Automatic subordination clauses | Lowndes

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Most Leases contain what are called automatic subordination clauses, by virtue of which the Tenant undertakes that the Lease is subordinated to any Mortgage loan granted by the Lessor, which already exists at the time of signature. of the Lease or that it is granted by the Lessor in the future.

Such a clause can be made more complex by including other provisions, such as an agreement by the lessor that the subordination of the lessee to the lease is conditional on the lender of the lessor, as a mortgagee, committing. not to seize the tenant and thus disrupt the possession of the tenant as long as the tenant is not in default of the lease (generally called the non-disturbance clause). Another variation is to include a provision whereby the tenant agrees to recognize the lender as the new owner if they exclude the mortgage and become the owner of the leased premises (generally referred to as a waiver clause).

Some subordination clauses require, as a condition of their entry into force, that the Lender and the Tenant enter into a Subordination, Non-Disturbance and Restitution Agreement (SNDA) dealing with these matters. Other articles on this blog discuss what parties to an ADSR generally want it to include, but rest assured that if you are a homeowner arranging mortgage financing, you can expect negotiation of a mortgage. SNDA between your tenant and your potential lender takes time and costs you money. Not only will the landlord have to pay their own attorney to facilitate the negotiation and execution of an NSDA, they will also have to pay the lender’s attorney fees when the loan closes. To make matters worse, if you are dealing with a regional or national tenant, they will likely have a legal department with associated bureaucracy to muddle up in order to get approval for an NSDA, which can take weeks or even longer.

The goal of this process is to make sure the lender is confident that the lease will be subordinate to their mortgage on terms they can agree to. This is usually evidenced by the lender’s attorney approving the subordination clause or SNDA (if applicable), as well as by the lender’s title insurer agreeing to list the lease as a subordinate matter in the insurance policy. the title of the lender securing the lien on the mortgage.

It is almost instinctive for lenders to ask the tenant for an NSDA whether or not the lease requires it. Considering the time and money it takes to put one in place, it is in the landlord’s best interest to avoid this unless it is absolutely necessary (i.e. mandated by lease). An automatic subordination clause in a lease can be stand-alone and invoked without NSDS if the lease does not require one. Many title insurers will agree to insure the Lease as a subordinate in a Lender’s title insurance policy only on the basis of an automatic subordination clause in the Lease. All you have to do is apply and show the title insurer’s underwriting advisor the lease clause. If the automatic subordination clause is really clear and unconditional, most title insurers will approve it and make sure the lease is mortgage-subordinate without SNDA.

Of course, it can be difficult when a landlord’s lawyer initially negotiates a lease to get the tenant to agree to an automatic subordination clause without many conditions (like future negotiation of an NSDA), but it’s worth it. sadness. You are more likely to be successful in this effort with a tenant that is a small business, as opposed to a regional or national business, so your starting point when preparing a lease should always be a simple automatic subordination clause. , without the added complication of requiring ADSD.

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