Ask a lawyer:
What are the recommended provisions for a Lease Subordination Agreement?
Introduction
A Lease Subordination Agreement is a critical document in real estate and commercial leasing transactions. It establishes the priority of claims on a property, typically subordinating the tenant's leasehold interest to the interests of a lender. This agreement is essential for protecting the lender's investment and ensuring that the lender's rights take precedence in the event of a default by the property owner. In Kenya, the legal framework governing lease subordination agreements is influenced by various statutes, including the Land Act, 2012, and the Land Registration Act, 2012. This article will delve into the recommended provisions for a Lease Subordination Agreement in Kenya, providing a comprehensive guide for landlords, tenants, and lenders.
Table of Contents
Definition and Purpose of Lease Subordination Agreement
Key Provisions in a Lease Subordination Agreement
Subordination Clause
Non-Disturbance Clause
Attornment Clause
Notice and Cure Periods
Insurance Requirements
Default Provisions
Governing Law
Legal Framework in Kenya
Relevant Case Laws
Conclusion
TLDR
1. Definition and Purpose of Lease Subordination Agreement
A Lease Subordination Agreement is a legal document that subordinates the tenant's leasehold interest to the interests of a lender. This means that the lender's rights to the property take precedence over the tenant's rights. The primary purpose of this agreement is to protect the lender's investment by ensuring that their claim to the property is superior to that of the tenant. This is particularly important in situations where the property owner defaults on their loan, and the lender needs to foreclose on the property.
2. Key Provisions in a Lease Subordination Agreement
2.1 Subordination Clause
The subordination clause is the cornerstone of the Lease Subordination Agreement. It explicitly states that the tenant's leasehold interest is subordinate to the lender's mortgage or deed of trust. This clause ensures that the lender's rights take precedence over the tenant's rights in the event of a default by the property owner.
Example: "The Tenant hereby subordinates its leasehold interest in the Property to the lien of the Mortgage held by the Lender, and agrees that the Lender's rights under the Mortgage shall be superior to the Tenant's rights under the Lease."
2.2 Non-Disturbance Clause
The non-disturbance clause protects the tenant's right to continue occupying the property even if the lender forecloses on the property. This clause ensures that the tenant's lease will not be terminated as long as the tenant is not in default under the lease terms.
Example: "The Lender agrees that, in the event of foreclosure or other enforcement of the Mortgage, the Tenant's possession and occupancy of the Property under the Lease shall not be disturbed, provided that the Tenant is not in default under the Lease."
2.3 Attornment Clause
The attornment clause requires the tenant to recognize the lender (or any subsequent purchaser at a foreclosure sale) as the new landlord under the lease. This clause ensures continuity of the lease agreement even after a change in property ownership.
Example: "The Tenant agrees to attorn to and recognize the Lender, or any purchaser at a foreclosure sale, as the new landlord under the Lease, and to be bound by all the terms and conditions of the Lease."
2.4 Notice and Cure Periods
This provision outlines the procedures for notifying the tenant and the lender of any defaults under the lease or mortgage. It also specifies the time periods allowed for curing such defaults. This ensures that both parties have an opportunity to address any issues before taking further action.
Example: "In the event of a default by the Tenant under the Lease, the Landlord shall provide written notice to the Lender, and the Lender shall have a period of thirty (30) days to cure such default. Similarly, in the event of a default by the Landlord under the Mortgage, the Lender shall provide written notice to the Tenant, and the Tenant shall have a period of thirty (30) days to cure such default."
2.5 Insurance Requirements
This provision requires the tenant to maintain adequate insurance coverage for the property. It ensures that the property is protected against potential risks, and the lender's interests are safeguarded.
Example: "The Tenant shall maintain comprehensive general liability insurance, property insurance, and any other insurance required under the Lease, naming the Lender as an additional insured. The Tenant shall provide the Lender with certificates of insurance upon request."
2.6 Default Provisions
This section outlines the consequences of default by either party under the Lease Subordination Agreement. It specifies the remedies available to the non-defaulting party, including the right to terminate the agreement or seek damages.
Example: "In the event of a default by the Tenant under the Lease, the Lender shall have the right to terminate the Lease Subordination Agreement and pursue any remedies available under the law. In the event of a default by the Landlord under the Mortgage, the Tenant shall have the right to terminate the Lease Subordination Agreement and seek damages."
2.7 Governing Law
This provision specifies the legal jurisdiction that will govern the Lease Subordination Agreement. In Kenya, it is essential to state that the agreement will be governed by Kenyan law.
Example: "This Lease Subordination Agreement shall be governed by and construed in accordance with the laws of the Republic of Kenya."
3. Legal Framework in Kenya
In Kenya, the legal framework governing lease subordination agreements is primarily derived from the Land Act, 2012, and the Land Registration Act, 2012. These statutes provide the legal basis for creating, registering, and enforcing lease agreements and subordination clauses.
Land Act, 2012
The Land Act, 2012, provides the legal framework for the management and administration of land in Kenya. Section 58 of the Act defines a "short-term lease" as a lease made for a term of two years or less without an option for renewal, or a periodic lease, or a lease to which section 57(2) applies. A long-term lease is defined as one for a term of more than two years.
Source:
Land Registration Act, 2012
The Land Registration Act, 2012, consolidates and rationalizes the registration of titles to land. It provides for the registration of leases and other interests in land, ensuring that such interests are legally recognized and enforceable.
Source:
4. Relevant Case Laws
Case Law 1: Kenya Commercial Bank Ltd v. Osebe [1982] eKLR
Facts: The case involved a dispute over the priority of claims between a lender and a tenant. The lender sought to foreclose on the property, while the tenant claimed a right to continue occupying the property under the lease.
Outcome: The court held that the lender's rights under the mortgage took precedence over the tenant's leasehold interest. The tenant's lease was subordinated to the lender's mortgage, and the lender was entitled to foreclose on the property.
Relevance: This case underscores the importance of a subordination clause in protecting the lender's interests and ensuring that their rights take precedence over the tenant's rights.
Source:
Case Law 2: Githunguri Dairy Farmers Co-operative Society Ltd v. Attorney General & 2 others [2016] eKLR
Facts: The case involved a dispute over the enforcement of a lease agreement and the priority of claims between a lender and a tenant. The tenant sought to enforce their leasehold rights, while the lender sought to foreclose on the property.
Outcome: The court held that the lender's rights under the mortgage took precedence over the tenant's leasehold interest. The tenant's lease was subordinated to the lender's mortgage, and the lender was entitled to foreclose on the property.
Relevance: This case highlights the importance of a non-disturbance clause in protecting the tenant's right to continue occupying the property, even in the event of foreclosure.
Source:
Conclusion
A Lease Subordination Agreement is a vital document in real estate and commercial leasing transactions in Kenya. It ensures that the lender's rights take precedence over the tenant's rights, protecting the lender's investment in the property. The key provisions of a Lease Subordination Agreement include the subordination clause, non-disturbance clause, attornment clause, notice and cure periods, insurance requirements, default provisions, and governing law. Understanding and incorporating these provisions into the agreement is essential for landlords, tenants, and lenders to safeguard their respective interests.
TLDR
A Lease Subordination Agreement in Kenya ensures that a lender's rights take precedence over a tenant's leasehold interest. Key provisions include subordination, non-disturbance, attornment clauses, notice and cure periods, insurance requirements, default provisions, and governing law. Relevant case laws underscore the importance of these provisions in protecting the interests of all parties involved.
Sources
Answered by mwakili.com