Contributed By McGuireWoods LLP
One circumstance in which a third party may cause a lease to be terminated is a foreclosure by a lender of a deed of trust encumbering a landlord’s property. If a property owner defaults under a deed of trust and the lender forecloses, then any leases subordinate to the deed of trust are automatically terminated as a matter of law in the absence of a written agreement to the contrary. To prevent this, parties have a number of alternatives. This may be accomplished in the lease, and indeed many commercial leases expressly provide that the tenant will attorn to the lender, or that the tenant will even agree to allow the deed of trust to be subordinated to the lease at the lender’s election. Another approach is for the parties to enter into a subordination, non-disturbance and attornment agreement (“SNDA”) that expressly protects the tenant’s leasehold interest for so long as it is not in default under the lease. This is more commonly sought by tenants under longer-term leases, as landlords are often not incentivized to pursue SNDAs for smaller or short-term leases. In some cases, when negotiating a loan for a property with existing leases, landlords and lenders themselves may insist on the execution of an SNDA prior to making the loan, to ensure that the leases are subordinate but also to ensure that critical leases are not “wiped out” in the event of a foreclosure.
Leases may also be terminated in the event of a condemnation of all or part of the property by a governmental authority. Most commercial leases describe in detail the rights of the landlord and tenant to terminate the lease, including their rights to any condemnation proceeds. Most leases provide that all proceeds are the property of the landlord, but that the tenant may separately make a claim for lost property, lost profits, moving expenses, etc, as long as the amount payable to the landlord is not reduced.