The ABCs of Attornment Agreements: An Essential Primer

What is an Attornment Agreement?

At its most basic level, an attornment agreement is a legal document which requires rent to be paid in accordance with the terms of a lease to a third party. For example, it is common practice for landlords to have the tenants under all of their leases execute a standard attornment agreement in connection with a transfer of the property, whether that be the sale of the property, a mortgage, or an assignment of a lease. Although they will often be signed in the context of a transfer of the subject property, attornment agreements are not limited to situations involving a transfer of the subject property. At the conclusion of a court ordered sale, for instance, a landlord may require tenants to sign a standard form attornment agreement. A standard exercise of purchase options may also involve having the tenant sign an attornment agreement in favour of the purchaser of the property.
While the term "attorn" has a legal meaning , "attornment" is a French derivation which means to do service and to behold. When a tenant attorns to a new landlord it is agreeing to attorn or become the tenant of the new landlord. An attornment agreement is therefore a contract amongst three parties – the landlord, the tenant, and a third party. The landlord is often referred to as the "original landlord" and in the context of an attornment agreement, the original landlord is typically a party to the attornment agreement. If the attornment agreement is being executed in conjunction with a leasing (or subleasing) of commercial space, the tenant will be the original tenant, while the landlord and the tenant under the new commercial lease will be the other two parties to the attornment agreement.

Why Use Attornment Agreements?

Attornment Agreements are important because of the extended period of time which leases typically run and the fact that third parties become involved at various stages in the life cycle of a lease. Attornment Agreements are important for you as a tenant, as a landlord, and as a lender. The words "attorney" and "attornment" have the same root meaning in Old French – "to call to account" or "to summon" and that is the essence of an attornment. A party is being summoned to recognize the status of another and to attest to it upon a demand.
An Attornment Agreement is: (1) a requirement of a lender, (2) a right, and (3) a protection. It is a requirement of lenders. Mortgage lenders want to make sure that rental income will continue regardless of title. Occupiers may not recognize a new landlord. Lenders want the assurance that the lease will continue without interruption. A tenant occupying a property may not recognize the owner of a property who takes title to a property through foreclosure. A lender typically bridges the gap with an attornment from the tenant. An attornment is a simple recognition that the new lender or purchaser-in-foreclosure recognized the previously existing lease, and was willing to guarantee that the lease would not be disturbed. A lender needs an attornment to assure it that the income stream will not be disturbed.
It is a protection for tenants. Attornment may be requested by a prospective purchaser of land, a mortgage lender, or a judge. While it is a right of a lender to ask for an attornment, it is a right of all three participants – a tenant, an occupier and a lender – to have the protection of an agreement that the lease of the property will continue. A tenant has the right to want to continue the occupancy and to have its rights and privileges preserved in the face of a sale of the property or the imposition of a charge on the property. This is significantly important in situations where a tenant is occupying a long term lease whereby the tenant has the right to return to occupation after a takeover by the lender or the purchaser.

Essential Ingredients of an Attornment Agreement

The agreement to attorn typically contains some of the following key elements:

• No Modifications to the Lease: For the attornment to be valid, the lease must not be modified (other than for rents and any other amounts then in default). However, the attornment agreement can include reasonable covenants from the landlord to the tenant, such as the obligation to maintain and/or repair the lease premises, provided that the covenants do not conflict with the obligations of the parties under the lease;
• Reference to a Specific Mortgage and the Mortgagor: The mortgage agreement is often referenced in the attornment agreement, which helps ensure that the attornment is enforceable against the parties to the attornment agreement, specifically, the tenant and landlord;
• Reference to the Particular Lease: The attornment agreement should reference the particular lease being attorned to (rather then all leases between the parties generally); and
• Notice of Foreclosure: Mortgage lenders can agree in an attornment agreement that the lender will give notice of a foreclosure to the tenants of the property. Adherence to the provisions of the attornment agreement is usually a condition upon which the mortgage lender will agree to give such notices to tenants.

Attornment agreements have the potential to create significant liability for both the mortgage lender and the tenant. Accordingly, careful consideration should be given to the landlord’s obligations to the tenant and to the property.

Pros and Cons

Attornment agreements have their advantages and disadvantages, particularly to the assignee or purchaser of a leasehold interest. The most obvious advantage is: a continued privileged relationship with the landlord. The tenant benefits in that it will have the benefit of a contractual relationship with the landlord which can provide additional protection to the tenant and in particular, avoid an expensive claim for accelerated rent that might otherwise be available to the landlord. The assignee or purchaser of the leasehold interest also benefits from this. If a property acquisition is a share sale, the attornment should ensure that the assignee pays only the current rent under its internal lease and not any of the arrears owing by the vendor.
The express agreements with the landlord will encourage a positive relationship between the tenant and the landlord. Those express agreements should make clear that the lease and all amendments remain in force. References are often made back into the head lease for the purposes of establishing the status of tenant to landlord and landlord ability to collect rent. It is therefore important to recognize that the attornment agreement does not create a new head lease, but rather that the original premise of the head lease is maintained. The attornment agreement ensures that there is by-passing of the head landlord or original owner, allowing payment of rent directly between the parties.
The downside for the purchaser or the assignee is the lack of jurisdiction and oversight. The attornment is solely between the original tenant and the head landlord and does not provide for any oversight by the purchaser or the tenant. The purchaser cannot choose a head landlord nor can it control the timing of any change to the head landlord. If the head landlord is released under a surrender, that move can be managed by the original tenant but not the purchaser or assignee.

Effect on Lease Agreements

Attornment agreements affect the lease agreements of many tenants where a sale occurs or a property is in foreclosure. When a property is sold, a buyer may wish to have the benefit of an attornment by the lessees so that the lease will not be lost due to the taint of an existing dispute between the seller and the lessee . If an attornment agreement is not obtained and the lessee refuses to acknowledge the purchaser, the purchaser may have to litigate the issue, at a time when it would rather just exercise its rights as landlord. Likewise, where a property is in foreclosure, an attornment agreement may be valuable to a buyer. If a lease has been denied an attornment by a debtor in bankruptcy, the note-holder or a foreclosure purchaser may want an attornment agreement with the lessee in order to obtain certainty.

How to Prepare Attornment Agreements

If such an agreement is required, it is prudent for the tenant to obtain independent legal advice. As the attornment will affect the lease, the tenant should be separately represented, unless the landlord will accept separate counsel for the tenant, and its counsel accepts doing double work to draft the agreement. It is always better for the tenant to have its own legal counsel so that all liability issues can be discussed and understood. The landlord’s counsel should draft the agreement to be signed by the tenant. Legal counsel should ensure the following:
• The attornment should refer to the lease.
• The attornment should specify the tenant’s obligations and the obligations that are to be assumed by the purchaser.
• The agreement should be short and only include the standard lease terms.
• The agreement should not contain any changes to the tenancy.
• Provision should be made to permit the purchaser to deduct the rent from any rent held by the landlord in escrow or subject to a vendor take-back mortgage.
• If there is an exclusive use clause or similar in the lease, that party should be able to assume or obtain the benefit of same.

Attornment Agreement FAQs

An attornment agreement is a common type of commercial document that appears in files of all participants in commercial real estate transactions. A new lawyer or real estate agent may well wonder about the purpose of the document, and why it is necessary at all. For those familiar with the document, it may be helpful to clarify some of the more common questions that arise.
What is an attornment agreement? An attornment agreement ("Attornment") is a short form document by which tenant(s) agree(s) that it/they will commence paying rent to a new landlord. Attornment documents are usually signed as part of a closing of a purchase and sale of land when property is purchased by a purchaser from a vendor who is leasing the property to one or more tenants. Attornment agreements are very common but are not so common for the recipients of the documents, and therefore we list below some common questions and answers about attornment agreements.
Why do we need these at the closing? Attormnent documents hold no value in themselves. However, if a buyer buys a property leased to a tenant without acquiring the tenant’s agreement to pay rent to the buyer, then the tenant could continue to pay rent to the vendor. This would present a risk to the buyer that the tenant could default on their payment obligations during any post-closing adjustment period, leaving the buyer with an outstanding amount due to the vendor when the property is sold.
Why don’t the leases say that when an attornment agreement is needed? The leases for the properties you acquire by way of a closing, if they are long term leases, will likely have a provision requiring the tenant to agree to attorn to a purchaser of the property. However, if the leases are of short duration (such as months-to-month leases), the leases will not contain that provision – and this may be because the tenant does not want to agree to that .
Do I need to do an attornment agreement if I am a tenant? Attornment agreements are usually requested to be signed only by a buyer of property where the buyer is purchasing property from a seller who is leasing the property to a tenant. The parties will negotiate whether to have the buyer take assignments of the leases (if any), or whether the buyer of the property simply wants the tenants to agree to pay the rent to the buyer after closing. If you receive an attornment agreement that you are required to sign, and you are a tenant, it is important to review the terms of the attornment agreement carefully to ensure that it does not contain any additional obligations or risks for you.
What if I have questions about the lease I signed that I want answered by the buyer? Well, the buyer is not legally required to handle those issues (and, since the buyer has acquired the property from the seller, the landlord, under a certificate of purchaser, the buyer may not have been provided with full copies of the leases). Your landlord may still be required to respond to your questions.
What if I don’t want to sign the attornment agreement? Why should I sign this document just because the buyer made a poor choice? The document carries no legal liability or obligations. Unless the buyer is carrying out some form of cost saving exercise by simply asking for the attornment, such as undertaking not to review the leases or not to address due diligence searches, it is unlikely that there will any detriment to the tenant if the tenant signs the attornment agreement. There are reasons that buyers ask for these documents, generally to protect themselves from additional costs, and there is little advantage to the tenant of refusing to sign.