Understanding Subordination Agreements in Commercial Leases
A subordination agreement modifies the priority of liens or claims on a property. In the context of commercial leases, a subordination agreement addresses the relationship between the tenant, landlord and lender.
Importance of Subordination Agreements Commercial Leases
1. Ensuring Lender’s Priority: Subordination agreements primarily protect the interests of lenders (banks) by allowing them to maintain their position as the primary lienholder. This protects the lender’s investment and ensures that they have first claim to the property in the event of default or foreclosure.
2. Subordination of Tenant’s Rights: The subordination agreement explicitly states that the tenant’s leasehold interest is subordinate to the lender’s mortgage or deed of trust. This provision establishes the priority of the lender’s claim over the tenant’s interest in the property.
3. Facilitating Financing: Subordination agreements can help tenants secure financing for improvements or expansions of the leased premises. By agreeing to subordinate their leasehold interest to the lender’s mortgage, tenants provide assurance to lenders that their claims will be secondary, thereby making it easier for tenants to obtain financing.
Key Provisions in Subordination Agreements
1. Non-Disturbance Clause: A non-disturbance clause is often included in subordination agreements to protect the tenant’s rights in case of foreclosure. It ensures that if the property is foreclosed upon, the tenant’s lease will remain valid and enforceable, and the tenant will not be evicted or disrupted by the foreclosure process.
2. Attornment: Attornment refers to the tenant’s acknowledgment and acceptance of a new landlord in the event of a transfer of ownership or foreclosure. Subordination agreements often require the tenant to recognize and attorn to the new landlord or owner, maintaining the lease obligations and rights under the original lease.
3. Notice Requirements: Subordination agreements typically outline the notice requirements for all parties involved. This ensures that the tenant is informed of any actions taken by the lender or landlord regarding the property, such as foreclosure proceedings or potential changes in ownership.
Subordination agreements are vital instruments that govern the relationship between lenders, landlords, and tenants in Arizona commercial leases. By clarifying the priority of interests, these agreements protect the rights of all parties involved. For tenants, subordination agreements can facilitate financing and provide security in the event of foreclosure.
If you are looking to draft a commercial lease agreement and have questions about subordination agreements then contact the Dunaway Law Group at 480-702-1608 or message us HERE.
The Dunaway Law Group provides this information as a service to clients and other friends for educational purposes only. It should not be construed or relied on as legal advice and does not create a lawyer-client or attorney-prospective client relationship. Readers should not act upon this information without seeking advice from professional advisers. This Firm limits its practice to the states of Arizona and New York.