When you look over the lease for your apartment or for a space you're renting for your business, you might come across a phrase saying "lease subordinate to any mortgage," or something very similar. It doesn't mean that you have to pay the bank ... or even talk to them. It just means that the bank that makes the mortgage loan's right to the property takes precedence over yours. To understand what this all means, you also need to understand how real estate ownership works.
When someone buys a property, they are really buying a set of rights that are attached to a piece of land. The three key rights are the right to keep others out of the property, the right to give the property to someone else, and the right to have the land and to use it. When a property owner leases a space to you, they're giving you a little piece of their right to use it, and when they take out a mortgage, they're effectively using their right to give the property to someone else.
Rights to Property
Many different people can have rights to a piece of property. When a court tries to determine whose rights come first, it looks at who got their interest in the property first. So, if you leased space at the property before the property's owner took out their mortgage, you could theoretically prevent the bank from taking the property if the owner didn't pay the loan. This happens because you were there first.
Subordination clauses like the one in your lease protect the bank's interests. When you sign them, you're agreeing to have your rights in the property moved below the bank's rights. That way, if the owner doesn't pay the mortgage, the lender can take it back without talking to you or asking your permission.
Subordination and Non-Disturbance
By itself, this clause can be problematic for your rights as a tenant. If the lease has this clause, it could give the lender the right to evict you even before the end of your lease. To protect yourself, look for non-disturbance language. A non-disturbance clause binds the lender not to interfere with your lease in exchange for your agreement to subordinate your rights to them. In commercial properties, tenants, owners and lenders sign complicated legal documents called "Subordination and Non-Disturbance Agreements" that do this.
Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.