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Subordination Without Nondisturbance: A One-Sided Marriage

By Jeffrey H. Newman

If love and marriage go together like a horse and carriage, surely a demand for subordination should be followed by a request for nondisturbance. For purposes of this article, it is assumed that the request (demand) for subordination is being made by a landlord (currently in lease negotiations with a prospective tenant) who intends to effect a financing either in the near future for initial permanent funding, or in the distant future for perhaps expansion or eventual refinancing. In effect, subordination (and attornment) by a tenant is the tenant's vow to remain a tenant through good times or bad (including foreclosure and its aftermath), for better or for worse; but, if the landlord does not give the tenant nondisturbance protection, the landlord is not reciprocating the vow. Naked subordination (subordination without nondisturbance) allows any mortgagee who may succeed to the landlord's position by foreclosure to accept or reject the tenant (i.e., honor or terminate the tenant's lease) by virtue of the tenant's subordinate position.

A tenant will be subordinate to a lender who “takes over the property” by foreclosure either because the lender's mortgage was recorded prior to the execution of the tenant's lease (whether or not the lease is recorded), or because the tenant, whose lease was prior in time to the recordation of the lender's mortgage, executed a subordination agreement. Recent events have shown that the previously unlikely scenario of a landlord default followed by a lender takeover is not only possible but is no longer a rarity. As a result, many tenants are now vulnerable to successors in interest who may either terminate their leaseholds or continue them after weakening many leasehold rights. Accordingly, tenants must start to focus on subordination provisions in order to ameliorate the harsh potential results of naked subordination.

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