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.