A Thought About Non-Disturbance Agreements

While the comments here are more for commercial servicers, we suggest that the point is a concept of some wider application so the attention of all readers is invited.

First, what is a non-disturbance agreement and how does it relate to mortgage servicing?  Picture an office building or strip of stores.  Because most owners do not buy with all cash, they need to obtain financing – a mortgage.  One of the basics of mortgage law (and thereby servicing) is that any later interests in the property are junior and subordinate to the mortgage.   (There can be nuance about the precise date a mortgage is executed or recorded, but for our purpose assume there is no issue.)

Along comes a major firm or business desiring to rent two floors in the office building, or a popular merchant seeking a long term lease at the strip mall.  In theory – indeed in practice – the property owner might some day default on its mortgage.  If that happens, the foreclosing mortgagee could, and often will name tenants in the foreclosure action as necessary party defendants; their leases in our example are junior which results  in extinguishment of those tenancies.)  Sometimes not cutting off tenants is the better strategy, but that is an entirely difference subject.  Assume for this review tenants are being named in the foreclosure.

Why would the firm, or the merchant, invest all that money in their quarters, planning to remain for the life of their leases (10 or 20 years perhaps) if they could be thrown out at any time should the landlord default on its mortgage?  The answer is that the tenants would not make the investment – and thus would not sign the leases – without some protection against a foreclosure.

Enter the non-disturbance agreement. The essence of such a document is the lender’s promise not to name the tenant in any foreclosure, rather, to refrain from doing so, thereby recognizing the survival of the tenancy.  Mindful that few solid tenants (the ones which preserve and increase the value of the mortgaged property) would ever come to the premises absent a non-disturbance agreement, this seems like a good idea all around.

But there is a twist, a possible downside.  What if the tenant is in default?  Or what if the tenant is locked up in serious, lengthy, contested litigation with the landlord, perhaps relating to repairs or conditions at the property, and is consequently not paying rent?  If that tenant is protected from foreclosure by a non-disturbance agreement, anyone who buys at the foreclosure sale (be it the lender or a third party) could inherit the litigation and a tenant not paying rent.  Such a scenario could even meaningfully devalue the property.

The concluding lesson then is that the otherwise valuable and necessary non-disturbance agreement should be drafted to afford protection to the lender if a tenant is in default or failing to pay rent for any reason.

Mr. Bergman, author of the four-volume treatise, Bergman on New York Mortgage Foreclosures, LexisNexis Matthew Bender (rev. 2024), is a partner with Berkman, Henoch, Peterson & Peddy, P.C. in Garden City, New York. He is also a member of the The American College of Real Estate Lawyers, a fellow of The American College of Mortgage Attorneys, an adviser to the New York Times on foreclosure issues and writes a regular servicing column for the New York Law Journal. He is AV rated by Martindale-Hubbell, his biography appears in Who’s Who In American Law and he has been for years listed in Best Lawyers In America and New York Super Lawyers.