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.