Let’s say that we are acquiring a 50-foot by 50-foot easement on a five-acre parcel with only a single-family residence (SFR) on it. The local water agency is going to put a 10-foot by 20 foot building on the easement with room for parking.
The subject property is situated about one mile from the edge of a rapidly growing town.
The property owners are Dan and Marilyn Smith. The Smiths have owned the land for sixteen months.
The fair market value of the property is $700,000.00 and the balance of the mortgage is $561,000.00. Taxes are current.
The offer to the Smiths is $7500. They accept the offer and sign the easement. The document is recorded immediately.
Let’s say that for some reason we don’t take a subordination from the lender.
Fast-forward a year: The Smiths find themselves out of work and default on the mortgage. The lender visits the property and decides that an SFR on five acres is underutilizing the potential of the parcel and sells the land to a developer. The developer demands that you remove your facility from the property at your expense.
Can your facility be required to move at your expense? Most probably.
The chain of title on the subject property reads:
1. The Smiths
2. The lenders mortgage
3. Your organization’s easement
4. The developer
Notice where your easement is in the chain. The lender has a superior interest in the property. When a default on the mortgage occurs the lender(s) are first in line and if you didn’t get them to subordinate their interest to your easement you do not have an enforceable right!
All hope is not lost. Since the Smiths signed your easement, you are not in trespass. That means that condemnation is a possibility. You of course would have to weigh the economics.
So, back to the question: when do you consider taking a subordination?
When the subject property is likely to change its use (farmland for example)
When the current owners of the subject property have a high mortgage to FMV ratio
When your facility has a high dollar value and you don’t want to be required to move it
How do you get a subordination agreement? You contact the lender and ask for one. Beware if they ask you what you are paying for the easement. Sometimes they demand that the money be given to the lender and they apply the amount to the borrowers account.
Following is an example of a subordination agreement that you are welcome to use. Caution: make sure that your legal counsel approves its use for your organization.
The following format may be used for a subordination agreement
The undersigned Trustor/Mortgagor, Trustee/Mortgagee, and Beneficiary(ies), in that certain deed of trust/mortgage recorded on the ____ day of ________, 20____ at Book____, Page____, (or File Number________) in the office of the county recorder of ________________, State of _____________. Said deed of trust/mortgage, being on the same property described in favor of (your company/agency) dated the ____day of __________, 20___, concurrently herewith, do hereby consent to the execution of said grant of easement and to all the terms and conditions thereof; the undersigned further agree that the lien or charge of said deed of trust/mortgage will be and it is hereby subordinated to said grant of easement.
Executed this______day of _______, 20___.