Commercial Lease Might Not End With Foreclosure Sale

by Christopher Combs Arizona Real Estate Attorney It was recently stated that a commercial property lease is terminated after foreclosure by the lender.  A small real estate brokerage firm has two years remaining on their lease in a Tempe office building.  As a result of the real estate slowdown, they wanted to move into smaller space.  After the commercial property's foreclosure sale by the lender they believed that their lease had been terminated. However the lender?s property manager disagreed and said that were now required to make lease payments to the lender as the new owner of the office building.  The real estate brokerage firm?s attorney reviewed their commercial lease terms, and also said the language in the lease requires them to make lease payments for the next two years to the lender as the new owner of the office building.  How can the lender as the new owner of the office building enforce language in a lease after the foreclosure sale terminated the lease?

In general, the rule in an office lease, residential lease, or any other lease, similar to other junior liens, is terminated at the time of the foreclosure sale by the lender.  However, in many commercial projects, a lender will require language in the lease, or in a separate agreement, that the lease will be enforceable after the foreclosure sale, and that the tenant will then make the lease payments to the lender or other purchaser at the foreclosure sale.  Similarly, a major tenant like Albertson?s or Home Depot that has a favorable lease because of their anchor tenant?s status will want similar language in the lease or in a separate agreement. These types of commercial lease provisions are generally enforced by the courts on the theory that the lender or other purchaser at the foreclosure sale is a third-party beneficiary of the language in the commercial lease.

Note: Since the May, 2009, federal law, residential tenants after a foreclosure sale are generally entitled to stay in the home through the end of the lease term, provided that the lease payments are made to the new owner.  The residential tenant, however, is not required to stay in the home, and can move out after the foreclosure sale.

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Created on Dec 31st 1969 18:00. Viewed 0 times.

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