Non-disturbance

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Strategy

Look before you lease – how your organization's lease rights could suddenly be wiped out – and what to do about it

What if your landlord defaulted on his mortgage? As you undoubtedly know, during the past several years, many of the most respected names in real estate have been unable to sustain their obligations.

A lender could take over your building after default. Quite possibly, your practice would be required to sign a more costly lease. This might be the case, for example, if your practice were paying $25 per square foot in a market which has moved to $30 a square foot.

To avoid having your lease rights wiped out by a landlord default, you should insist, as we do, on a "non-disturbance" agreement. This provides that the more senior lender (or ground lessor) would honor your lease should your landlord default on his obligations.

Whether any such agreement protects or undermines your rights depends on how it's drafted. Office and healthcare tenants can gain a lot more from a lease negotiation than many executives think

Here’s some prudent advice about common traps in a non-disturbance agreement:

-- Lease modifications. Many so-called “standard” lender/landlord non-disturbance agreements provide that the tenant and landlord can modify the lease only with lender approval. This can impose tremendous costs, delay needed actions and limit your ability to accomplish routine business objectives.

Our advice: It isn’t your responsibility as a tenant to police the relationship between landlord and lender/ground lessor, or to become an intermediary. If a lender wants to limit a borrower’s ability to change economic or other lease terms, that should be an agreement between the lender and borrower. You may agree to modify fundamental economic terms, such as base rent only after notifying the lender, but consider this as a concession, not something to routinely agree to.

-- Notice requirements. Many proposed non-disturbance agreements will require you to send notice to a senior lender, lender’s counsel, the managing agent, junior lenders and perhaps others before exercising rights under your lease – such as a termination or remedies for a landlord’s default. Notice requirements can become burdensome and in some cases undermine your substantive rights.

Our advice: Don’t get involved with giving notice to your landlord’s business partners. Give notice to your landlord as required in your lease. Let the lender look out for its own interests. If you do agree to give notice to lender and others, make sure to specify that even if notice is not given you are still free to exercise your substantive rights under the lease.

-- Foreclosure proceedings: If your organization is left vulnerable by your lease, if could get dragged into costly and distracting litigation associated with foreclosure against your landlord.

Our advice: As part of any non-disturbance/subordination agreement, require a promise for the lender that your organization will not be made a defendant in any foreclosure proceeding if your landlord defaults. This helps assure your lease cannot be terminated.

-- Claims against the new landlord. Commonly a non-disturbance agreement will contain language to the effect that if the lender/ground lessor becomes your new landlord, they will not be responsible for defaults before they took over. You will nonetheless remain fully responsible for all rent that was to be paid, repair obligations to be performed, and so on.

Our advice: If a previous landlord failed to make essential repairs or provide basic services which were his responsibility and you paid for these, you may want to make sure you can recover from a successor since they get the benefit

-- Lender’s obligations upon landlord default. Many non-disturbance agreements simply state that if the lender takes over your organization’s building, they will have a “reasonable time” to remedy the landlord’s defaults. Unfortunately, what appears reasonable to a lender could pose serious problems for your practice.

Our advice: When negotiating your lease, set reasonable time limits upon a landlord’s defaults, and provide a specific remedy you can pursue after this time. It’s also best to specify a definite time within which the lender must remedy the situation, perhaps adding 10 or 15 days to the time that had been permitted the landlord.

The lesson here: tenants can gain a lot more from a lease negotiation than many executives think. But to serve a tenant’s long-term interests, the “details” are absolutely crucial.