One of the important provisions included in my Addendum to Lease between a landlord and a tenant that intends to operate an Arizona medical marijuana dispensary is a condition that requires the landlord to deliver to the tenant a Nondisturbance Agreement from every person or entity that holds a deed of trust or a mortgage on the premises. If your not-for-profit dispensary entity intends to lease premises for the dispensary or the growing facility, a Nondisturbance Agreement from every lienholder is a must have document. This document protects the tenant from being evicted if the landlord loses the real property in a foreclosure.
Under Arizona real estate law, when the landlord defaults on a lien that encumbers real estate, the lienholder can foreclose and the land is sold to the highest bidder. The legal consequences of a foreclosure is that the foreclosure terminates / extinguishes the interests in the land of every party whose interest is of a lower priority than the foreclosed lien. Translation: If a lienholder whose lien was recorded before the tenant entered into a lease forecloses, the foreclosure terminates the lease.
Solution: If the premises your nonprofit entity leased or intends to lease are encumbered by one or more Deeds of Trust or Mortgages, the entity must get a Nondisturbance Agreement from every lienholder. This is an agreement signed by the lienholder in which the lienholder promises that if the lienholder forecloses on its lien, it will honor the tenants lease as long as the tenant does not default on the lease.
Example 1. Landlord borrows $X from Lender on January 1, 2011. The loan is secured by a Deed of Trust that encumbers the land of which the leased premises is a part. The Deed of Trust is recorded on January 3, 2011. Landlord leases premises to dispensary on March 4, 2011. Landlord defaults on the payments due to Lender on January 1, 2013. Lender forecloses by selling the property at an auction held by the trustee under the Deed of Trust on May 1, 2013. The foreclosure terminates the lease as of May 1, 2013. If the tenant cannot make a deal with the new owner to stay in the premises, the tenant will be out on the street and the dispensary will die. If the tenant can work out a new lease with the new owner, the new rent will probably be a lot higher because the new owner has the tenant over a barrel.
Example 2. Same facts as above except the lease required the landlord to get a Nondisturbance Agreement from the Lender and the Lender signed and delivered the Nondisturbance Agreement to the tenant. The tenant recorded the Nondisturbance Agreement on March 4, 2011. The foreclosure does not terminate the lease and the new owner becomes the new landlord and cannot evict the tenant as long as the tenant satisfies all of the tenant’s obligations under the lease.
Warning #1: During these difficult economic times, many landlords are defaulting on their loans. Do not take a chance that you might lose your entire investment in your Arizona medical marijuana dispensary because your landlord defaults on a loan. Your dispensary must get a Nondisturbance Agreement from every lender that holds a lien that was perfected before the date of the lease because the failure to do so could cause the loss of your entire investment in the dispensary if the landlord defaults and the property is sold at a foreclosure sale.
Warning #2: You can ask the landlord to disclose the existence of liens and the name and address of the lienholder(s), but the only safe way to determine if a lien, Deed of Trust or Mortgage encumbers your leased premises is to pay a title insurance company to give you a status report that lists all liens and encumbrances on the leased premises. If the landlord tells you there are no liens and you don’t verify that fact independently, you’ll wish you had purchased a status report from a title insurance company when the property sells at a foreclosure auction and your dispensary is evicted from the premises.
Solution: Every would be dispensary that leases premises that are encumbered by a lien must protect itself from potential eviction due to the landlord’s default on a lien by obtaining a Nondisturbance Agreement signed by the lienholder.
If you have already signed a lease, it’s not too late to ask the landlord to ask the lender to give you a Nondisturbance Agreement, but the landlord and the lender are less likely to to it if it is not a condition to the effectiveness of the lease.