If a borrower occupies (or will occupy) its place of business under a sublease, the lender needs to be cognizant of the precarious position faced by all subtenants. A subtenant's rights pursuant to a sublease are entirely dependent upon the continuance in force of the master lease for the space (which is a lease between borrower's sublandlord, as tenant, and the master landlord). A subtenant, however, is not a party to the master lease and has no direct relationship with the master landlord. If the master lease is terminated for any reason (including a default by borrower's sublandlord), the sublease and borrower's rights thereunder will automatically terminate. Thus, the one inherent and fundamental risk common to all subleases is that the sublease remains in effect only for so long as the master lease remains in effect. Therefore, a subtenant must protect itself against the potential loss of its sublet space, and the most effective means to mitigate this inherent and fundamental risk is to obtain a recognition agreement from the master landlord. A recognition agreement will provide that, if the master lease is terminated due to a default by borrower's sublandlord, the master landlord will recognize borrower's sublease as a direct lease between the borrower and the master landlord and will not disturb the borrower's possession of its sublet premises, provided that the borrower/subtenant is not is default of its sublease. That said, in most instances it can be extremely difficult to obtain a recognition agreement from a master landlord for a borrower that is subleasing. This difficulty is due largely to the master landlord's preference to reserve the decision on accepting a subtenant as a direct tenant until it is faced with the loss of its direct tenant (i.e., borrower's sublandlord).

The precarious nature of subleasing is made even more so when the master landlord has a mortgage on the property subleased by the borrower. If the master landlord defaults under a senior mortgage, the interest of borrower's sublandlord under the master lease as tenant thereunder could be extinguished by reason of the foreclosure of the master landlord's mortgage. As explained above, if the master lease is so extinguished by foreclosure due to master landlord's default under its mortgage, borrower's sublease is also automatically extinguished. Generally, lenders generally require a borrower that is leasing space to protect its leasehold interest by entering into a non-disturbance agreement with landlord's lender. Under such a non-disturbance agreement, the landlord's lender typically covenants that, in the event of a foreclosure, the tenant will have the right to remain on the leased premises so long as the tenant continues to comply with the terms of its lease and the tenant is not otherwise in default of its lease. However, lenders can overlook that the same reasons for requiring a borrower that is leasing space to enter into a non-disturbance agreement with landlord's lender equally applies to a borrower that is subleasing space. The automatic extinguishment of the sublease by a foreclosure due to master landlord's default under its mortgage can be avoided if the borrower that is subleasing is require to obtain a non-disturbance agreement from the master landlord's lender.

In sum, subtenants and their lenders have particular incentives to seek recognition agreements from master landlords and non-disturbance agreements from the master landlord's lender. Not only do subtenants and their lenders typically want protection in the event that the sublandlord defaults under the master lease and its lease is involuntarily terminated as a result thereof, but they also want to be able to preserve the leasehold estate of the borrower/subtenant in the event that the master landlord defaults on its mortgage. In other words, a subtenant and its lender have reasons to want two separate forms of agreement, namely: (i) a recognition agreement from the master landlord; and, (ii) a non-disturbance agreement from the master landlord's lender.