Commercial mortgage lenders and major tenants negotiate nondisturbance agreements all the time. These agreements, which come up constantly in commercial real estate, assure a tenant that if the lender forecloses, the tenant can stay in its leased space. The lender also gets comfort that the tenant’s occupancy won’t bring with it certain unpleasant surprises for the foreclosure purchaser, often the lender itself. Even in the periodic downturns in commercial real estate, these agreements rarely activate, but everyone expects to see them.
In a matter where I recently acted as an expert witness, a mortgage lender in Arizona—an affiliate of Wells Fargo—agreed a few years ago that it would act in “good faith” and “reasonably” in negotiating a nondisturbance agreement with a significant commercial tenant. The tenant happened to be a seller of “adult goods,” but the lender had approved the tenancy and it was perfectly legal. After the Arizona lease transaction closed, the tenant reached out to the lender to try to get the promised nondisturbance agreement. For months, the lender didn’t respond, not even giving the tenant the first draft of a document.
At one point, the lender suggested a nondisturbance agreement might be forthcoming if the tenant paid more rent. At another point, it seemed the lender had changed its mind about having the tenant in the property. But the lender had agreed to act “in good faith” and “reasonably” in working out a nondisturbance agreement with the tenant, and had approved the tenant and the lease.
Eventually, the tenant got tired of waiting. After months of stonewalling by the lender, the tenant asked a court to decide whether the lender had met its obligations or not. As an expert witness, I was supposed to tell the court what the lender would have needed to do in order to act “in good faith” and “reasonably” in working out a nondisturbance agreement. This engagement was not in any way confidential. If it had been, I would not be writing about it.
We see words like “reasonably” and “in good faith” all the time, not just in Arizona, but in legal documents of all kinds. These words bridge gaps when the people negotiating documents aren’t quite ready, or don’t have the time, to lay out and define in detail exactly how someone must behave. As the most common example, a lender or landlord often agrees it will withhold its consent only “reasonably” or make a determination only “in good faith.” Usually things work out. Sometimes they don’t. And that’s what happened in my Arizona litigation.
After reviewing the facts, I concluded that the lender’s extended unresponsiveness and failure to even offer up a first draft nondisturbance agreement, almost by itself, showed a lack of reasonableness and good faith. The lender had approved the tenant and the lease. Once that approval was in place, if an ordinary and typical lender wanted or had agreed to enter into a nondisturbance agreement, the lender would issue a proposed document. Then lender and tenant would typically negotiate for a while and soon agree on a nondisturbance agreement. That resulting agreement might very likely favor the lender over the tenant in some important ways. But the agreement would still exist and still assure the tenant that a foreclosure would not terminate its rights. In the Arizona case, the lender’s silence and delays meant the parties never got anywhere close to that point until the tenant sued.
Everyone involved could have saved time and stress by agreeing on a nondisturbance agreement as part of the basic documents. That would not have taken very long. Instead, they took the common shortcut of referring to “good faith” and “reasonableness.” Although we sometimes worry that those words are too vague and have no meaning, I ultimately concluded that they meant something. Once I defined how I thought a lender acting “reasonably” and “in good faith” would approach the situation, it was rather obvious that the lender had failed to meet the agreed standard.
Eventually this dispute settled. I suspect the tenant got a nondisturbance agreement—though not necessarily a very kind and gentle one.
Joshua Stein is the sole principal of Joshua Stein PLLC. The views expressed here are his own. He can be reached at email@example.com.