In this post we examine New Jersey law governing a commercial tenant’s rights in the context of a foreclosure suit filed by the landlord’s mortgage lender. If you are a commercial tenant whose landlord is being sued in foreclosure, or a lender contemplating whether to name a tenant in a foreclosure suit then this post is a must read.
A lease between a landlord and tenant signed subsequent to the mortgage is subordinate or inferior to that mortgage. Guttenberg S & L v. Rivera, 85 N.J. 617, 627 (1981); World Traditions, Inc. v. DeBella, 316 N.J. Super. 537, 544 (Ch. Div. 1998). It is well-settled that as long as a mortgage was in existence prior to the execution of a lease between a mortgagor and a tenant, the mortgagee, upon default of the mortgage, may foreclose upon the leasehold and obtain an order for possession against the mortgagor’s tenant. Guttenberg, 85 N.J. at 626-627; American-Italian B. L. Ass’n. v. Liotta, 117 N.J.L. 467 (E. & A. 1937); DeBella, 316 N.J. Super. at 544.
Therefore, ordinarily, unless an existing tenant is made a party defendant to the foreclosure suit, his interest is unaffected thereby.
American-Italian, 117 N.J.L. at 471.
However, a lease, whether signed before or after a mortgage, may be subordinated to the mortgage by a Subordination, Non-Disturbance and Attornment Agreement (an “SNDA”) signed between the lender and tenant. Indeed, an SNDA often contains a provision obligating the tenant to obtain the lender’s consent to amend an existing lease. But, “What if the lease has priority and was in place at the time the loan closed, the lease contains no automatic subordination language, and no SNDA was signed or it was silent as to amendments?” The Necessity to Obtain a Lender’s Consent to a Lease Agreement, W. John Park and Iryna Lomaga Carey, 202 N.J.L.J. (October 18, 2010) [1].
The general rule is that such a lease is not subordinate to a mortgage recorded subsequent to the lease. In those instances, the mortgagee is bound by all of the terms and conditions of any lease executed prior in time and, in the event of a foreclosure, is subject to the terms and conditions of the lease.
Id. (emphasis added). Indeed, as that article notes, “New Jersey Courts have previously recognized that in the case where the lease has priority, a landlord/borrower and his tenant are free to modify or amend a lease and bind the mortgagee. Kirkeby Corporation v. Cross Bridge Towers, Inc., 91 N.J. Super. 126 (Ch. Div. 1966).” Id.
So what happens with a commercial tenancy when the property is sold at foreclosure sale?
In DeBella, the Chancery court noted that a sheriff’s sale purchaser is entitled to repudiate a commercial tenancy and seek the tenant’s eviction from the premises where the lease is subordinate to the foreclosing lender’s pre-existing mortgage. However, a prospective purchaser may not have access to sufficient information prior to the sheriff’s sale to determine the lease status of commercial tenants, reminding us once again why foreclosure investing is a tricky business.
Our New Jersey law firm is presently litigating a foreclosure case on behalf of a commercial tenant named in his landlord’s foreclosure case. Have a question about this post? Contact our law firm [2] today.