Protect Your TIA by Negotiating Favorable Foreclosure Provisions

June 23, 2016
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Despite a steady economic rebound that has been confidence-inspiring for commercial real estate tenants, foreclosures still are a risk, particularly in regions that haven’t seen as much of an uptick as metropolitan areas. Tenants should continue to keep an eye on protecting heavily negotiated or hard-won lease rights—especially those that have a high price tag they’ll have to pay if an owner can’t follow through on its obligations. The amount of your tenant improvement allowance (TIA) can be substantial—and crucial to customizing your space so you can operate there—so it’s important to protect it in case of your landlord’s mortgage foreclosure.

If you can’t put out your own funds in the short term for buildouts and improvements that the owner can no longer pay for, and the lender refuses to spot for those costs, it can sink your business.

You can protect your TIA though, using the same subordination, nondisturbance, and attornment (SNDA) provisions you’ll likely be asked to agree to when you first sign your lease (or upon a refinance of the property). Those provisions, whether in a lease clause or a stand-alone document, are designed to protect the owner’s lender, but with careful negotiation you can use them to your advantage. To ensure that you’ll be able to complete your tenant improvements, consider negotiating the following items that can protect your TIA in the event of a foreclosure:

  • Item #1: Stand-alone agreement. Some leases already state that they are self-subordinating, regardless of an SNDA. But tenants should require an SNDA in the form of a separate document up front.
  • Item #2: Existing obligations. After all of the parties have agreed to a standalone SNDA, the next step is to require the lender to honor the existing lease and all the terms therein. And, to the extent that there is a TIA involved, it will be protected by the lender.
  • Item #3: Performance default. Tenants should examine carefully the rights that a new landlord would have should there be a foreclosure, and to make sure that they mirror the original lease terms. A sticking point during negotiations for an SNDA should be getting the same terms from the lender—and not just for the SNDA but all terms and rights that the tenant was entitled to prior to the foreclosure.

For more tips on negotiating your SNDA and a Model Lease Clause that you can adapt to ensure that you’ll be able to complete your tenant improvements, see “Protect TIA in Case of Owner's Mortgage Foreclosure,” available to subscribers here.