Advanced commercial real estate law: What are a tenant’s rights in a receivership or foreclosure

When a  commercial tenant occupies a building pursuant to a lease, he wants and expects to stay throughout the lease term.  He invests in tenant improvements, and he is growing a business at that location.  It would be expensive — indeed sometimes financially catastrophic — for his business to be forced to move.

So, he pays his rent and abides by all of the covenants in the Lease.  He should be allowed to stay until the end of the lease term, right?

Well, no, not necessarily.  If the landlord defaults in his mortgage payments, then the mortgagee — or a receiver appointed by him — may have the right to eject the tenant from the premises.  Ouch!

This is so because a tenant’s rights under a lease are, in an illustration I utilize, like popping a balloon.  The balloon represents the landlord’s rights in the property.  If the balloon pops, the landlord’s rights are extinguished, then the tenant’s rights in and to the property — which are derived solely from the landlord — immediately and automatically go away as well.

Thus, in addition to getting a lease from the Landlord, there are three additional steps a commercial tenant must take if he wants to assure that he has the absolute right to continue to occupy the leased premises in the case that tenant rights would be superseded by a superior right:

1) The tenant should conduct a title examination to ascertain any mortgagees or other parties (such as the holder of a recorded purchase option) that would have rights superior to those of the tenant under the lease.  Any recorded interest that precedes the execution of the lease may have priority over the lease.

2) The tenant should record his lease, or a memorandum memorializing the material terms thereof, signed by the landlord and tenant in the county recorder’s office.  This protects him from interests in the real estate arising after the date of recording of his lease.

3) The tenant should obtain “a non-disturbance agreement” with the lender or other party with a superior priority position, stating that should the holder of the mortgage or other rights come into title of the property, the lender will respect the lease that is in place (or “not disturb” the tenant’s occupancy).

Finally, if the tenant wants to insure his right to remain in a premises for the term, he can also purchase a tenant’s title insurance policy, designed specifically for that purpose.

Investments in commercial real estate by a tenant (such as by tenant improvements) and investments in the business inside real estate (such as building the presence of a retail store, restaurant or bar) at a specific location carry significant risks for a tenant unless the tenant first takes the three steps outlined above.  A third party may be able to strip away the tenant’s investment overnight.


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