May 1st, 2010
The Real Deal: Your Legal Update for Real Estate
Volume 3, Number 1, May 2010
Who do Commercial Tenants Pay When Their Rental Property Forecloses?
When commercial landlords lose their rental property to foreclosure, it can be easy for their tenants to get confused as to whom lease payments are made. Commercial tenants want to pay the right person, but oftentimes question is whether that person is the foreclosing lender or the former landlord. The answer to this question lies in the SNDA provisions of the lease agreement.
Standard commercial leases typically contain SNDAs, or agreements that call for subordination, non-disturbance and attornment. The subordination agreement ensures that liens held by lenders and mortgagers remain senior to tenant’s liens. The attornment agreement prohibits tenants from breaking their lease in the event of foreclosure, by requiring them to recognize foreclosing lenders as new landlords. And the non-disturbance agreement protects tenants by keeping their lease in effect throughout a foreclosure.
So the first place a commercial tenant should turn if his landlord is facing foreclosure is the lease agreement itself. The SNDAs should clearly outline the relationship between lenders, landlords and tenants. More specifically, the SNDAs should indicate to whom tenants should pay rent in the event of foreclosure. Unless the SNDAs state otherwise, former landlords lose their rights to collect lease payments once a lender forecloses on their rental property.
From a policy perspective, SNDAs are important because they assure tenants and lenders alike that commercial leases will retain their power, even if the property changes ownership. Tenants can thus feel secure about improving their space and developing lasting relationships with customers and clients in the area. Likewise, lenders can be confident that tenants will continue to pay rent following foreclosure. SNDAs provide clarity that benefits everybody involved, from lenders and tenants to members of the surrounding community.
Problems sometimes arise in the short time preceding a commercial foreclosure, for which SNDAs can provide guidance. Sometimes during this pre-foreclosure period, landlords quit fulfilling their lease obligations, but continue demanding payment from tenants. If the landlord’s actions constitute a material breach of the lease agreement, however, then the tenant’s lease obligations may also be relieved, excusing payment of the remaining lease. Tenants in such a scenario should closely review their SNDAs with qualified counsel to determine their legal rights.
The general rule for commercial tenants is that they are not relieved of their lease obligations in the event that their lease space is foreclosed upon. Rather, they will see a change of owners and likely begin making lease payments to a new landlord. The specifics of how the switch will occur should be clearly delineated in the lease agreement’s SNDAs.
Creating Enforceable Community Association Rule
Generally, making and enforcing rules is a big part of what HOA Boards do. And because they are typically charged with making rules, as well as enforcing them, boards have an interest in making rules that are easily enforceable. After all, an unenforceable rule is not much of a rule at all.
HOA boards have an implied power to create rules that protect common areas and keep the peace. To make sure that rules align with these purposes, directors should ask two questions when considering proposed rules:
1) Does this rule complement the CC&Rs?
2) Is this rule reasonable?
Directors must be very familiar with their community’s CC&Rs to make sure rules comply with and complement them. CC&Rs should include provisions describing how to amend or add rules, and boards can generally make any rule changes that do not conflict with these or other controlling documents. Typically rules that complement the community’s CC&Rs are reasonable, but this is not always the case.
When determining whether a rule is reasonable, directors can ask, “Is this rule something that a reasonable person in my shoes would do?” If the answer to this question is yes, then the rule could be enforceable. Here are some examples of reasonable rules:
- A board can enforce dog leash laws in its park so that other members can be safe from dog attacks.
- A board can set reasonable speed limits on private roads to keep the community safe; and can impose fines for speeding violations.
- A board can fine homeowners for parking on the street for too long as a way to help keep streets clear for emergency vehicles and other drivers.
Rules that comply with a community’s CC&Rs, and are reasonable, help boards preserve the nature of a community. Moreover, well-designed rules benefit all of the members by keeping the community safe and aesthetically appealing. In addition to making sure that rules are enforceable, boards must consistently enforce them, as rules that are not enforced can lose their enforceability altogether. Moreover, boards must enforce rules uniformly to prevent allegations of discrimination or favoritism. Creating enforceable rules and ensuring they are fairly enforced, while not easy tasks, are among the more important duties directors are charged with.
Liens on Homes Do Not Automatically Disappear When Owners Pay Off Debts
Liens on homes do not automatically disappear when homeowners pay off their debts. On occasion, lenders and lien holders neglect to remove liens after accepting payment for the debts they secured. Even homeowners who fully repay a debt can run into problems if the lender fails to remove the lien from their home. Until the lien is removed, homeowners will have difficulty selling or transferring their property.
This raises the question of how homeowners can remove old liens from their home.
A homeowner’s first line of offense should be to contact the lender or lien holder directly and request they record a deed of release and reconveyance. This document essentially states that the debt is satisfied and recording it removes the lien. Lenders are obligated to record the deed of release and reconveyance within 30 days of being repaid.
If unsuccessful, a homeowner can turn to A.R.S. 33-707 for recourse. This statute outlines the procedure title companies must follow to record the deed of release and reconveyance, which is summarized as follows:
- Title companies cannot take action until at least 60 days after the debt was satisfied.
- After the 60 days have expired, title companies must send notice of intention to release the mortgage or deed of trust, accompanied by a copy of the release or satisfaction of mortgage or deed of release and reconveyance, to the trustee and beneficiary of record and their respective successors in interest.
- Title companies must also send these documents to those who received payment of the obligation.
- The deed of release and conveyance must establish the following information:
- Name of beneficiary or mortgagee or any successors in interest
- Name of original mortgagor or trustor
- Name of the current property owner
- The recording reference to the deed of trust or mortgage
- The date and amount of payment, if known
Still another option for homeowners lies in A.R.S. 33-713. This statute allows the Superior Court in the county in which the property is located to enter an order discharging the lien. An attorney can help homeowners determine which of these approaches is most suitable for their situation, and then help them properly navigate the process.
This newsletter is provided for informational purposes only and is not intended to replace individual legal advice. Please consult a knowledgeable attorney regarding your specific needs.
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