Subordination, Non-Disturbance and Attornment Agreements (“SNDA”s) have become increasingly popular and are now prerequisites to most lending transactions. We have all seen them, requested them, and negotiated lease provisions obligating the tenant to provide one when requested by the landlord’s lender. Many of my clients, however, do not know what their function is or why they are significant.

What Is a SNDA and Why Do Lenders Care?

The basic function of the SNDA is to set forth the rights of the lender under its mortgage vis-à-vis the tenants occupying space at the property mortgaged. The basic SNDA accomplishes three goals: (1) it subordinates the rights of the tenant under its leasehold interest to the lien of the mortgage, (2) it obligates the lender to agree to not disturb the rights of the tenant if the lender forecloses on its lien, and (3) It obligates the tenant to attorn to the purchaser at a foreclosure sale (in other words, the tenant will recognize the purchaser at the foreclosure sale as the landlord under its lease).

A lender’s biggest concern with leasehold interests and its mortgage is priority. In most cases a lender wants to guarantee that its lien is superior to all leasehold interests so that the rights of the tenants do not hinder the lender’s ability to exercise its rights under the mortgage (e.g. the ability of a lender to apply the insurance proceeds received after a casualty to reduce the principal balance of the loan, or the ability of the lender to eliminate any tenant claim that it has an ownership interest in the property that is not subject to the lien of the mortgage). The SNDA guarantees that the lender’s lien will have priority, that the lender will be able to foreclose against the entire property, and that it will be able to exercise all of its rights.

A SNDA also guarantees that the landlord will be able to preserve the leases at the property (in most cases). A fully leased property is worth far more than an empty building and many anchor tenants are essential to the value of the property. In certain circumstances a tenant can walk away from its lease once the lender foreclosures on its lien if the leasehold interest has been subordinated. The landlord wants to avoid this and therefore needs an agreement from all tenants that they will recognize future owners of the property as the landlord under the tenants’ leases.

Why Tenants Should Care About SNDAs

Foreclosures create drastic changes in properties. The tenant may or may not have priority over the landlord’s mortgage and a foreclosure sale may terminate the tenant’s leasehold interest against the tenant’s wishes causing the tenant to lose not only its leasehold interest but also the tenant improvements that it installed at the property. The purchaser at the foreclosure may have no obligation to undertake the landlord’s obligations under the lease and a tenant will be obligated to continue to pay rent regardless of the landlord’s performance. The tenant’s security deposit may have been whipped out when the landlord’s financial condition deteriorated. These are all problems facing a tenant when the landlord’s lender forecloses. A well drafted SNDA will reduce the risk facing a tenant in a foreclosure setting, will help the tenant to preserve its leasehold interest, and will help the tenant to avoid thousands of dollars in legal fees and costs when the leasing relationship sours.

Issues for Landlords to Consider When Drafting a Lease

Most leases obligate the tenant to execute a SNDA when requested by the landlord’s lender. Most of these provisions, however, fall short of what is required to adequately protect a landlord. Unless the lease sets forth the specific obligations of the tenant with regard to a SNDA, or attaches a form of a SNDA, a provision in the lease that obligates the tenant to execute a SNDA will only obligate the tenant to execute a form that subordinates the leasehold interest to the lien of the mortgage and nothing further. In fact, the tenant will have no obligation to execute any SNDA that alters the lease terms in any way, which is what most SNDAs do. Although a subordination of the leasehold interest is essential, most lenders want the nuts and bolts that go along with standard SNDA forms. Prudent lenders should therefore consider attaching an industry standard form of SNDA or set forth a list of specific items that the tenant must agree to in a form of SNDA. The problem for landlords is always anticipating what their future lender will request. A landlord will never be able anticipate all requirements of its lenders, but by attaching a form of SNDA that has the standard language requested by most lenders the landlord can avoid many future tenant disputes.

An additional issue for landlords requesting an SNDA is timing. SNDAs are usually requested a couple of weeks before a closing of a loan or a sale of a property. By the time that the tenant receives the SNDA, reviews it with its attorney, provides comments to the landlord’s attorney, and the two sides negotiate revised provisions, several weeks have usually passed and the closing could be delayed or even abandoned due to the landlord’s failure to obtain a SNDA acceptable to the landlord’s lender. It is therefore essential that landlords include specific deadlines in their leases. A tenant should be required to return a signed SNDA or any comments within five business days, and the tenant should be obligated to provide alternate language when objecting to a term in the SNDA. Additionally, there should be a general obligation that the tenant acts in a timely manner. Any violation of these requirements should be a default under the lease.

An additional provision that landlord’s should add to the lease is language that the lease is automatically subordinate to the lien of any mortgage executed by the landlord regardless if the tenant executes a SNDA. Most lenders will likely not be satisfied with general subordination language in a lease, especially for anchor tenants’ leases, but some lenders may be willing to accept such language in lieu of a SNDA for some of the smaller tenants. A landlord may also consider drafting the subordination language so that the subordination of the lease is not automatic and is at the option of the lender. There are certain circumstances where the lender may wish to keep the lien of the mortgage subordinate to the leasehold interest (e.g. to avoid an unintentional lease termination that may occur when the lender forecloses on its lien).

Issues for Tenants to Consider When Drafting a Lease

There are generally two main issues for tenants to consider when executing SNDAs: costs and giving up rights. Every time that a tenant is obligated to sign a SNDA, it will likely have its attorney review the form. This costs time and money. A tenant should therefore require that the lease obligate the landlord to reimburse the tenant for its legal fees in connection with the review and execution of each SNDA. At a minimum, a tenant should request that the landlord pay the tenant a set fee for each SNDA requested.

The second issue facing tenants is that tenants do not want to give up material rights that they have in the lease and future landlords may not be obligated to perform under the lease. To avoid this scenario a tenant should require that the lease provision that obligates it to provide a SNDA state that the tenant has no obligation to execute any SNDA that materially alters its rights under the lease. The subordination should also be subject to the lender agreeing to be bound by all of the lease terms.

Most importantly, the lease provision obligating the tenant to execute a SNDA should make any subordination by the tenant of its leasehold interest subject to the lender or any other purchaser at a foreclosure sale agreeing to recognize the tenant’s lease, to not disturb the tenant’s right to possession under the lease, and to perform all of the covenants under the lease. Unwitting tenants often execute SNDAs, or agree to lease provisions, that subordinate their leasehold interests, but which do not obligate the landlord’s lender or other future landlords to perform under the lease. Many lease provisions will also allow the landlord’s lender to whip out the leasehold interest when it forecloses. A tenant should never agree to such terms.

DISCLAIMER: This article is to be used for general information purposes only, not as a substitute for in-person evaluations. The information contained herein is not legal advice and no attorney-client relationship is formed through this article.