NON-DISTURBANCE AGREEMENTS – WHAT THEY ARE AND WHEN YOU NEED ONE
august 2015 | AUTHOR: chuck stobie
When negotiating and finalizing the terms of a commercial lease, a tenant must be mindful of circumstances existing outside of the parameters of its tenancy relationship with the landlord which could threaten the continuation of its tenancy. Specifically, the landlord may have granted mortgage security against the lands upon which the premises are located to third party lender. This could be problematic for the tenant if the mortgage has priority over the lease. This will be the case if the mortgage predates the lease, having been granted before the lease was signed, or the lease, by its terms, grants priority to any present or future mortgagee of the landlord. In either case the tenant could face eviction in certain circumstances. This could prove catastrophic to a tenant that has expended considerable time and money to build out the premises and install equipment to facilitate its business operations. Similarly it could be equally ruinous to a tenant who has established valuable goodwill attributable to its operations which is tied to that specific location.
In the case of a mortgage having priority over the lease, should the landlord default pursuant to the terms of its mortgage, the mortgagee will have a number of options to enable it to enforce its security. Amongst others, it may choose to take possession of the property, evict all tenants and search for prospective buyers of the property on the basis of a sale with vacant possession. Clearly this would be a disaster from the tenant’s perspective.
To guard against such a calamity, it is advisable that the tenant insert provisions within the documentation that it executes with the landlord (including any agreement to lease, letter of intent and the lease itself) obligating the landlord to obtain a Non-
Disturbance Agreement for the benefit of the tenant from any present or future mortgagee of the lands. Essentially this document is a three party agreement executed between the landlord, the tenant and the mortgagee which, amongst other things, provides that, should there be default under the mortgage which entitles the mortgage to take possession of or sell the lands, the continued occupation of the tenant will not be disturbed, so long as the tenant is not in default under the terms of the lease.
Generally speaking, lenders are usually amenable to executing a Non-Disturbance Agreement provided that it is tailored to address some of their concerns. In many instances the mortgage initially was granted based on the anticipated income stream generated by the lease and accordingly the mortgagee may be happy to execute such an agreement as it will serve to ensure that the rental income continues. The execution of a Non-Disturbance Agreement with the tenant would enable the mortgagee to obtain the written covenant from the tenant agreeing that, in the event of a default under the mortgage causing the mortgagee to take possession of the premises, it will become the tenant of the mortgagee and commence paying rent directly to the mortgagee. Additionally the mortgagee may include provisions in the agreement which serve to: (a) prohibit the landlord and the tenant from amending or surrendering the lease without its consent; and (b) relieving the landlord of any obligations associated with rights of set off the tenant may have against the landlord either due to default of the landlord or monies owed to the tenant arising prior to the date that the mortgagee takes over and commences collecting the rents from the tenant. Essentially the mortgagee will be granted a “clean slate” when it steps in and begins collecting rent following a mortgage default by the landlord.
Depending on the circumstances of the tenant and the provisions of the lease, most notably, the tenant inducements that may have been included in it and yet to be received by the tenant, these inclusions are usually palatable to the tenant. Certainly they are preferable to the prospect of potential eviction by the mortgagee due to the landlord’s default under the mortgage.
Having the foresight to include the requirement for a Non-Disturbance Agreement in all documentation executed with the landlord, combined with careful draftsmanship of the document itself, can provide considerable peace of mind to a tenant to ensure that it will not be the unfortunate victim of an eviction where it has dutifully fulfilled all its obligations under its lease.
If you have any questions relating to any of the above, please do not hesitate to contact Chuck Stobie at cstobie@kmblaw.com or 905.276.0405.
In the case of a mortgage having priority over the lease, should the landlord default pursuant to the terms of its mortgage, the mortgagee will have a number of options to enable it to enforce its security. Amongst others, it may choose to take possession of the property, evict all tenants and search for prospective buyers of the property on the basis of a sale with vacant possession. Clearly this would be a disaster from the tenant’s perspective.
To guard against such a calamity, it is advisable that the tenant insert provisions within the documentation that it executes with the landlord (including any agreement to lease, letter of intent and the lease itself) obligating the landlord to obtain a Non-
Disturbance Agreement for the benefit of the tenant from any present or future mortgagee of the lands. Essentially this document is a three party agreement executed between the landlord, the tenant and the mortgagee which, amongst other things, provides that, should there be default under the mortgage which entitles the mortgage to take possession of or sell the lands, the continued occupation of the tenant will not be disturbed, so long as the tenant is not in default under the terms of the lease.
Generally speaking, lenders are usually amenable to executing a Non-Disturbance Agreement provided that it is tailored to address some of their concerns. In many instances the mortgage initially was granted based on the anticipated income stream generated by the lease and accordingly the mortgagee may be happy to execute such an agreement as it will serve to ensure that the rental income continues. The execution of a Non-Disturbance Agreement with the tenant would enable the mortgagee to obtain the written covenant from the tenant agreeing that, in the event of a default under the mortgage causing the mortgagee to take possession of the premises, it will become the tenant of the mortgagee and commence paying rent directly to the mortgagee. Additionally the mortgagee may include provisions in the agreement which serve to: (a) prohibit the landlord and the tenant from amending or surrendering the lease without its consent; and (b) relieving the landlord of any obligations associated with rights of set off the tenant may have against the landlord either due to default of the landlord or monies owed to the tenant arising prior to the date that the mortgagee takes over and commences collecting the rents from the tenant. Essentially the mortgagee will be granted a “clean slate” when it steps in and begins collecting rent following a mortgage default by the landlord.
Depending on the circumstances of the tenant and the provisions of the lease, most notably, the tenant inducements that may have been included in it and yet to be received by the tenant, these inclusions are usually palatable to the tenant. Certainly they are preferable to the prospect of potential eviction by the mortgagee due to the landlord’s default under the mortgage.
Having the foresight to include the requirement for a Non-Disturbance Agreement in all documentation executed with the landlord, combined with careful draftsmanship of the document itself, can provide considerable peace of mind to a tenant to ensure that it will not be the unfortunate victim of an eviction where it has dutifully fulfilled all its obligations under its lease.
If you have any questions relating to any of the above, please do not hesitate to contact Chuck Stobie at cstobie@kmblaw.com or 905.276.0405.
This article is provided for general information purposes and should not be considered a legal opinion. Clients are advised to obtain legal advice on their specific situations.
