When it comes to commercial real estate, a subordination of lease agreement is a crucial document that outlines the relationship between a tenant, a landlord, and a lender. In general, a subordination of lease agreement puts one party`s rights and interests ahead of the other parties in the event of a default or foreclosure. Here, we will explore the basics of a subordination of lease agreement, its benefits, and the key terms within it.
What is a Subordination of Lease Agreement?
A subordination of lease agreement is a legal document that establishes the priority of interests in a commercial property between a tenant, a landlord, and a lender. The agreement is often requested by a lender when a tenant wants to lease a commercial space in a building that is already secured by a mortgage. In essence, the subordination agreement puts the lender first in line for any proceeds from the property in the event of a foreclosure or default.
The Benefits of a Subordination of Lease Agreement
For tenants, the benefit of a subordination of lease agreement is the assurance that the lender cannot terminate the lease agreement during the mortgage term. It also gives tenants the ability to negotiate better commercial lease terms because lenders tend to offer more favorable terms when tenants sign a subordination agreement. For landlords, the benefit is that it makes their property more attractive to potential tenants who may require financing or want to avoid any potential lease termination in the event of a foreclosure. Lastly, for lenders, the subordination of lease agreement provides a greater level of security. It ensures that the lender’s mortgage will rank ahead of the tenant’s leasehold interest.
Key Terms Within a Subordination of Lease Agreement
The following are some of the key terms found within a subordination of lease agreement:
1. Subordination: This term establishes that the leasehold interest created by the lease agreement is subordinate to the mortgage.
2. Non-Disturbance: This term ensures that the tenant will not be evicted or disturbed by the lender unless the borrower defaults on the mortgage.
3. Attornment: This term refers to the tenant`s agreement to recognize the lender as the new landlord in the event of foreclosure.
4. Notice of Default: This term requires the lender to notify the tenant in advance before initiating foreclosure proceedings.
5. Quiet Enjoyment: This term provides the tenant with the right to quiet enjoyment of the property.
Conclusion
In conclusion, a subordination of lease agreement is an essential document for tenants, landlords, and lenders in the commercial real estate industry. It provides the necessary clarity and protection of interests for all parties involved. Whether you`re a tenant seeking a lease agreement, a landlord looking to attract tenants or a lender financing a property, it is always advisable to include a subordination of lease agreement in your commercial real estate transactions.