Attornment Clause & How it Affects Commercial Foreclosure

An attornment clause is a critical aspect to take into consideration when commercial foreclosure occurs. In commercial foreclosure, the lien holder of the property may foreclose, or take possession of and ownership of the property if the property owner fails to make payment on his or her loan. In a commercial situation, this often leaves tenants of the building in limbo. The attornment clause, when in place, is one tool tenants and new property owners can use to work through this difficult transition.

Commercial Foreclosure Ownership Changes

When a lender forecloses on a property with tenants in it, usually a retail, industrial or rental arrangement, the new owner has several rights in handling those tenants. In general, any contracts, including leases, on the building in place at the time of the foreclosure are nullified at the time of the property changing hands. When a new property owner buys the property, the new owner is able to make decisions about how the property will be run. He or she does not need to honor contracts, in most cases, in place prior to the foreclosure.

However, the attornment clause does play a role in the process of managing tenants of the commercial property. This clause is in the tenant's agreement and specifically states that the purchase of a property at the foreclosure sale is a substitute landlord for the tenant. This means that the new owner can elect to enforce the tenant's original lease agreement, rather than to allow such an agreement to be voided at the time of foreclosure.

Key Factors To Keep In Mind

No matter which side of the commercial foreclosure, the attornment clause is an important one for several reasons.

• The owner by foreclosure (the new property owner) must notify the tenant that the new owner is the substitute landlord on the lease agreement.
• The new owner does not have to use the attornment clause.  If the new owner wishes to wipe out the old lease, leaving the tenant without any right to continued possession of the space, the owner can do so.
• An attornment clause may encourage bidders in a foreclosure sale. Filling commercial buildings with paying tenants is difficult.

These factors play a key role in the commercial foreclosure process. These clauses affect each tenant.

Hiring an Attorney

Individuals who are tenants or those who are purchasing commercial property through the foreclosure process should use an attorney to manage attornment clauses. While the rights of the tenant may be limited, an attorney can represent the tenant while speaking with and negotiating with the new owner.