If you’re a tenant of commercial property, it’s possible that your landlord has asked or will ask you to enter into a Subordination, Non-Disturbance and Attornment Agreement, or “SNDA.” It is often a requirement in the lease agreement. The title of the SNDA itself is daunting and hints at the complexity involved in weighing the interests of parties brought together, not by choice, but by their mutual relationship with a landlord. This article provides a primer on SNDAs. In the event you are confronted with one, you will learn why you may want one, and where to go for assistance.
An SNDA is an agreement entered into between a tenant and the lender of the landlord (and, ideally, the landlord) to establish the relationship between the tenant and lender (who would not otherwise have a direct relationship) and provide relative priorities between them. As the title of an SNDA suggests, the agreement has three main components: subordination, non-disturbance, and attornment.
In the subordination portion of the agreement, the tenant typically agrees to subordinate its interest in the leased premises to the landlord’s lender’s mortgage (or the lien of the mortgage). A lender looking to take a security interest in landlord’s real property as collateral for repayment of a loan to landlord wants to make sure that the security deed takes priority over any other interest in the real property, including the rights of existing tenants under leases affecting such real property.
A security deed recorded prior to the time a lease is entered into automatically has priority over the lease. However, landlords of commercial property should make sure that their lease form contains automatic subordination language and language requiring tenants to execute an SNDA upon request. These provisions give comfort to lenders during the underwriting process and make it easier for the landlord to get the capital it needs.
In the same way that a lender wants to make sure that its security deed has priority over a lease, tenants want to make sure that, in the event the landlord defaults on a loan and the lender forecloses on the property, they will still be able to operate in the leased premises for the remainder of the lease term under the new landlord (whether it be the lender or a transferee of lender).
This provision is very important for tenants. Without it, a foreclosing lender with a prior security deed or its transferee can refuse to recognize the lease and the tenant’s right of possession thereunder. When negotiating a lease, tenants should inquire whether any lenders have a security interest in the property on which the leased premises is located, and, if so, consider requiring in the terms of the lease that landlord cause its lender to enter into a non-disturbance agreement with respect to the lease.
Whether or not to request a non-disturbance and spend the time and money negotiating one may depend on a few factors, including: whether tenant is paying above or below market rate; whether the land is a redevelopment opportunity; and the likely type of purchaser in the event of foreclosure. These decisions are best made with the advice of a commercial real estate attorney, who can help weigh competing interests involved.
Like the non-disturbance provision where the lender agrees to recognize the tenant under the lease, the attornment provision ensures the lender (or its transferee) that, in the event of foreclosure, the tenant will attorn to the lender as the new landlord. In other words, the tenant will recognize the new landlord (lender or its transferee) as the landlord under its lease. Without this provision, at common law, a tenant may be able to walk away from a lease in the event a landlord is foreclosed upon.
When to Negotiate an SNDA
Timing Matters. Whether you’re the lender or the tenant, it’s good to know at what point negotiating an SNDA provides you the most leverage to obtain terms beneficial to your interests.
Before the Lease – Negotiating an SNDA before a lease is signed typically gives the tenant the greatest possible leverage. At this point, a landlord does not want to kill a market rate deal, and may put pressure on its lender to get the SNDA executed; likewise, whether the lender has already made the loan or not, the lender is typically eager to close the loan or secure a tenant whose rental payments will help landlord attain the necessary debt-service coverage ratio.
After the Lease – The lender has the most leverage in this situation. Often, tenants have already agreed in the lease to sign an SNDA within a stated period of time or to automatically subordinate to a future lender. Also, the lender is secure with the knowledge that tenant has obligated itself to occupy the space and make rental payments.
Below are a few SNDA provisions to be aware of that should be considered during the negotiation process with the help of counsel:
1. Subordinate to what? – Will the lease be subordinate to the lien of the security deed or the security deed itself? Lender wants the lease subject to all provisions of the security instrument, including any future amendments, which may subject tenant to additional requirements and afford it less rights.
2. Liability of New Landlord after foreclosure – this is one of the areas of an SNDA that is heavily negotiated. On the one hand, a new landlord (whether lender or a transferee of lender after foreclosure) does not want to be liable for all the things a prior landlord did or did not do during the term of the lease, which on its face is a reasonable position. On the other hand, a tenant will want the new landlord to step into the shoes of the old landlord and take care of the responsibilities the old landlord had, also a reasonable position. Below are a few instances where lenders will attempt to disclaim liability:
a. “claims of offsets or defenses which tenant may have against landlord”
If tenant and the old landlord have agreed to offset rent because, for example, tenant made repairs to a roof, the new landlord under this provision would receive the benefit of full rental payments without tying itself to any obligation to recognize the agreed upon offset against rent. A possible middle ground here is a provision that makes the new landlord recognize prior offsets for things that would have been the responsibility of the new landlord had the tenant not undertaken the repair.
b. “acts or omissions of Landlord”
A new landlord shouldn’t be responsible for the prior negligence of an old landlord, however, if the default continues after the date of foreclosure, the new landlord should assume liability.
c. “rent or additional rent which a tenant might have paid for more than the current month”
While an uphill battle for tenants, tenant arguments usually take the following form: the new landlord should recognize prepayments of rent because the lender had the opportunity in the loan documents to prohibit landlord from accepting rent paid in advance.
d. “any security deposit or other prepaid charge paid to landlord”
This limitation of liability is probably ok, unless lender has actually received the security deposit.
e. “amendments or modifications of the lease made without lender’s consent”
Tenant can again raise the point here that Lender can protect itself in the loan documents by requiring landlord to get the consent of lender to all amendments. Lender may counter that such a consent requirement would be overly burdensome, and, regardless of whether such a provision exists, landlord may seek to amend the lease without lender’s knowledge.
Without a doubt, the negotiation of an SNDA requires the careful balancing of the legitimate, reasonable and conflicting interests of both lenders and tenants. Even whether to spend the time and money necessary to negotiate an SNDA, or even request one in the first place, can itself be a complex decision with multiple factors involved. A commercial real estate attorney with experience negotiating SNDAs can help guide you through the initial questions, and, in the negotiation process, help strike a reasonable balance with the other parties involved without spending an inordinate amount of time.
If you are a tenant, landlord or lender and have questions about recommended lease provisions or about negotiating an SNDA, please feel free to contact me for assistance.