Commercial Property Lease Terminates After Foreclosure
Question: Two months ago our small accounting firm signed a five-year lease for space in an office building in the Camelback corridor in Phoenix. Due to the current weak commercial leasing market, our lease has very favorable terms. The owner of our office building, however, has fallen behind on the mortgage payments to the lender. The lender’s property manager has told us that foreclosure proceedings will be instituted before the end of the year. If there is a foreclosure will our favorable five-year lease be terminated? Does the new federal law that protects tenants after foreclosure apply to commercial property leases and foreclosures?
Answer: The new federal law effective May, 2009, generally allows residential tenants to stay for the entire lease term after foreclosure. This new federal law, however, only applies to residential tenants, and commercial tenants have no similar protection after foreclosure. Therefore, if there is a foreclosure of the office building, your five-year lease will be terminated.
Note: After the foreclosure sale any new owner of the office building, whether the lender or a third-party buyer, frequently will honor the leases of existing tenants, or at least negotiate with existing tenants for new leases.