With commercial vacancy rates up and office rents down, many businesses are looking at moving, but there are things to watch out for, including what happens if a building goes into foreclosure and the lender takes it back.
As a practical matter, lenders want tenants in place to produce rent, said James Jordan, partner with law firm Sutherland Asbill & Brennan LLP in Atlanta.
“Generally, I’m not aware of any instances where a tenant has been kicked out of a building in connection with a foreclosure,” Jordan said. “From a legal perspective, in large commercial deals the security deed holder usually agrees not to disturb the tenant in the event of a foreclosure.”
In apartments, the lender often forecloses subject to the rights of the tenants, he said. “They’re not trying to disturb or terminate leases.”
Still, a foreclosure can create challenges, experts say, including whether or not services and upkeep promised when the lease was signed will be maintained.
"It was one of the things we were worried about when we learned the foreclosure was going to happen," said Stephanie Everett, managing partner in the Bloom Law Firm, located in the Equitable Building in downtown Atlanta, the metro area's first significant commercial foreclosure. The building was sold at auction last summer.
The current management company "has done a good job of maintenance," she said.
If a tenant is considering leasing space in a building where foreclosure is a possibility, she said, "do so fully knowing the risks associated with the decision. The lease will likely be subordinate to the lender’s security interest giving the lender the right to terminate the lease after the foreclosure sale.
"It is like a wolf in sheep’s clothing -- while the landlord’s offer now may appear to be a great deal, the tenant could be left with nothing after the foreclosure sale," Everett said.
After a foreclosure, "if there is an obligation for improvement and no money to do it, the lender likely won't fund it," said Alan Joel, principal in Joel & Granot Commercial Real Estate and 2010 president of the Atlanta Commercial Board of Realtors.
Tenants have options to protect themselves, he said, including these two: Negotiating an escrow agreement with the landlord in which money is put into an account to pay for improvements; and negotiating rent offsetting rights, which allow the tenant to make improvements in lieu of paying rent.
"Small tenants can find space that doesn't require a lot of improvement," Joel said.
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