May 10, 2018

Subordination, non-disturbance and attornment agreements (SNDAs)–what's the big deal?

An often overlooked standard boilerplate lease provision, relating to subordination, non-disturbance and attornment agreements (SNDAs), can become of critical importance to tenants, landlords and landlord’s lenders in the event the subject property is sold, refinanced or foreclosed upon during the lease term.

In this regard, let us take a closer look at what is an SNDA and why does it matter?

Typically, the SNDA is an agreement between the tenant, landlord and landlord’s lender containing three of the following clauses:

  1. A subordination clause
  2. A non-disturbance clause
  3. An attornment clause

All three clauses come into play in the event a lender pursues a foreclosure on its security interest (typically a mortgage lien) on the property following a default by the landlord under its loan. Under the subordination clause, the tenant agrees that its lease is subordinate to the lender’s lien on the property, effectively allowing the lender to foreclose its mortgage in the event the landlord defaults under the mortgage loan. Under the non-disturbance clause, so long as the tenant is in compliance with its lease, the lender agrees not to “disturb” the tenant’s rights under the lease in the event the lender forecloses its lien following a default by the landlord under the mortgage loan. Under the attornment clause, the tenant agrees to “attorn to” or recognize the lender or any subsequent purchaser as the tenant’s new landlord, requiring that the tenant continue paying rent to the new landlord throughout the remainder of the lease even if the property is foreclosed or sold. 

Why does this matter? Under a typical real estate loan the lender takes a security interest in the landlord’s property as collateral for repayment of the loan. This security interest is typically in the form of a mortgage on the landlord’s property. In this regard, the lender wants to make sure its mortgage on the landlord’s property takes priority over any other interest in the property, including the rights of existing or future tenants under leases affecting the property. 

Preventing lease termination in a foreclosure proceeding

An SNDA becomes important to the tenant if a lender’s mortgage was recorded against the property prior to the tenant entering into its lease, as an existing mortgage generally has priority over the tenant’s subsequent lease. That means, without an SNDA or “non-disturbance” language from the lender, if the landlord defaults under its mortgage loan the lender could effectively terminate the tenant’s lease in a foreclosure proceeding. Further, given that the landlord is already in default under its mortgage loan it is unlikely that the tenant would have any meaningful remedy against the landlord for damages incurred because of the lender’s termination of its lease. Finally, without an SNDA in place the lender may leverage its right to terminate the lease in the foreclosure proceeding against an existing tenant to negotiate terms that are more favorable to the lender (e.g., higher rental rates). 

On the other hand, if a lease does not contain language stating that the lease is subordinate to future mortgage liens, the tenant’s lease will generally be superior to future mortgage liens on the property. In that event, a lender seeking to secure a mortgage lien will likely require the landlord to obtain an SNDA from all existing tenants, which means that existing tenants may have some leverage to negotiate terms that are more favorable to the tenant, like a lower rental rate or extended term. That said, this tactic may create unwanted tension between the tenant and landlord.  

Components of a SNDA

In drafting a SNDA it is important to understand that the agreement involves three parties (the tenant, landlord and lender) and these parties do not always have the same interests. 

A lender that takes a lien on the property subject to an existing lease will want an SNDA to protect its interest in the event it has to foreclose its lien and succeed to the landlord’s rights in the property. In this regard, a lender may require provisions in a SNDA that are more lender friendly. For example, a lender may require language stating that it is not obligated to complete the landlord’s obligations under the lease. A lender may also require provisions providing that it is not liable for the defaults of the landlord under the lease and that any rights that the tenant may have against the landlord because of any landlord default cannot be asserted against the lender.

A tenant that signs a lease after a lender’s mortgage lien was recorded against the property wants an SNDA so that in the event the landlord defaults under its loan the lease will not be disturbed. That said, a tenant should closely review the SNDA to ensure that there are no provisions that could negatively affect its rights under the lease. For example, if the landlord agrees to provide the tenant with an improvement allowance and the landlord subsequently defaults on its loan (and the lender forecloses on the property before the landlord has paid the improvement allowance to the tenant), then under a standard SNDA the lender would not be obligated to pay to the tenant the improvement allowance. Yet under attornment clause of an SNDA, the tenant is obligated to recognize the lender as its landlord and continue to perform its lease obligations under the lease, such as the payment of rent. As a result, the tenant is now in the undesirable position of having to perform its obligations under the lease (paying rent) while the new landlord does not have to perform the obligations that the tenant contracted for when it signed the lease.

With respect to the landlord, an SNDA only comes into play when the landlord is no longer in control of its property. As such, the landlord generally does not care what the SNDA provides for except that the lease is subordinate to the landlord’s lender’s mortgage (or future lien holders) to ensure that the landlord is able to refinance or sell the property during the lease term if necessary without having to provide any assurances with respect to the leases affecting the property.

Are SNDAs a big deal? They sure are. While this article only touches on certain issues related to SNDAs, there are many facets to an SNDA which could result in hidden exposure to the tenant, landlord or lender. 

Depending on whether you are a tenant, landlord or lender (or even prospective purchaser) you should not rely on a standard form SNDA as there are provisions that can be incorporated in a lease to protect your particular interests. As such, it is important that you consult an attorney to negotiate your lease that incorporates an SNDA to protect your interests in the event of a sale, refinance or foreclosure of the subject property. 

This Chuhak & Tecson, P.C. communication is intended only to provide information regarding developments in the law and information of general interest. It is not intended to constitute advice regarding legal problems and should not be relied upon as such.

Client alert authored by: Phyllis K. Franklin, Principal

This alert originally appeared in the Spring 2018 Real Estate Focus newsletter.