Who's on first-protecting the commercial mortgage lender: A lender's overview of subordination, nondisturbance, and attornment agreements

Real Property, Probate and Trust Journal, Fall 2001 by Homburger, Thomas C, Eiben, Lawrence A

The situation is not much better for tenants who have an interest senior to a mortgage or who have the protection of only a nondisturbance agreement without an attornment agreement. These tenants have a right to occupy their leasehold interest until termination as long as they pay their agreed-upon rent, but the tenants lack the ability to enforce the specific terms of the lease that do not run with the land 43 What the tenants lack is "a specific agreement to assume all the obligations of the original lease" or an attornment agreement.44

An attornment agreement provides the solution to this problem by creating direct privity of contract between the new landlord and the tenant following a foreclosure 45 As stated above, a properly drafted nondisturbance agreement will ensure the tenant's right to continued occupancy of the leased premises.46 However, the preservation of a tenant's right to occupancy, without the preservation of other provisions that were originally incorporated in the lease, is not sufficient to protect the tenant's interest. Without a contractual agreement by which the new landlord following a foreclosure agrees to a continuation of the landlord's obligations under the original lease, the surviving lease has substantially less value to the tenant. Even a tenant with a leasehold that is prior to a mortgage will often seek an attornment agreement with the lender to ensure the continuation of the landlord's obligations under the lease beyond allowing the tenant the right to retain possession of the premises.

Similarly, a lender will seek an attornment agreement because an attornment agreement assures the lender that it can enforce the contractual provisions of the lease following a foreclosure. If the tenant has agreed to attorn following a foreclosure, courts will enforce this agreement for the benefit of the lender.47

As a condition to agreeing to a nondisturbance agreement, a lender will often require a further agreement modifying some of the landlord's obligations under the original lease should it (or another entity) become the new landlord following a foreclosure. The attornment agreement, as perhaps the sole direct contractual vehicle between a tenant and a lender prior to foreclosure, provides an ideal venue to incorporate various agreements governing the lender-tenant relationship and the conditions that will prevail should a new landlord succeed the original landlord as a result of foreclosure. Careful drafting of attornment agreements can prevent future disputes and misunderstandings.

In negotiating attornment agreements, lenders often try to ameliorate those terms of leases with which they do not want to live in the event of foreclosure. Lenders can do this by including provisions in an attornment agreement that come into effect when a new landlord takes over a lease following foreclosure. These provisions may limit or exclude a tenant's rights to assign and sublet; options to renew the lease; and options to purchase the property or to acquire additional space otherwise permitted under the lease.