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What are the recommended provisions for a Lease Subordination Agreement?
Introduction
A Lease Subordination Agreement is a legal document that establishes the priority of claims between a tenant's lease and a lender's mortgage on a property. This agreement is crucial in real estate transactions, particularly when a property owner seeks financing and the lender requires assurance that their mortgage will take precedence over existing leases. In Kenya, the provisions for a Lease Subordination Agreement are guided by various laws and regulations, including the Land Act, 2012, the Land Registration Act, 2012, and the Law of Contract Act, among others.
Table of Contents
Legal Framework
1.1 Land Act, 2012
1.2 Land Registration Act, 2012
1.3 Law of Contract Act
Key Provisions in a Lease Subordination Agreement
2.1 Definition and Parties Involved
2.2 Subordination Clause
2.3 Non-Disturbance Clause
2.4 Attornment Clause
2.5 Notice and Cure Periods
2.6 Rights and Obligations of Parties
2.7 Governing Law and Jurisdiction
2.8 Execution and Delivery
Conclusion
1. Legal Framework
1.1 Land Act, 2012
The Land Act, 2012, provides the legal framework for land management and administration in Kenya. It outlines the rights and obligations of landowners, tenants, and lenders, and provides the basis for lease agreements and subordination clauses.
Section 54: This section deals with the registration of leases and the rights of lessees.
Section 55: This section outlines the conditions under which a lease can be subordinated to a mortgage.
1.2 Land Registration Act, 2012
The Land Registration Act, 2012, complements the Land Act by providing detailed procedures for the registration of land transactions, including leases and mortgages.
Section 38: This section mandates the registration of all leases and subordination agreements to ensure their enforceability.
Section 39: This section outlines the priority of registered interests, which is crucial for understanding the implications of subordination.
1.3 Law of Contract Act
The Law of Contract Act governs the formation and enforcement of contracts in Kenya, including Lease Subordination Agreements.
Section 3: This section requires that all contracts relating to the disposition of an interest in land be in writing and signed by the parties involved.
2. Key Provisions in a Lease Subordination Agreement
2.1 Definition and Parties Involved
A Lease Subordination Agreement should clearly define the terms used and identify the parties involved:
Landlord: The property owner who has leased the property to the tenant.
Tenant: The individual or entity leasing the property from the landlord.
Lender: The financial institution providing a mortgage loan to the landlord.
2.2 Subordination Clause
The subordination clause is the core of the agreement, specifying that the tenant's leasehold interest is subordinate to the lender's mortgage:
Purpose: To ensure that the lender's mortgage takes precedence over the tenant's lease in case of foreclosure.
Effect: The tenant agrees that their leasehold interest will be secondary to the lender's mortgage.
2.3 Non-Disturbance Clause
A non-disturbance clause protects the tenant's rights in the event of foreclosure:
Purpose: To ensure that the tenant can continue to occupy the property under the existing lease terms, even if the lender forecloses on the property.
Effect: The lender agrees not to disturb the tenant's possession as long as the tenant complies with the lease terms.
2.4 Attornment Clause
An attornment clause requires the tenant to recognize the lender as the new landlord if the lender takes possession of the property:
Purpose: To establish a direct relationship between the tenant and the lender in the event of foreclosure.
Effect: The tenant agrees to attorn to the lender and continue paying rent under the existing lease terms.
2.5 Notice and Cure Periods
The agreement should specify the notice and cure periods for any defaults:
Notice Period: The time frame within which the tenant or landlord must notify the other party of a default.
Cure Period: The time frame within which the defaulting party must remedy the default to avoid further action.
2.6 Rights and Obligations of Parties
The agreement should outline the rights and obligations of each party:
Landlord: Obligations to maintain the property and comply with the mortgage terms.
Tenant: Obligations to pay rent and comply with the lease terms.
Lender: Rights to foreclose on the property and obligations to honor the non-disturbance clause.
2.7 Governing Law and Jurisdiction
The agreement should specify the governing law and jurisdiction for resolving disputes:
Governing Law: The laws of Kenya, as outlined in the Land Act, Land Registration Act, and Law of Contract Act.
Jurisdiction: The courts of Kenya, which have the authority to interpret and enforce the agreement.
2.8 Execution and Delivery
The agreement should be executed and delivered in accordance with the Law of Contract Act:
Execution: The agreement must be signed by all parties involved.
Delivery: The agreement must be delivered to the relevant parties and registered with the appropriate land registry.
Conclusion
A Lease Subordination Agreement is a critical document in real estate transactions, ensuring that the lender's mortgage takes precedence over the tenant's lease while protecting the tenant's rights in the event of foreclosure. In Kenya, the provisions for such agreements are guided by the Land Act, 2012, the Land Registration Act, 2012, and the Law of Contract Act. By including key provisions such as subordination, non-disturbance, and attornment clauses, and specifying the rights and obligations of each party, the agreement provides a clear framework for managing the relationship between landlords, tenants, and lenders.
Answered by mwakili.com