Can a Commercial Lease Survive a Residential Foreclosure?

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Aside from home-based businesses, there are many companies (typically small businesses) that have office(s) located in a residential building. The residential property in question may be a single family home, condominium, apartment, or townhome whose owner is paying a mortgage loan and renting the property out to the business owner.

A question arises if and when the residential property in question enters foreclosure. What is to become of the commercial lease and the company owner who is running a business at the location?

Can a business be evicted due to a residential foreclosure?

Unfortunately, commercial leases differ quite dramatically in comparison with residential leases. The most significant difference is that there are far fewer consumer protection laws in place to protect commercial lessees compared to residential lessees.

A company doing business in a residential building (that is, of course, zoned for permission to operate a business) will have entered into a commercial lease with the building’s owner, who then effectively becomes the company’s landlord. If the landlord falls behind on paying the mortgage and the property is foreclosed upon, what will happen to the business owner and his employees who work in the building? Will they be evicted or do they have the right to stay on after the foreclosure sale with the bank essentially becoming their new landlord?

There are two distinct possibilities that can result in eviction of the business owner:

  1. If the commercial lessee (tenant/business owner) was made aware of (and a party to) the impending foreclosure, and the lease was created before the property owner defaulted on the mortgage, the lender has the right to evict the commercial tenants, but they must obtain a court order to do so.
  2. Any lease that originated after the property owner had already defaulted on the mortgage becomes null and void on the official foreclosure date. No court order is necessary for eviction of the commercial lessees.

Because of the above two scenarios, commercial tenants must advocate for themselves when they are signing a lease. Specifically, commercial renters should scrutinize something called the SNDA (Subordination, Non-disturbance and Attornment) provisions that exist within nearly every commercial lease.

How can SNDA provisions save me from having to uproot my business?

Subordination, non-disturbance and attornment provisions are included in commercial leases specifically to protect commercial renters in the event of a foreclosure on the property. Unfortunately, many commercial tenants have a tendency to “skim” the SNDA sections of their rental agreement due to their excessive length and confusing legal jargon.

Despite the investment of time, commercial tenants should always certify that their lease agreement contains favorable SNDA provisions – specifically the Non-disturbance Provision. Although negotiating a Non-disturbance agreement that both parties agree with can take several months, in the end it will leave the renter protected against eviction in the event of default by the landlord on the mortgage.

If you are a business owner renting a commercial space in a residential building that’s in foreclosure, find out what rights you have by consulting with a real estate attorney in New Jersey. Conversely, business owners just beginning the process of locating rental space should do the same to ensure that your business location will be safe in the event of foreclosure.

If you want to learn more about commercial leases in relation to residential foreclosures, call Veitengruber Law for your free consultation meeting with one of our experienced real estate and foreclosure attorneys. We now have offices in Wall, Bordentown and Marlton, NJ. Visit our website to learn more about how we can help you.

Image credit: Dan Nguyen

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