SNDAs – How to Handle from the Tenant’s Perspective

At some point, almost every tenant of a commercial lease is asked to sign a Subordination, Non-Disturbance and Attornment Agreement (an “SNDA”). Generally, the SNDA comes from the landlord’s lender sometime after the tenant’s lease has been signed and the term has commenced. It can be a complex document with onerous provisions for a tenant, and, without adequate counsel early in the process, a tenant may have little room to negotiate or revise an SNDA.

At its core, an SNDA contains three key provisions. First, the tenant agrees that, notwithstanding that the lease may pre-date the lender’s mortgage, the lease is subordinate and junior to the mortgage. Second, the lender agrees that, so long as the tenant performs its obligations under the lease prior to the expiration of applicable cure periods, the lender will not disturb the tenant’s occupancy or terminate the tenant’s lease in the event of foreclosure or other enforcement by the lender.  The third prong is attornment: the tenant’s agreement to accept the lender (or other purchaser at foreclosure or its successor or assign) as the landlord following foreclosure.  This exchange of promises gives the lender a senior right to its collateral and gives the tenant security in its lease.

But SNDAs are usually not limited to simple subordination, non-disturbance and attornment. Lenders will usually seek to limit their obligations to the tenant in the event they foreclose and step into the landlord’s shoes.  Lenders often seek a requirement to obtain lender consent for any lease modification, a lender’s right to notice from tenant of (and the right to cure) landlord defaults, and a tenant covenant to pay rent pursuant to an assignment of rents.  Lenders may also seek to limit the tenant’s rights to extend or terminate the lease.

When negotiating a new lease, tenants should determine whether there is a mortgage in place with priority over the proposed lease and carefully review any lease subordination provisions. Tenants should also consider requiring a reasonable SNDA with an existing lender of record as a condition to signing the lease. Landlord-prepared leases often contain provisions under which a tenant’s lease is made automatically subordinate to any existing or future mortgage or requiring the tenant to subordinate the lease to any future mortgage upon request.  Such automatic subordination provisions can make the tenant’s lease junior to the lender without the protections of a non-disturbance covenant.  Tenants should seek a provision in their leases conditioning such subordination on tenant’s receipt of a commercially reasonable SNDA from the lender.  This preserves some ability for the tenant to negotiate and protect itself against onerous terms.  Tenants should require the recordation of the SNDA to assure that the non-disturbance covenants are binding on the lender’s successors and assigns.

When tenants receive an SNDA form, it may be presented by the lender and landlord as non-negotiable. The terms of the lease will govern how compliant the tenant must be to the landlord’s demands for a specific form of SNDA. Reasonable modifications to protect tenants should be judiciously requested, but they are worth requesting and are frequently granted. Here are some SNDA tips for tenants to remember:

  • Understand whether the SNDA has the potential to permit the lender to cut off or limit important tenant rights in the event of foreclosure. Even if the tenant’s right to the leased property is not disturbed, a lender-friendly SNDA may not preserve options, rights of first refusal, renewal rights, or rights in the event of casualty or condemnation, or it may alter or limit rights to setoff, abatement and the security deposit. A tenant can expect to be required to relinquish the right to pursue the lender for breaches and defaults of the landlord predating the foreclosure. The SNDA should preserve (if possible) important tenant rights under the lease.
  •  Seek to provide in the SNDA that the lease terms will prevail in the event of any conflict between the loan documents and the lease. For example, loan documents may provide that casualty proceeds go to the lender. The tenant may desire to provide in the SNDA that insurance proceeds will be made available for repair of the building, if so required in the lease.
  • Make sure the landlord is a party to the SNDA to approve payment and other covenants of tenant performance to the lender and to seek the landlord’s confirmation that restrictions on the tenant’s rights vis-a-vis the lender do not modify the tenant’s rights against the landlord under the lease.
  • Consider (if the tenant has bargaining power) providing in the SNDA that pre-foreclosure landlord defaults that are ongoing after foreclosure (e.g., building repairs) are the lender’s obligation to correct when it takes possession.
  • Modify any requirement to provide the lender prompt notice of all landlord defaults, to require only concurrent copies of notices of default that the tenant sends to the landlord under the lease.
  • Provide that the lender will not unreasonably withhold consent to routine or non-material lease amendments.
  • SNDAs frequently contain estoppel provisions under which the tenant confirms certain facts about the lease, such as amount of rent, amount of security deposit and no landlord defaults. Estoppel certificates are common when a lender is financing a commercial property; however, the tenant should scrutinize each provision to ensure the tenant can make the statements truthfully as of the date of the document. If the estoppel provisions relate to performance by another party, such as a statement that the landlord has fulfilled all obligations under the lease, the tenant should certify such statements only “to the knowledge of tenant.” Make sure the lease and all amendments, side agreements, and addenda are correctly identified and that all existing breaches or defaults of the landlord are identified accurately.
  • After a tenant signs an SNDA, it should modify and annotate its records to assure that it is reminded to comply with the SNDA when giving notice, amending the lease, etc.

Teaming Agreements Set Out Construction Team Members’ Relationship and Responsibilities in Pursuing Award of a Contract

A written teaming agreement is useful in defining the roles and responsibilities of a team of designers and contractors seeking to win a contract for a construction project. In my recent article for the Daily Journal of Commerce, I detail several key aspects of a well-drafted teaming agreement. Read the full article here.

“Teaming Agreements: When the Best Team May Not Be Enough” was originally published by the Daily Journal of Commerce on February 17, 2017.

Under California’s Right to Repair Act, Ignore Deadlines at Your Own Peril

In a very recent decision, the Fourth District Court of Appeal in Blanchette v. Superior Court affirmed the plain language of the Home Builder’s Right to Repair Act, holding that even a facially insufficient notice of defect triggers the obligation of a builder to respond within 14 days.  The statute, Civil Code section 895 et. seq., was “expressly designed,” as the court pointed out, “to permit the parties to resolve claims without resort to litigation.”  Therefore, the court stated that allowing the builder to ignore the deadline and not raise objections within that early timeframe would not further the purpose of the statute.

The court also stated that by the very terms of the statute itself, courts are obligated to strictly construe its terms.  In this case, the court strictly construed the builder’s obligation to “acknowledge” notice – even a deficient notice – within the 14-day window after the builder’s receipt of the claim (which is typically no more than 19 calendar days under California law).  In Blanchette, the builder did not acknowledge the claim until 24 days later, well beyond 14 days from receipt.  When the builder failed to respond, the claimant filed a class action. The builder sought a stay of the lawsuit until the homeowner complied with the requirement to describe the defect in “reasonable detail.” While the trial court granted the builder’s request for a stay, following a writ to the Fourth District, the stay was ultimately lifted to allow the class action to proceed due to the builder’s failure to timely respond.

Takeaway for builders:  As I have reiterated before to my clients and in presentations, such as recently at the Forward Planning Seminar of the North State BIA, prepare at the beginning of a project to be sued so that (1) you know how to respond when you do receive such a notice or lawsuit, or (2) even if you never face a claim, you can rest easy that you won’t be caught off guard.

Design-Build Certification

One should never stop learning, so next week I will attend a three-day seminar presented by the Design-Build Institute of America. If I complete the seminar and pass a test, I will become a Designated Design-Build Professional.  The DBIA has an informative page about certification on its website.

In preparation for the seminar, I completed an online course that introduced general concepts and terminology: project delivery systems (e.g., design-build); procurement methods (e.g., public bid), and contracting format (e.g., payment terms).  The online course was a good introduction to topics that will be explored in more detail next week.

Design-build is increasing in popularity because it promotes collaboration between owner, contractor, and designer and thereby makes possible more creative and efficient solutions to design and construction problems. To be successful, however, participants in a design-build project need to have a clear understanding of the process and their roles.  That is why training is important, both for my clients and for myself as their advisor.

I’ll report again when (if) I survive next week’s seminar.

Lenders Beware: Ensure Those HOA Dues Get Paid! Nevada HOA Superpriority Statute Survives Constitutional Challenge

Foreclosure sign in front on modern houseThe Supreme Court of Nevada stirred a great deal of controversy in its 2014 opinion SFR Investments Pool 1, LLC v. U.S. Bank, N.A.,[1] holding that a 1991 statute granting superpriority status to certain homeowner’s association (HOA) liens[2] created a true priority lien such that its foreclosure extinguishes all other liens, including a first deed of trust on the property.[3]

Prior to the SFR Investments decision, most lenders assumed the statute merely provided for a payment priority, so that upon a lender’s foreclosure of its deed of trust, the HOA would recover a portion of its overdue assessments—they certainly did not anticipate that an HOA would have the ability to wipe out a “first position” deed of trust.  As one can imagine, the SFR Investments decision did not sit well with lenders and prompted a flurry of additional lawsuits, including a constitutional challenge claiming that the statute violates the Due Process and Takings Clauses of both the United States and Nevada Constitutions. Continue Reading

When “Non-Binding” LOIs Become Binding

A letter of intent (“LOI”) is often the first document in a proposed deal – a summary of a range of key terms or concepts for negotiation toward entering into a final, formal agreement. But what seems like a simple document can be much more than a mere list of possible terms to be discussed by the parties, and might just result in a final agreement in one side’s sole discretion.  In some cases, an LOI can be an enforceable agreement to negotiate in good faith toward a final agreement based, at least in part, on its stated terms.  Even those LOIs that specifically say they are non-binding may, in fact, be binding.  For instance, an LOI could be enforceable in its own right if all material terms of a final agreement are set out in the LOI and the parties’ conduct suggests they treated the LOI as a final agreement.  Rather than being a “safe haven” that can be terminated at will without liability, an LOI can present great risk and unintended consequences to the parties if not recognized and handled with care.  Missteps in documentation and/or subsequent conduct of the parties along the way could result in blown deals and damages.  Even an otherwise carefully and clearly drafted LOI may not be free from risk or unintended consequences. Continue Reading

Choice of Law Provisions Cannot Bypass California’s Prohibition on Jury Waivers

Last week, the California Court of Appeal ruled that a property owner was entitled to a jury trial in a dispute with a lender despite the fact that the loan agreement contained a jury waiver provision and a New York choice-of-law provision.

The case involved the San Francisco apartment complex known as the Rincon Towers. In 2007, the plaintiffs borrowed $110 million on a two-year loan to finance the acquisition.  In 2009, the plaintiffs failed to repay the loan. The plaintiffs claimed that under the terms of the loan agreement they were entitled to a one-year extension of the maturity date.  The lender disagreed and instead completed a nonjudicial foreclosure sale. Continue Reading

Is Late Notice A Big Deal? Ninth Circuit Asks For An Opinion From CA Supreme Court On Insurance Question

So, what’s the big deal if you’re a little “late” in giving your insurer notice of the claim or lawsuit against your company?  That’s the question, albeit in essence, that the Ninth Circuit has posed to the California Supreme Court recently in an Order Certifying Questions, Pitzer College v. Indian Harbor Insurance Co.

Specifically, the Ninth Circuit is asking for legal insight as to the following:Policy

1. Is California’s common law notice-prejudice rule a fundamental public policy for the purpose of choice-of-law analysis? May common law rules, other than unconscionability not enshrined in statute, regulation, or the constitution, be fundamental public policies for the purpose of choice-of-law analysis?

2. If the notice-prejudice rule is a fundamental public policy for the purpose of choice-of-law analysis, can a consent provision in a first-party claim insurance policy be interpreted as a notice provision such that the notice-prejudice rule applies? Continue Reading

Calling All Owners and Contractors! Pay Attention to Disclosure Statement Requirement to Protect Against or Preserve Lien Claims in Washington

Lurking in the depths of the Contractor Registration Act (Chapter 18.27 RCW) is an important statute that has the potential to eviscerate lien rights if not satisfied by contractors furnishing improvements on certain projects in Washington. RCW 18.27.114 requires that contractors working on residential projects or commercial projects of limited scope furnish a Model Disclosure Statement Notice to Customer (“Disclosure Statement”) prior to commencing work.

The form of this document and additional information required of a contractor can be found on the Washington Department of Labor & Industries (“L&I”) website.   The Disclosure Statement advises the contractor’s customer (upfront in the contract documents usually, and prior to the commencement of work) of his/her rights and responsibilities, discloses the contractor’s registration and bonding requirements, and warns the customer of the contractor’s right to file a lien claim in the event of nonpayment. Continue Reading

Joint Venturers Must Venture Carefully

There are good reasons to partner with other designers or contractors–even competitors–on construction and design projects.  Perhaps such a collaboration gives you access to new geographical or industry markets, or enables you to take on a project of broader scope.   A joint venture arrangement is a straight-forward way to collaborate in such instances.  However, there are issues that should be clearly defined at the outset.  In my recent article for the Daily Journal of Commerce, I address the joint venture arrangement and discuss what to consider when setting up a successful joint venture. Read the full article here.

“Joint Venturers Must Venture Carefully” was originally published in the Daily Journal of Commerce on December 16, 2016.