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What is it and What Should You Look for if One is in Your Lease?
By Stuart A. Heller
A subordination clause is used to allow a landlord to control the priority of interests in a leased premises and the building or development in which it is located. Commonly they are used to assure that the landlord can give his lender or a subsequent purchaser at a foreclosure sale an interest senior to (of higher priority than) that of the tenant, and thus be able to use the property as collateral for a loan. Typically such clauses require the tenant to agree that upon the occurrence of certain conditions, such as the landlord refinancing his property or the property being sold at a foreclosure sale, the tenant’s interest in the property will become subordinate or “junior” to the interest of the lender or new owner, either automatically or at the request of the landlord. That allows the lender to foreclose on and sell the property even if it acquired its interest after the tenant’s interest was established by its lease.
Sometimes the clause requires the tenant to sign a “subordination agreement” at the landlord’s request to establish his lender’s or the new owner’s superior interest in the property. If such a clause is in a lease proposed to you, you want to be sure that it requires that if the lender or a foreclosure sale purchaser takes over the property, it will honor your leasehold rights and assume the landlord’s obligations so long as you are not in default of any of the terms and conditions of your lease. Often the clause requires the tenant to “attorn” to the holder of the landlord’s mortgage or any person acquiring the property at a sale or other proceeding under that mortgage, that is, to recognize that person as having all of the rights of the landlord under the lease. In that case you should insist on a reasonable “non-disturbance” provision maintaining your rights so long as you are not in default of your obligations under the lease.
COMING NEXT: Why is there a “Waiver of Subordination” clause in my lease, and should I be concerned?
With over 35 years experience Stu Heller helps his clients achieve their business objectives, stay out of trouble, and have more time to focus on their strengths. He can be reached at 206-623-0579, fax 206-682-7972, heller@theleasinglawyer.com and hellerlaw@aol.com. His office is at 1325 4th Avenue, Suite 940, Seattle, Washington 98101, and website http://www.theleasinglawyer.com/. Be sure to consult your lawyer before applying any of the above to a particular situation. © 2007 Stuart A. Heller
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