Subordination and Non Attornment
NOTE: A SUBORDINATED LEASE MAY BE TERMINATED BY FORECLOSURE SALE: Dover Mobile Estates v. Fiberform Products, Inc., 220 Cal. 3d 1494 (1990)
1. Fiberform entered into a lease with the then owner which stated it was subordinate to any deeds of trust. Thereafter the owner placed a deed of trust on the property, defaulted, and Dover, an unrelated party, bought the property at the foreclosure sale. After the foreclosure sale, but before the end of the lease term, the tenant gave a 30-day notice to terminate the tenancy, vacated the premises and stopped paying rent. Dover sued for rent under the lease. The decision holds that Dover could not recover because the lease, although recorded earlier in time than the trust deed, was expressly subordinated to it, thus the foreclosure sale terminated the lease. The decision points out the same result would follow if the lease had
been created after recordation of the deed of trust.
It should be noted that both tenants and lenders may be able to avoid the result of this case if they desire to do so by use of an agreement achieving non- disturbance in the favor of the tenant and attornment in favor of the lender. Under the circumstances where the borrower is also a tenant in the building, the lender will most likely want a subordination, attornment, and non- disturbance agreement executed by the borrower.
Unless subordination, attornment, and non-disturbance provisions exist within the language of the leases encumbering the security property,many lenders will require that all tenants execute a subordination, attornment, and non- disturbance agreement. Some lenders will not accept the existing language in the leases and will require the tenants to individually execute subordination, attornment, and non-disturbance agreements at the time of funding the loanA sample copy of the agreement to which we have been referring has been includes for your reference. This agreement provides the foreclosing lender will still have a valid lease under terms agreed to by the lessee and lessor even though the lease has been subordinated to the lender’s deed of trust. Attornment is an acknowledgment by the tenant that he or she holds a tenement with a new defined person or landlord.
The sample agreement goes a long way to clarifying the lender’s, borrower’s and lessee’s rights before and after foreclosure; however, knowledgeable legal advice should be obtained before concluding that such an agreement will achieve the desired results. You and or your lender will want to have legalcounsel assist in drafting this document for the specific fact situation involved in each loan transaction.
Dan Harkey
Business and Private Money Finance Consultant
Bus. 949 521 7115
Cell 949 533 8315
dan@danharkey.com
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