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New hazards in commercial leasing.

The 1993 real estate market puts added pressure on landlords to make commercial lease deals. In their rush to sign up new deals, however, landlords should steer clear of new hazards that have become common in today's real estate market.

Mortgage Foreclosure. Landlords must understand the consequences of a pending mortgage foreclosure on lease negotiations. When a bank starts a mortgage foreclosure, a receiver is usually appointed by the court. The appointment of a receiver insures that the rents will be collected and applied toward the payment of building expenses, including the mortgage. The appointment of a receiver takes away the landlord's right to sign a new lease. As a result, a lease signed by the 'landlord after a receiver is appointed is not binding.

One should not assume, however, that a receiver has the same authority as a landlord to sign leases. A receiver should review the order which appointed him to determine if he has authority to negotiate new leases and to determine if there are any limitations on his authority to negotiate such leases. For example, the order may permit the receiver to only enter into leases with certain minimum rentals or a maximum term.

Landlord Bankruptcy. Landlords should also understand the effects of its filing for bankruptcy on a leasing transaction. On the commencement of a Chapter 11 bankruptcy case, the bankruptcy code requires the receiver to redeliver the property to the landlord as the "debtor in possession. " This terminates the authority of the receiver to enter into leases. In addition, the debtor in possession may be required to obtain the consent of the bankruptcy court to enter into new leases.

The debtor in possession may "reject" a lease which has already been signed. A rejection of a lease, however, does not mean that the lease is terminated or that the tenant must move out of the building. Rather, when a lease is rejected, the debtor in possession may not be required to provide the repair, cleaning and other services which were required to be provided to the tenant under the lease. As a result, although the tenant can remain in the building, it may not receive all the building services. The tenant, however, may be entitled to an offset in rent equal to the value of the services which are no longer being provided.

Non-Disturbance Agreements. Even if the building's mortgage is not currently being foreclosed, the landlord is often asked by new tenants for protection from a future foreclosure of the mortgage. This is because most landlords provide in their leases that, if the holder of the mortgage acquires the property by foreclosure, such mortgage holder can terminate the lease and evict the tenant. To avoid this, a tenant will ask the landlord for a non-disturbance agreement from the holders of present and future mortgages. By signing a nondisturbance agreement, the mortgage holder agrees that, as long a tenant is not in default under the lease, it will not disturb the tenant's lease, even if it forecloses on the mortgage.

Subleases. More and more, companies are looking for bargains in the sublease market. For example, a tenant that signed a lease a few years ago at the height of the market may now be offering that space to others on a sublease basis at a substantially reduced rent. Since the landlord can evict the subtenant as well as the tenant if the tenant defaults under its lease with the landlord, the subtenant may ask the landlord to sign a non-disturbance agreement. In considering whether to grant a request for a non-disturbance agreement, the landlord should ask himself whether he will expect the subtenant to pay the full amount of rent which the tenant was required to pay under the defaulted lease, or whether he would be willing to accept the rent which was paid by the subtenant under the sublease.

Irwin L Wikler is an attorney with the law firm of Fink Weinberger p.c. with offices in New York City, White Plains, Great Neck, Albany, Clifton, New Jersey and Zurich, Switzerland.
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Title Annotation:Review & Forecast, Section V; real estate market
Author:Wikler, Irwin I.
Publication:Real Estate Weekly
Date:Jan 27, 1993
Previous Article:Experienced prosper.
Next Article:Patience paves way to recovery.

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