What Are a Commercial Property Tenants Rights After Foreclosure?

A small pet grooming business leased some space in a small shopping center. They wanted to make approximately $25,000 in tenant improvements in the back area of the leased space. Before making the improvements, they learned that the shopping center was in foreclosure. They contacted the lender (a national bank) and explained to them that they wanted to make the tenant improvements, but were not going to if we were going to be evicted after foreclosure. The lender’s representative said that the lease would be honored after the foreclosure, and that a longer lease could even be negotiated. However, an investor purchased the shopping center at the foreclosure and delivered a notice of eviction to us. Does the pet grooming business have any commercial property tenant rights to stay in their leased space? If they are evicted, does the investor have to pay them the $25,000 for the tenant improvements?

Under a 2009 federal law, a residential tenant generally has the right to stay in the home after foreclosure until the end of the lease term. A tenant in a shopping center or other commercial property, however, has no such right, and is subject to eviction after the foreclosure unless there is non-disturbance or similar language in the lease. The purchaser at a foreclosure sale, such as the investor who purchased the shopping center, has the right to evict the tenant, and has no obligation to reimburse a tenant for any tenant improvements. However, if the tenant can prove that they relied on the statement by the lender’s representative that they would be allowed to remain in the leased space after the foreclosure, they should have a claim against the lender for at least the $25,000 in tenant improvements.

Note: The pet grooming shop should immediately contact an Arizona commercial property attorney to review their lease to see if there is non-disturbance or similar language that will allow them to stay in the shopping center after the foreclosure.

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