Q: The question you recently answered about a long-term tenant surviving the foreclosure of his home (because his lease predated the mortgage) was welcome reading to us, because that is our situation, too. Our landlord hasn’t been foreclosed on yet, but it’s imminent. Still feeling nervous, I reread our lease, and found this odd clause, called "Subordination." It says that we agree to be "subordinate" to the interests of any future mortgagor or lender. Should I be worried about this? –Michael M.
A: Yes, you should be worried. Your lease was drafted by a lawyer who was well aware of the common-law rule that protects tenants whose leases were signed before the date the mortgage (or other loan secured by the property) was recorded. That lawyer knew that if, after signing your lease, the owner decided to refinance or use the property as collateral for a loan, the lender would want the right to get rid of any existing tenant if it had to foreclose. Again, under the default rule, the lender would have been stuck with you because the lease predated the loan or mortgage.
By signing a lease with a subordination clause, you’ve given up the right to keep your lease if a bank or other mortgagor has to foreclose on a loan that was made after your lease was signed. These clauses are common in commercial leases, where the harsh result of the subordination clause is often balanced by a tenant-friendly clause.
Known as a "nondisturbance" clause, this counterpart to a subordination clause provides that as long as the tenant is in good standing (the rent is paid and the tenant is otherwise abiding by the lease terms), the subordination clause will not kick in. The interests of both sides (lender and tenant) are protected when both clauses are in a lease: The foreclosing lender won’t get stuck with a tenant who is unable to pay the rent or otherwise not living up to the lease terms, but it will honor the tenant’s lease as long as the tenant is meeting its obligations under the lease.
In a commercial setting, where tenants are often represented by brokers and lawyers, tenants often successfully negotiate for a nondisturbance clause when presented with a subordination clause. Most of the time, the landlord agrees. But residential tenants are rarely represented by counsel, and few are up on the intricacies of these rules, let alone possessed of the bargaining power to insist on some balance. Hence the harsh result in your situation: According to that clause in your lease, your lease will be wiped out by a foreclosure on a post-lease loan.
All may not be lost, however. New federal legislation, the Protecting Tenants at Foreclosure Act of 2009, was designed to give tenants relief when their homes were foreclosed on. It targets tenants whose leases, unlike yours, were signed after the mortgage. Under the old common-law rules, these leases were wiped out by a foreclosure. Now, with some exceptions, they survive.
But the law also shows Congress’ strong desire to ease the plight of all tenants who lose their homes through no fault of their own, and that’s where you come in. Given this strong statement of governmental intent, you may be able to argue that the subordination clause in your lease should not be enforced, because it is contrary to public policy. This is heady stuff for a lawyer interested in housing policy and tenants’ rights, so if you find yourself headed toward a lease termination at the hands of your landlord’s post-lease lender, look around for a housing rights’ law group or legal aid office. If they can’t represent you, they may be able to direct you to someone who can. …CONTINUED
Q: I’ve been having trouble getting my tenants to pay rent on time. My late fee policy, which is legal — I charge no more than what I figure I lose, in interest and time — just isn’t enough to deter tardiness. Another landlord friend who owns commercial real estate suggested that I withdraw perks, like parking places or the right to rent the clubhouse for private gatherings, when tenants pay late. That might get their attention. Is there anything illegal about this? –Pam M.
A: Your commercial landlord pal has seized upon a clever way to make his business tenants prioritize their rental payment above their other monthly expenses. The landlord knows that many commercial tenants face harsher consequences for late payments from their other creditors, such as credit-card companies, vendors or banks, than they do from a landlord who charges a late fee. That’s because, as you noted, the late fee must be tied to the actual damages that the landlord suffers when the rent is late. If you assess your damages honestly, they typically don’t amount to much.
Thanks to creditor-friendly legislation, however, credit-card companies and banks can often skirt or avoid this general rule, and get away with imposing harsh penalties. Landlords as a group are not the happy beneficiaries of special legislation designed to pressure tenants to pay on time. As a result, some tenants pay the landlord last.
When landlords withdraw a perk as a consequence of a late rent payment, they’re really diminishing the value of the rental, and the size of that lost value will determine whether the consequence is legal. Whether you impose a late fee or take away a perk, the test is the same: The penalty to the tenant must be an accurate measure of the damages you have suffered due to the late payment. For example, if you take away the parking for an office suite, which diminishes the value of the rental by $200, it’s the same as charging a $200 late fee.
But what if the value of the perk exceeds your true damages? In a commercial context, it’s presumed that landlord and tenant are bargaining from equal positions of power, and the consequences of having the deal fall apart are not so dire as to pressure the weaker side into agreeing to an unfair deal (in other words, no one will be left without a roof over his head). As a result, courts allow commercial landlords and tenants to vary many general rules, such as the one here on late fees. When a commercial tenant signs a lease that allows the landlord to take away perks when the rent is late, he’s voluntarily giving up the protections against outsized late fees that he’d otherwise enjoy.
The game changes, however, when it’s a residential tenant at the other end of the deal. Here, no matter what the tenant agreed to in a lease, courts are often reluctant to approve of harsh variations on general rules of law designed to level the playing field, and are especially loathe to allow tenants to give up specific tenant rights. For instance, with very few exceptions, tenants cannot waive their rights to habitable housing, nor can they waive their rights to notice of an impending lawsuit.
I suspect that many courts would look askance at your friend’s practices if they were applied to a residential tenant. If the value of the removed perk exceeds the dollar amount of the landlord’s actual damages, these courts would see the ploy for what it is (an attempt to impose a higher late fee than would otherwise be allowed), and strike it down.
Janet Portman is an attorney and managing editor at Nolo. She specializes in landlord/tenant law and is co-author of "Every Landlord’s Legal Guide" and "Every Tenant’s Legal Guide." She can be reached at janet@sandbox.inman.com.
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