Tenant Protection When Landlord’s Property Is Foreclosed!

Posted by Lee Sterling | Posted in Landlord-Tenant, Legal | Posted on 20-05-2009

evictionnotice
I’ve mentioned the SNDA in previous posts (Subordination, Non-Disturbance, and Attornment). The ND portion refers to non-disturbance of the tenant’s right to have its lease recognized as valid in the event of the foreclosure of a senior trust deed. The S refers to the Subordination clause and the A refers to the Attornment clause. I’ll discuss the Subordination and Attornment clauses in separate blog posts. From the Tenant’s standpoint, the non-disturbance clause (“ND”) is most important.

The use of the Non-Disturbance Agreement depends on the timing of the recording of the trust deed and the recording date of the lease (or the recording of a Short Form Notice of Lease) ,collectively “Notice”. Usually neither the Tenant nor the Landlord want the whole lease recorded. The lease may or may not provide for the recording of a Short Form Notice of Lease. As a Tenant you may want a Notice recorded. Check with your attorney for advice.

California follows the race-notice theory of recording. The first legitimate document recorded has priority over subsequently recorded documents. If a trust deed is signed on January 2, but not immediately recorded, and the lease is signed on January 10 and its Notice is recorded on January 11, while the trust deed has not yet been recorded , the lease would have priority over the trust deed. If the trust deed were subsequently foreclosed, it would NOT have the right to evict the Tenant so long as the Tenant was not in default under the terms of the lease.

However, if the trust deed were RECORDED first the lease would be subject to the priority of the trust deed. If the trust deed were foreclosed, the foreclosing party could evict the Tenant! The reason most Tenants want the ND is that they usually have spent quite a bit of money on leasehold improvements, moving costs would adversely impact their bottom line, they may have spent substantial amounts branding their location, and they may be out of business while moving to a new location. A Non-Disturbance agreement should protect the Tenant in those circumstances.

Before entering into a lease, or when renegotiating a lease, the Tenant should determine whether or not there is a recorded trust deed encumbering the property. If there is, the Tenant should make it a condition of the lease that the Landlord provides a Non-Disturbance agreement signed by the lender. Obtaining a Non-Disturbance Agreement often depends on the negotiating position of the parties. A tenant leasing 1,000 square feet of retail space in a mall probably won’t be able to obtain the lender’s consent to a Non-Disturbance agreement. However, a major Tenant in a development should insist on an ND agreement. Merely having the ND clause in the lease will not protect the Tenant if the lender has not provided the signed agreement. The ND clause may provide that the Landlord will use its best efforts to obtain the lender’s Non-Disturbance Agreement. In the standard lease used by commercial brokers in Carlsbad and the rest of San Diego, the lease ND clause provides that if the landlord doesn’t obtain the ND agreement within 60 days, the Tenant may go directly to the lender to try to obtain the Agreement. Without the lender’s signed agreement, the Tenant is at risk. There are various forms of ND clauses and agreements. Be sure to have the language reviewed by your attorney if you want to protect your rights to retain your lease rights in the event of foreclosure.

If you have general questions about commercial leases, please send us a note at Lee@leesterling.com

Tenant Protection When Landlord’s Property Is Foreclosed

Posted by Lee Sterling | Posted in Carlsbad, Economics, Landlord-Tenant | Posted on 10-05-2009

foreclosure-extiAllan 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.

North County Industrial Vacancy – Carlsbad Highest

Posted by Lee Sterling | Posted in Carlsbad, Economics, Industrial, Market Research, Oceanside, San Marcos, Vista | Posted on 04-05-2009

industrial-buildingGrubb & 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.