Question

Q: Ajax Stores, as a tenant, is negotiating a lease with Farris Realty Company. Ajax intends for the leased premises to be its main store location and is negotiating a 20-year lease. In addition, Ajax is anticipating that it will spend approximately $250,000 on trade fixtures and other improvements to the leased premises. Ajax conducts a title examination of the leased premises and discovers that Farris Realty Company has encumbered the eased premises with a mortgage to First Bank and Trust to secure a debt of $1.5 million. As a paralegal working for a law firm that represents Ajax, you have been made aware of the mortgage to First Bank and Trust. Should Ajax be concerned about the mortgage to First Bank and Trust? If so, what safeguards can you think of to protect Ajax?

Answer 1

Yes, Ajax should be concerned about the mortgage to First Bank and Trust. In the given case, a subordination, non-disturbance, and attornment agreement should be obtained by Ajax from First Bank and Trust at the time of entering into the lease. This agreement would protect the rights of Ajax as a lessee and Ajax would be able to use the leased property in the event of any foreclosure by First Bank and Trust. In other words, with a subordination, non-disturbance, and attornment agreement, the First Bank and Trust would be obliged to honor the lease agreement and allow Ajax to use the leased property in case it decides to take over the property (in the event of any default by Farris Realty Company). The relevant portion of the agreement that would protect Ajax is the "non-disturbance" part as it would restrict the lender (First Bank and Trust) or any new purchaser of the property from disturbing/terminating the tenancy rights of Ajax. The other two parts of the agreement (subordination and attornment) are included to protect the rights of the lender.