Subordination Agreement in Commercial Leases

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.

Commercial Evictions

** This Post Only Applies to Commercial Evictions Arizona **

Under Arizona law there are two (2) basic ways a landlord can recover possession of a commercial property.

“Locking Out” an AZ Commercial Tenant

Arizona landlords are permitted to “lockout” a tenant who is behind on their rent or otherwise in breach of the lease agreement. Through a lockout the landlord literally just locks out the tenant. If a commercial tenant is more than five (5) days late with a rent payment, the Arizona landlord may enter the premises and take possession without any prior notice or demand for payment. However, before you just lockout your tenant it is important to review the lease and see if it contains terms which will limit your ability to recover possession without notice or a demand for payment.

In spite of the very broad repossession power given to commercial landlords, an Arizona landlord must follow specific procedures found in the lease relating to notice and termination of the tenancy.

Tenant’s Belongings after Lockout

What must an Arizona commercial landlord do with all the tenant’s property left in the premises if they lock out the tenant? Arizona law gives the landlord a lien on all of the tenant’s property in the premises when the landlord recovers possession.  The landlord can hold the property and demand payment of rent in exchange for release of the property.  If the tenant has not paid rent due within 60 (sixty) days, the landlord may sell the seized property and apply the proceeds to the amount of rent owed by the tenant.

Prior to selling the tenant’s belongings, the landlord must provide the tenant with a 10 (ten) day notice of intent to sell the property if rent is not paid.  If the tenant still fails to pay past due rent and late fees, the landlord must sell the property at a public auction.

Potential Mistakes with Lockouts 

There are a several potential traps associated with seizing an Arizona commercial tenant’s property and holding it for auction.  A landlord may not hold for auction any property exempt by law.  For example, personal financial records of the tenant, or personal education materials, or a personal library on the premises. 

A much more significant trap for commercial landlords is seizing property on the premises that belongs to a third-party.  

It is quite common for commercial tenants to have equipment that is rented from another business.  For example, a restaurant might rent freezers from a restaurant supply company. Or a printer might be financing its printing company through a bank.

Sometimes rented equipment can be easily identified by a sticker or label on the equipment.  However, a commercial landlord should make a concerted effort to determine whether or not the tenant owns the property seized at the business before that property is auctioned at a public sale.

Note, that if a commercial lease has been assigned or there is a sub-tenant of the original tenant occupying the property a landlord can still enter and seize the property of the sub-tenant if the rent is in arrears.  The landlord has a lien in the sub-tenant’s property on the premises.  If the past due rent and late fees are not paid then the Arizona commercial landlord can proceed to auction as described above. 

The commercial landlord still has a lien on sub-tenants belongings even if they have been faithfully paying rent to the original tenant, who has not been forwarding that rent on to the commercial landlord. The commercial sub-tenant would have a breach of contract claim against the original tenant, but the commercial landlord can proceed to auction unless the original tenant or sub-tenant pays the past due rent.

Filing the Lawsuit Against the Tenant

In Arizona, as an alternative to locking out a tenant, an Arizona commercial landlord can file an eviction lawsuit against the tenant.  A major reason for filing an eviction lawsuit is that it is the quickest and easiest method to obtain a money judgment against the tenant.

For this reason, it is always advisable to obtain personal guaranties from the principles of any closely held corporation or limited liability company tenant.  You will then have the ability to seek recovery of your damages from the guarantors.  Additionally, as Arizona is a community property state it is imperative to have both a husband and wife sign the personal guaranty.

Another reason an Arizona commercial landlord might consider a lawsuit instead of a lockout is to limit any potential liability that may arise from making an error in the lock-out process. A good commercial lease will have terms which limit a commercial landlord’s liability for any consequential damages the commercial tenant suffers as a result of the lock-out.  If you don’t have a lease which limits your liability for consequential damages, you should consider going to court and getting a judgment, rather than simply locking your tenant out. 

If you are an Arizona commercial landlord and need an Arizona commercial eviction, then contact the Dunaway Law Group by phone at 480-702-1608 or message us HERE.

*** These blog posts are not intended, nor shall they be deemed to be the rendering of legal advice. Reading these blog posts does not create an attorney-client relationship, nor shall it impose an obligation on the part of the attorney to respond to further inquiry. ***

Terminating Commercial Lease

*** This Blog Post Only Applies to Commercial Lease Agreements ***

Most commercial lease agreements have what is called a “holdover provision”. A holdover provision details what happens when the original commercial lease ends and a formal extension is not filed. A typical holdover provision will say something like, “either the tenant or the landlord can terminate the lease with a 60-day notice”.

However, in the event that the commercial lease is silent on how to terminate the lease once it has become month to month then A.R.S. § 33-341 which states in part: “A lease from month to month may be terminated by the landlord giving at least ten days’ notice thereof.”

I find this amazing that a landlord can terminate a commercial lease by only giving the tenant ten (10) days to vacate! What if you have a large warehouse full of supplies? What if you have a thriving medical practice? Without pre-negotiated terms you may be subject to a ten (10) day notice to vacate!

A.R.S. § 33-1375(B) of the Arizona Residential Landlord – Tenant Act requires landlords to give their tenants at least 30 days to vacate. Amazing that Arizona businesses are given even less time to pack up their stuff and leave than people!

What Should Commercial Tenants Do?

A tenant negotiating a commercial lease agreement should make sure the lease specifically addresses the “holdover provision”. This provision should detail exactly how a lease will terminate. Depending on your type of business you may want to require a 90 day notice from the landlord.

Commercial lease agreements usually last many years and involve hundreds of thousands of dollars in rent so before signing on the dotted-line make sure you have negotiated the terms that will protect your needs. If you need help from an Arizona real estate attorney then contact the Dunaway Law Group at 480-389-6529 or HERE.

*** This Blog Post Applies to Commercial Lease Agreements in Arizona ***