not be protected during a foreclosure, again depending on when the lease was recorded.

Attornment, Subordination, Non-Disturbance

In some cases, lease agreements define what will happen in case of a commercial foreclosure. The leases may contain clauses regarding attornment. Attornment basically allows a tenant to remain with a new landlord, who in the case of a foreclosure is often the foreclosing lender. In a lease with an attornment provision, the lender has already agreed not to evict the tenant as long as the tenant has been compliant under the lease's terms.

A lending bank foreclosing on commercial property has less incentive to evict a tenant, especially if the tenant has been bringing in income. It is not to the bank's advantage to resell the space if it already has paying tenants. Also, a new owner who purchases the property at auction may not want to increase vacancies and may be more amenable to entering into an agreement with the existing tenant(s).

In addition to attornment, leases may provide clauses on subordination and non-disturbance. In a subordination scenario, where the lease came first in time, the lender agrees to allow the tenant to remain on new terms in exchange for the tenant subordinating its lease to the lender's mortgage.

Another protection provided to tenants is a non-disturbance clause. This clause prevents a landlord or foreclosing lender from disturbing the tenant's possession as long as the tenant complies with the lease's terms. Again, this will prevail where the lease preceded the mortgage.

If you have further questions regarding tenants and foreclosed properties, talk with an experienced commercial real estate attorney.