What is an Attornment Agreement?
An attornment agreement is a written document between a landlord and tenant where one party consents to allow the other party to assign certain rights and obligations under a lease. This agreement comes into play when the landlord proposes to hand over the management of the site (or just the physical facility) to a third party or when the landlord intends to sell its interest in the property.
The purpose of an attornment agreement is to give the landlord relief from its obligations under the lease and to ensure that the tenant continues to pay rent to the third party instead of the landlord. The concept of attornment establishes the legally recognized right to transfer contractual obligations from one party to another .
Attornment agreements, however, can be more than just agreements between landlords and tenants. For example, courts have held that these agreements are persuasive authorities to bind a tenant to a new landlord in the case of property foreclosure. A tenant may therefore be bound by an attornment agreement even if it never enters into a lease with the new landlord, and even if the landlord did not actually foreclose on the property.
Landlords are the granting party to an attornment agreement. To enforce an assignment of the lease, a landlord may insert language in the attornment agreement providing for entry by a third party into any real property in which the landlord has an interest, including a mortgage.
Attornment Agreements & Their Significance in Real Property
The significance of an attornment agreement in real estate cannot be overstated. They are integral to the regulation that governs landlords and tenants in Ontario, as attornment is considered the basis of tenancy. It confirms the acceptance of a landlord-tenant relationship upon sale or transfer of an interest in real property, as landlord, tenant, or leasehold interests are not subject to the Landlord and Tenant Act and not binding on the purchaser unless the tenant has attorned to the new landlord. Thus, attornment insures the continuation of the lease within the period of time required for the new landlord to make arrangements with its accountant and lawyer to pay rent directly to them and the tenant to receive the proper receipts.
Further, it allows the new landlord time to review the tenancy agreement(s) currently in place and protects an existing tenant from a new owner as attornment limits a purchaser’s ability to evict a tenant, as the terms of the lease agreement continue to bind all parties. When attornment is used, the new landlord is subject to all obligations and rights under the original tenancy agreement. This is a means of protecting the tenant for the balance of the term of the lease. Tenants are offered the security of their tenancy because the lease agreement is not modified or terminated upon a change of ownership, but attaches directly to the property itself.
The Essential Elements of Attornment Agreements
Attornment agreements typically contain a few key components, most notably rights, obligations, and conditions. In the context of an attornment agreement owed to a Declarant by a purchaser of a lot from the Declarant, these components must be carefully considered.
Unrestricted Rights
The Declarant will generally demand that the purchaser’s rights to use the common property in a subdivision be subject to the Declarant’s rights to use the same property. While it may be prudent to negotiate the Declarant’s undiminished right to use the common property, the Declarant’s rights should not be absolute; rather, it is appropriate to represent the rights of the Declarant to change the designated purposes or uses of the common property, provided that the Declarant’s rights to change the use of the common property is consistent with land use restrictions and zoning regulations, and is indemnified.
Obligations
Generally speaking, the purchaser’s obligations under the attornment agreement will relate to the purchaser’s obligations to pay maintenance and taxes attributable to the common property. It is important to keep in mind the term "attributable." Attributable is ambiguous when used in this context and should be specifically defined.
Conditions
The Declarant may impose conditions, which are enforceable as covenants running with the land, that require the purchaser to keep the property in a clean, sanitary and healthful condition, and properly fenced. Any covenants running with the land should allow for the Declarant to enforce such conditions against both the Declarant and the purchaser.
How Attornment Agreements Secure the Interests of Parties
Protection through attornment agreements is contractually established between a landlord, tenant and lender and each one of the parties to an attornment agreement has a mutually beneficial interest in the document. A tenant wants protection of having security of tenure at a given location; the landlord has peace of mind that a subordination has been agreed to and that the order of registrability will be protected; and a lender wants to avoid a situation where a tenant decides not pay rent to the lender if there is a default on the mortgage. In addition, there are also scenarios where, if a tenant is not bound to the attornment agreement, the tenant may refuse to honour its obligations under the lease.
Scenario 1
A tenant is not willing to pay rent to the lender if there is a default on the mortgage. When an attornment agreement is in place, the lender is entitled to provide a notice of default to the tenant, and if there is a mortgage default and a demand for repayment, the tenant must comply with the lender’s demand for rent. However, if the tenant is not bound by an attornment agreement, the tenant can state that it will not comply with an order from the lender. In such cases, the lender would not be able to recover rental arrears.
Scenario 2
A receiver is appointed over the property under the power of sale. Attornment agreements give a receiver the right to step into the shoes of the landlord so that tenants are obligated to continue to pay rent to the receiver. If no attornment agreement exists, the receiver may have to initiate eviction proceedings to recover the premises.
Scenario 3
The landlord wants to carry out due diligence on the tenant as a prospective purchaser. Any prudent purchaser will carry out its due diligence enquiries before entering into any transaction. When a landlord is considering selling its property, a potential purchaser will be requesting attornment agreements from the tenant in order to ensure that the sale can be carried out without any undue influence from the existing lease.
Scenario 4
A landlord wants security of tenure. If a landlord is not able to enforce standard form attornment documents against its tenant, the landlord will not have any security of tenure with respect to the tenants’ operation. Furthermore, if a tenant leases additional space from a different landlord under a new lease, the first landlord’s lease may have priority as a result of the first landlord registration which means that the priority between two leases may be affected.
Scenario 5
Multiple mortgages secured against the same property. When there are multiple mortgages secured against the same property and multiple attornment agreements, it is important to distinguish the legal priority of each instrument.
The Legal Nature of Attornment Agreements
Attornment agreements are an important element of a landlord’s security for rent (in addition to the security deposit and/or personal guaranty). Tenants often overlook their significance because they routinely sign them without further consideration where requested by the landlord. Attorneys should counsel their client so as to ensure that the client understands that the rights to collect rent, and everything else under a lease, are protected for the benefit of both the landlord and the tenant during the loan workout process. The attornment agreement serves as a binding acknowledgment of rights afforded rather than imposed upon the tenant under the lease (i.e., that the tenant will not vacate the premises without paying rent through the end of the term and that it will continue to honor the terms of the lease). Once the agreement is signed, the tenant may have waived its right to treat a subsequent default under the lease as a basis to terminate the lease; however, where the lease has been or may be rejected in bankruptcy, the rejections of leases and executory contracts code section allows the debtor to terminate a lease whether the lease is personally guaranteed or not . Even though tenants are customarily required to sign an attornment agreement before receiving their keys, they should also be understanding of a demand to sign an attornment agreement at the request of the new landlord or the landlord’s lender in the event of a foreclosure. Such agreement is also standard. A tenant which fails to sign an attornment agreement does so at its own peril, as it could lose its tenancy and gain an eviction action should the landlord proceed with a foreclosure without the tenant’s acknowledgement and attornment to the landlord. This is because leases (other than ones to residential tenants) do not automatically transfer to a new landlord during foreclosure. In some states, leases can be deemed extinguished if the tenant does not voluntarily acknowledge the new landlord and attorn to its benefit by executing an attornment agreement. Thus, it is extremely important for the tenant to sign an attornment agreement, lest it stay too long before abandoning a lease where it no longer desires to cure the defaults therein and remain in possession of the premises.
How to Draft and Negotiate an Attornment Agreement
As the issuance of notice to a tenant of a "rights writer" can come at the eleventh hour, so too must the negotiation and documentation of a written attornment agreement be done relatively quickly. To navigate a time-crunched timeline, weighed against the fluid dynamics of a transaction (and announcement/joint press release), it is highly preferred that the issuer of that notice have a pre-drafted form of attornment form agreement. Such form should be provided to all prospective assignees of the ground lease. An attornment agreement drafted in advance of the attornment notice and/or without knowledge of a particular ground lease may need to be customized, but the chances that this will occur are statistically remote.
For the ground lease tenant, if it does not have a pre-signed attornment agreement in hand once receipt of a notice is given, then it can consider itself to be on the ropes. The ground lease tenant should seek to immediately negotiate for the following terms to be included in the attornment agreement: (i) the right to cure defaults by the landlord that affect the tenant’s interest; (ii) no increase in minimum rent as a result of a change in ownership or transfer of the ground lease; (iii) all of the tenant’s rights under the ground lease shall continue in full force and effect; (iv) that the tenant’s failure to respond shall not be deemed to be an acceptance or agreement of the terms and provisions of the attornment agreement; (v) that the tenant is not responsible for any defaults by the landlord prior to the date of attorning; (vi) that all of the tenant’s rights to offsets, abatements, credits and extensions are preserved in full; and (vii) that the tenant does not take a leasehold mortgage (or, if a leasehold mortgage is already in place, that any ground lessor’s consent required to attorn to a subsequent purchaser has already been obtained).
The ability to receive a pre-signed attornment agreement is a rare concession from the ground lease landlord. Even when provided, these pre-signed forms are usually heavily negotiated and burdened with unfavorable terms from the prospective assignee’s perspective. Just as important as negotiating the terms of the attornment agreement itself, is the timing of the transfer itself. An attornment agreement executed at or prior to the time of transfer (i.e., prior to the closing date of the sale or transfer of the ground lease) is generally preferred, as this allows the future lessor to negotiate its position before it takes title (or equity interest) to the property. If an attornment agreement is executed after the closing of the sale or transfer, the negotiation leverage of the future lessor is effectively taken away at the time the transaction has reached its conclusion.
Common Misconceptions Surrounding Attornment Agreements
Given the legal intricacies involved in binding an asset to a debt, misconceptions about attornments are commonplace. When advising our clients, we have found that the following points of confusion about attornment agreements arise:
- Mortgagees and tenants can bind the real estate to any mortgage – Even though a tenant’s lease has been registered against the title to land, it does not create a binding obligation between a mortgagee and a tenant to bind the land. The tenant is not privy to the leasehold interest and the lease will be subject to the onus of first proving its validity against the lien of the mortgage. Primarily, however, the tenant must perform under the lease and failure to do so can work to void the attornment. This area is uncertain and all tenants should be advised by counsel to enter into an attornment agreement. Legal counsel for both the mortgagee and owner should also consider attornments with their respective clients.
- Tenants are always bound to the attornment agreement by the lease – While it is standard for commercial leases to stipulate that the tenant will attorn to the holder of the head lease, no tenant is ever permanently bound to the lease itself. Attornment clauses in a lease, while customary, are not legally binding upon third parties who may become owners of the asset. A tenant is not tied to the lease and will not be influenced by the reciprocal provisions in the lease which compel an attornment. Neither may a tenant be bound to the mortgage which has come into force independent of the lease. Further, most leases contain entire agreement clauses which mitigates against the argument that the attornment clause in the lease is a positive undertaking by the tenant to abide by the lease. The reason for these facts is that unlike an assignment of a lease which expressly transfers the interest of the assignor to the assignee, an attornment merely takes effect in future whereby the tenant promises to pay rent and perform under the lease to a successor of the owner. The lease is not assigned but continues in existence until the tenant defaults. In this character of attornment, the tenant’s obligation to pay rent to a successor of the owner is no more than a promise to pay. In fact, the promise is so fragile that it only gives the tenant an option to continue in possession and is not a good defence to an eviction.
- Banks require all tenants to sign an attornment to release the primary owner – It is increasingly uncommon for banks to require a blanket attornment from all tenants. It is also uncommon for banks to require perfection of their security interest in accounts receivable. In certain circumstances, however, banks may demand attornments to be received from tenants. In these situations, there is ample motivation for lawyers to try to insist on the inclusion of some legal protection for the tenant such as the right to cancel an attornment upon default by a successor of the owner.
Frequently Asked Questions Regarding Attornment Agreements
Attornment agreements are relatively short and simple documents for the most part, but like even the most well drafted lease, they will be of little use if the tenant does not understand their import. As such, we have set out below some common questions that arise in this area:
1. What exactly is an attornment agreement?
An attornment agreement is a document which requires the subject tenant to recognize a purchaser of the landlord’s interest in the property as their landlord for purposes of the lease. It is normally entered into in order to establish the validity of a relocation of a tenant’s security deposit in circumstances where the landlord is selling the property and required by the purchaser to procure an attornment agreement from each tenant. The purpose of the agreement is to allow the purchaser to deal with the subject tenant directly (including holding their security deposit) rather than through the former landlord. An attornment agreement usually sets out new contact information for the landlord, and also makes it clear which leases are being attorned to (in circumstances where a landlord owns multiple buildings in the area).
2. Who is responsible for preparing the attornment agreement?
In practice, it is normally the purchaser who prepares the attornment agreement. The vendor is provided with the draft by the purchaser and their lawyer and is expected to make comments and corrections (if any) to the purchaser’s lawyer prior to the closing of the real estate transaction.
3. How does the attornment agreement relate to a lease?
The attornment agreement is an ancillary document to the lease obligating the tenant to accept its relationship with the purchaser of the land and to pay its rent and other charges directly to the purchaser after the closing of the sale of the subject land.
4. What are the consequences if the tenant refuses to sign the attornment agreement or agrees to some revisions that the purchaser finds unacceptable?
If the tenant refuses to sign the attornment agreement , it may be in jeopardy of breaching the terms of the lease (resulting in a potential application for eviction). That said, the tenant cannot be evicted for its refusal to sign the attornment agreement if there is no change to the terms of the lease; the landlord has merely sold its interest in the property but the tenant remains bound by the same terms and conditions as before. If the tenant is requesting certain changes to the terms of the original lease, the purchaser is under no obligation to accept the changes and may refuse to close the sale of the property, leaving the vendor to find another purchaser or to withdraw the property from the market.
5. How do I know if the purchaser of my building has successfully obtained attornments from all of the tenants of the building?
One of the conditions in a sale of commercial real estate is normally that the purchaser obtain all necessary documents, including attornment agreements, from the tenants. The purchaser may also be required to provide a copy of each attornment agreement to the vendor to use as an exhibit to the bill of sale of the property. The most prudent course of action may be to request a copy of all attornment agreements from the vendor post-closing in order to confirm that the purchaser has signed attornment agreements with all tenants (the vendor should be able to provide them in due course).