For business owners making a real estate investment or lease on a property where your company will conduct its operations, it is essential to understand fully the ins and outs of a real estate subordination agreement. You may wonder how exactly subordination agreements fit into auto repair? How do they work? What do they have to do with real estate? Are they applicable to my business? These are all common questions I hear from auto repair owners interested in commercial property transactions.
Let’s take a look at these questions to better understand how commercial real estate works for auto repair owners. Subordination agreements apply in nearly all commercial real estate transactions. In many ways, subordination agreements can best be explained by analogy. For instance, for those of you that rely on a GPS to get around, you know that the GPS provides specific instructions to get from point A to point B. Now take that concept and apply it to real estate. Subordination agreements are like a GPS for real estate in that they provide instructions for all parties involved in a commercial real estate transaction. Namely, subordination agreements tell mortgage holders and tenants where there is room to negotiate over specific property issues. In these transactions, mortgage holders, tenants, and everyone in between can benefit from a subordination agreement. What do I mean by that? Well, a mortgagor may want to negotiate some of the terms of the subordination agreement. On the other hand, a tenant may decide that they want to include caveats and conditions to the subordination agreement. Such conditions may include specific rights regarding pre-payment, exclusivity, assignment, and estoppels.
So now you might be asking yourself, why does this matter to me as an auto business owner? Most small companies use leasing options when acquiring business facilities and commercial property. As an example, Vitale Collision Repair likely does not own their commercial space. Instead, it is likely that they are entering a leasing agreement with the owner of the property. That leasing agreement is subject to certain subordination conditions. So how do you, as an auto repair owner, embrace this process? The first step is to seek legal counsel to review the subordination agreement once it is presented. Make sure that you clearly understand your rights under the contract before signing it. If you have questions or misunderstandings, seek legal counsel to clarify these issues to avoid further disputes down the road.