Attornment Agreements: What Are They?
An attornment agreement is a contract between the landlord, the tenant and a third party. The purpose of the agreement is to direct the payment of rent into the hands of the third party, as opposed to the landlord, who may have sold the property, or assigned its rights under the lease. Attornment agreements are used to protect the rights of third parties such as lenders, who have a security interest in the property.
The term "attorn" means to acknowledge the rights of a new landowner. The act of attorning protects the tenant by ensuring he or she will not be evicted, unless it is for cause , even if the new owner may now be entitled to ask for the rent or terminate the lease for which they have assumed an interest.
The attornment agreement outlines the specific rights of the parties and it can be registered on title to give notice of the rights. It may also set out restrictions as to the purposes for which the tenant can use the property, the amounts to be paid and to whom. In a commercial context, it can be a way of transferring tenants and/or payment obligations from the seller to the buyer.
In Ontario, freehold owners are not required to accept pre-existing leases granted by their predecessor in title, however, lenders often make their financing approval conditional upon acceptable attornment agreements being executed.
How Do Attornment Agreements Function?
The mechanics of how attornment agreements work are relatively straightforward. The standard form agreements will typically include a clause in the lease or the sublease that sets out how changes in the landlord or landlord’s interest are to be dealt with in the case of a disposition of that interest. A common form would state: "If the Owner sells its interest in this Lease, the Tenant agrees to recognize and attorn to the successor Landlord as the Landlord under this Lease". The surviving of the tenant’s obligations under the lease, and rebuilding of the addition, would also be addressed in the lease at this time.
When a property is sold and the landlord becomes a successor, the tenant is required to recognize the new landlord and continue to abide by the terms and requirements of the lease. The tenant must become identified with the new landlord until such time as a new lease can be negotiated or a reasonable termination of the existing agreement can be made to suit the legal interests of both parties. If failure or inability to negotiate a new lease occurs, the tenant may be evicted from the property in accordance with the provisions of the lease or by the authority of a court order until such time as a tenant can be found or an acceptable agreement of lease can be made.
The Advantages to Attornment Agreements
Attornment agreements provide advantages to the landlord, tenant and lender. Attornment agreements stabilize the tenancy regardless of the status of the landlord. This is beneficial because it gives the tenant certainty that, if the landlord is unable to fulfill its obligations under the lease, the lease will not be terminated and, as a result, the tenant will not be evicted. In addition, for the lender, a tenant attorning to the rights of its landlord gives the lender some comfort that the rental revenues which are critical to the payment of debt will be ongoing. An attornment ensures that the lease will remain in place notwithstanding the change to the landlord’s ownership.
Issues and Considerations
The potential for legal challenges to attornment agreements and the corresponding risks to the certainties such agreements provide must be carefully and thoughtfully considered before signing. A commercial landlord needs to appreciate what it is promising and what it is exposing itself to if it signs an attornment agreement, often on a "no comment" basis. This is complicated by the fact that the parties to an attornment agreement are typically not the actual parties to the lease. For example, the landlord and tenant may have entered into a head lease and have prepared an attornment agreement without a particular consideration of the impact on these parties.
Another issue that can arise with attornment agreements is whether they have been signed by the appropriate signatories. An organization may need to ensure that its affiliated entities sign the attornment agreements, rather than the holding company or the parent company. This position is complicated by considerations such as whether the signer was authorized to sign or whether the signer was, on its face, properly authorized to sign. The issue comes up most frequently in respect of statutory limitations of liability but could arise in other contexts where an attornment agreement is signed by an affiliate company of the landlord or tenant.
Attornment, Subordination and Non-Disturbance Agreements
Subordination and non-disturbance agreements are often used in conjunction with attornment agreements. The essential difference between these three types of agreements is that a subordination and non-disturbance agreement is principally concerned with the relationship between the subtenant under the attornment agreement and the mortgagee upon the realization by the mortgagee of its power of sale (or foreclosure) in the Property; whereas an attornment agreement is principally concerned with the relationship between the attorning tenant and the landlord.
In the case of a subordination and non-disturbance agreement, the principle concern of the landlord/lessor is to protect the income stream under the lease from the tenant. In the case of an attornment agreement, the principle concern of the attorning tenant is to protect itself from the consequences of a new landlord who may have different views on the terms of the attorning tenant’s tenancy than the outgoing landlord had .
A collateral issue involved in the negotiation and drafting of these agreements is the right of the original landlord/lessor to enter into a subordination and non-disturbance agreement with respect to any lease of the Property. Bankruptcy and insolvency legislation upholds a landlord/lessor’s ability to grant a lease of the Property that may be adverse to the interests of an existing mortgagee or a purchaser at a sale under power of sale.
A further collateral issue is the ability of a landlord that has entered into an attornment agreement to subsequently sell the Property to a third party without the consent of the attorning tenant. The attitude of tenants is typically that they would want to control who might become their new landlord.
Negotiating and Drafting An Attornment Agreement
After drafting the ground lease to the satisfaction of the tenant, the landlord will then focus on negotiating an attornment agreement with the leasehold mortgagee. When negotiating the terms of an attornment agreement the parties should keep in mind the following things:
Deal points that should become a part of the attornment agreement should be agreed to before negotiation of the attornment agreement begins. For example, if the ground lease contains a consent-to-sublease provision, does the tenant want the leasehold mortgagee to have a separate consent-to-sublease right? It might be easier for the tenant to accept a separate consent-to-sublease right if it is conditioned upon the tenant providing the leasehold mortgagee with the same rights it would have under the leasehold mortgage to the subleased premises (e.g., a restriction on the scope and type of permitted use of the subleased premises; a requirement that the sublease be for a term-determined at or prior to expiration of the ground lease; and, a requirement that the sublease be deemed an asset of the ground lease).
Depending upon the size of the tenant (or the tenant’s affiliates), the tenant may be represented by in-house council, but it is always desirable for the tenant to have its own transaction counsel to negotiate the required documents. Similarly, the leasehold mortgagee will often have in-house counsel, but the leasehold mortgagee should also be represented by amortization counsel if the leasehold mortgage is securitized. One size does not fit all.
Attornment Agreements: A Summary
In conclusion, the implications of attornment agreements extend beyond simply establishing the identity of the landlord. Rather, they form an important part of the landlord-tenant relationship, one that goes hand-in-hand with the lease agreement and should also be considered when assessing the continuing rights and obligations of the parties when the landlord, but not the tenant, seeks to transfer its interest in the property . Without a properly executed and dated attornment agreement, the successor landlord may find it difficult, if not impossible, to collect rent and finances from the tenant, even if the successor landlord is deemed by the courts to be the true landlord. While the legal principle of attornment has been long-established, attornment agreements remain of great importance in the common law jurisdiction of Ontario.