Costco's Polish Sausage

I sitting alone at a table at Costco in Carlsbad, eating my Polish Sausage lunch (with soft drink, $1.63) the other day, and a nicely dressed gentleman asked if he could join me. There was plenty of room,  so I said “of course.” He sat down, and his cell phone rang. Obviously, I couldn’t help but overhear his conversation, although I tried to avoid eavesdropping. He mentioned a fired employee, who had wiped out her hard drive, and they were now in process of having to retrieve and rebuild the hard drive information.

I mentioned to him that I had overheard his comment, and we discussed the need to do backups of computer hard drives every day. Not just because hard drives are going to crash (we’ve had it happen twice in the past 8 years), but because there might be that disgruntled employee who wants to disrupt your business. It can cost thousands of dollars to rebuild seemingly lost information. In our case, we not only physically lost a hard drive, but our in-house back-up system also crashed at the same time!

Now we use an in-house back-up system, and we use an off site backup system called Mozy.. Just go to Google and type in “back-up systems,” and you’ll be taken to lots of information. As a commercial tenant, you want to be sure not to lose your valuable computer data because of a hard drive crash OR because of a disgruntled employee!

We now get to the A of SNDAs (Subordination, Non-disturbance, and Attornment Agreements in leases.) First a brief recap of Subordination and Non-Disturbance. You may remember from our previous articles that if you’re a tenant, and you’ve agreed to subordinate your interest in the lease to any mortgage, trust deed of other security device, and the holder of one of those security devices forecloses, your lease may be terminated. Leases usually provide for that subordination to security devises even if they are created after the lease commences. The non-disturbance clause protects you in the event of a foreclosure (or in the event the property is sold to another owner) by providing that if you’re not in default you’ll be able to keep your lease in effect.

The attornment clause stems from the old feudal law that there was a personal obligation between the lord of the manor and his tenants, and that those obligations were reciprocal. The consent of the lord was required for a sale of the tenant’s interest, and the consent of the tenant was required for alienation (sale/transfer) of the reversion or remainder interest in the property. Thus, the lord could not alienate his reversion or remainder interest without the consent of the tenant. The consent was called an attornment. The necessity for an attornment was abolished before the American Revolution by the English Statute of Anne. In California, the common law rule eliminating the requirement of attornment has been confirmed by statute. However, just to be sure, leases contain an attornment clause that provides that if title to the property is transferred by the Lessor or if title is acquired through foreclosure or termination of a Security Device the tenant will attorn to the new owner.

The language of the SNDA in each lease has to be examined carefully because there are differences that may result from the specific language of the three inter-related clauses. There are some interesting California cases involving the interpretation of SNDAs. Be sure to have the lease reviewed by California counsel before signing any lease.

Lee Sterling was a real estate lawyer in Colorado for 27 years. He is not licensed as an attorney in California. He does have a California real estate license # 01319489.

Allan Koljonen, a fellow member of the Carlsbad Chamber of Commerce, and a knowledgeable real estate investor, read our blog about what happens to tenants when landlords file bankruptcy, and wondered about the effect on tenants when a foreclosure is filed against a landlord’s property.

It depends…isn’t that a typical lawyer’s response. California follows the rule that a properly recorded lien or interest in real property is superior to any subsequently recorded lien or interest in real property. So, if a lease is recorded before a trust deed is recorded then the lease is superior, and the foreclosure of the deed of trust does not affect the previously recorded lease.

If, however, the trust deed is recorded prior to the recording of the lease, then the foreclosure of the trust deed will extinguish the lease and the tenants and landlord of the property will be relieved of their respective obligations under their leases. However, the parties may change the effect of the law by a special agreement in the terms of the lease. Very often tenants want to retain their lease rights after a foreclosure. They may have built up a local market for their location, they’ve spent thousands, perhaps, making leasehold improvements, and they certainly don’t want to incur all the expenses of having to move. In some cases, it’s the foreclosing party who may not want to have the lease automatically extinguished by the foreclosure. The rents may be at market or higher than current market rents, the tenants may be well-financed and well able to afford the current rent even if it is now higher than current market rent, and the foreclosing party doesn’t want leases to be extinguished, which would result in vacancies. So, it may be in both parties’ interest to have an agreement in the lease that changes the effect of the automatic extinguishment of a subordinate lease in a foreclosure.

The protection available to tenants and foreclosing parties changes the California law in the lease agreement by using subordination, non-disturbance, and attornment clauses. These are commonly referred to as SNDA. If you’re a tenant, determine whether your lease was recorded prior to or after the trust deed affecting your leased property, and make sure you read and understand the SNDA because the consensus is that there are going to be increasing commercial foreclosures affecting lease rights. I’ll cover each of the clauses of the SNDA in separate blog postings. Check back often for updates or subscribe to the RSS feed above. If you any general questions about the SNDA or commercial tenant’s law please email me at lee@leesterling.com. As you know, I was a Colorado real estate lawyer for 27 years, but I’ve retired and I’m not licensed to practice law in California. For specific legal questions you should always consult a lawyer licensed in the state in which the property is located.

By the way, if you like the image at the beginning of this post you can click on it to go the web page of Donald Teel, a commercial real estate broker in Prescott, AZ for information about what’s happening in that part of the country! You can also go to Donald’s web site by clicking here.

Grubb & Ellis\BRE Commercial (“Grubb”) is one of the leading commercial real estate brokerage companies in the area representing landlords and commercial building owners. They put out research reports quarterly on the commercial real estate market. Their first quarter of 2009 report on the industrial market covers all of San Diego, but I’m most interested in what is going on in North County.

The Grubb Report indicates that there is a total of 14,255,418 square feet of industrial space in Carlsbad, 5,331,920 square feet in Escondido, 8,498,851 in Oceanside, 7,642,154 in San Marcos, and 12,971,905 in Vista.

The total vacancy factor in each community, which includes some space available for sublease, is: Carlsbad – 19% (with 4% sublease vacancy); Escondido 6.2%; Oceanside – 14.8%; San Marcos – 8.5%; and Vista – 7.5%.

To get a copy of the full report, go to http://is.gd/wCYP

With the high vacancy factors in Carlsbad and Oceanside now is a good time to acquire new space or renegotiate your lease at favorable terms. If you’d like assistance in that regard call me at 760-230-1492 or email me at Lee@LeeSterling.com for a no cost consultation.