Foreclosure on the landlord can be bad news for tenants

Posted April 04, 2010, at 6:59 p.m.

Q. I have a hair salon in a strip mall, with a five-year lease. There were five other businesses in this same building, which is a small mall in a good location, but two of them went under in the last year. Now there is a rumor that the owner is behind in his payments to the bank, and that they are going to foreclose. I have been here for six years and built up a good clientele. I have no idea of where else I can move, and may lose my whole business if the bank doesn’t let me stay here. Could I come to work one morning and find myself locked out?

A. You are stuck between a rock and a hard place. If you look for a new location and move, your landlord can pursue you for breach of contract. If you do not look, you could easily wind up in a “move next week” situation.

Let’s start with your landlord’s best-case scenario, a sale of the property. Your lease is for two years or more. If the buyer does not have “actual knowledge” of your lease, the lease is not effective against the buyer unless you have recorded a memorandum of lease that complies with 33 MRSA [Section] 201. Unfortunately, very few tenants ask for them. The good news is that most buyers of commercial property like tenants who pay their rent and will often honor old leases. However, that is a practical outcome, not a legal right.

Worst-case scenario — your landlord really does get foreclosed. If so, your lease is gone. The foreclosure wipes out any interest in the property that is junior to the mortgage, including your lease. On the hopeful side, many buyers of commercial property want income and will honor old leases. On the not-so, others prefer to start from scratch with their own tenants.

Really worst-case scenario — finding yourself locked out — isn’t a realistic concern. Ultimately, even if the bank conducts a power-of-sale without providing notice directly to any tenants (like you) or occupants, it will still need to go through the eviction process with respect to you all. So the precise answer to your question is: “No, you will not show up one morning to find your shop locked up out of the blue.” But the better answer is, “You could find yourself looking at a very short timeline and I suspect that does happen sometimes.”

Many of my clients would be looking for options right now. Good luck.

This column is a service of the Lawyer Referral and Information Service of the Maine State Bar Association. Its contents are a general response to the question and do not constitute legal advice. Questions are welcome. E-mail AAL@mainebar.org, describe your question and note you are a BDN reader. Written questions mailed to “Ask a Lawyer,” Bangor Daily News, P.O. Box 1329, Bangor 04402-1329 will be forwarded to the LRIS.

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