As mentioned in my last post, there are some shaky times ahead for property owners who may be upside down in their current loan. In fact, recent numbers indicate that almost 46 billion in defaulted CMBS loans are outstanding. Landlords and Tenants can expect to see some significant turnover in ownership of commercial properties in the coming years, particularly through commercial foreclosure actions.
Every commercial lease in these troubled properties almost certainly has another agreement, tying the lender and the Tenant together. That document is the Subordination, Non-Disturbance and Attornment Agreement (SNDA for short). While SNDA’s will vary in certain respects, there are several concepts uniform throughout which will be addressed on the most basic level here. Think of this article as a jumping off point which would be best followed by reviewing your own SNDA and lease with respect to these concepts, and talking them over with your attorney.
SUBORDINATION
The subordination provision of an SNDA essentially provides that the lender’s claims against Landlord under the loan will be paid before any claims Tenant may have against Landlord under the lease. Rather basic language would look something like this:
“The Lease is and shall be subject and subordinate to the provisions and lien of the Security Instrument and to all renewals, modifications, consolidations, replacements and extensions thereof, to the full extent of the principal amount and other sums secured thereby and interest thereon.”
ATTORNMENT
The attornment provision of an SNDA provides that Tenant agrees, in advance, to continue performing under the lease if the Landlord loses the property pursuant to a default under the loan. There are essentially three ways a new landlord would be introduced: (1) foreclosure, whereby the lender takes the property, (2) foreclosure, whereby a third-party out-bids the lender for the property, and (3) transfer by deed in lieu of foreclosure, typically resulting in the lender taking over as landlord. Usually, the attornment provision will apply to all three situations. Rather basic attornment language would be:
“Tenant agrees that, Tenant will attorn to and recognize: (A) Lender, whether as mortgagee in possession or otherwise; or (B) any purchaser at a foreclosure sale under the Security Instrument, or any transferee who acquires possession of or title to the Property, or any successors and assigns of such purchasers and/or transferees, as its landlord for the unexpired balance (and any extensions, if exercised) of the term of the Lease upon the terms and conditions set forth therein.”
NON-DISTURBANCE
Why would Tenant agree to sign a document where they are second in line to get paid and have to deal with whatever landlord might result from a foreclosure? Because the Tenant receives the promise of non-disturbance.
The non-disturbance provision of an SNDA provides that, regardless of a change in landlord under the terms of the loan documents,Tenant’s operations under the lease will not be affected. This peace of mind is the primary motivation Tenant has to enter into an SNDA (and because most landlords make it a condition to the lease). Rather basic non-disturbance language would be:
“So long as Tenant complies with Tenant’s obligations under the SNDA and is not in default under the Lease, Lender will not disturb Tenant’s use, possession and enjoyment of the leased premises nor will Tenant’s rights under the Lease be impaired in any foreclosure action, sale under a power of sale, transfer in lieu of the foregoing, or the exercise of any other remedy pursuant to the Security Instrument.”
Keep in mind that the sample language provided is the most basic form of subordination, attornment and non-disturbance language. Your SNDA will surely go into much more detail and include additional representations, warranties and covenants between Lender and Tenant. However, if you are a tenant whose leased property could be subject to foreclosure in the coming years, keep these concepts in mind, as you will likely be needing them.
I was wondering what you response would be to tenant in possession who was never served with the foreclosure.
I am following a case with just those terms.
I would appreciate any comments you may have.
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By: kATHY on June 27, 2010
at 2:15 pm
I’m not sure I really follow what you are asking in relation to this post. However, these agreements are designed to protect against the questions that arise from lender foreclosure.
With an SNDA, the tenant would remain in possession, undisturbed, and the foreclosing lender would generally take over the roll of landlord. In that situation, where the tenant is not harmed by the foreclosure, I’m not sure a notice to the tenant would be necessary.
If no SNDA is in place, and the tenant’s rights are foreclosed and terminated, certainly notice to the tenants would be best practice. However, the lender’s relationship is with the landlord, and if superior, I do not believe notice to a commercial tenant is necessary unless required by agreement.
Hope this helps.
By: Brian Baker on June 28, 2010
at 2:43 pm
In a foreclosure with a trustee’s deed
What would happen if there is a SNDA in place and the landlord ask the tenant for a higher rent and gives them the option to leave.
Then changes its mind and tells the tenant he has to stay.
To my understanding the honoring of an SNDA is dependent on the new landlord accepting the property with the lease agreement. However, can the landlord change its mind after the trustee’s deed has been recorded.
and if the new landlord replaces the old, which landlord is responsible to the tenant for the security deposit paid to the old landlord.
By: peter on July 16, 2010
at 6:57 pm
Peter,
While I can’t speak to your situation specifically, as I have not read the documents in question and do not know if local law may play in to the analysis, I would be happy to provide some general information in relation to your questions. For a more tailored answer and advice on what to do, I would recommend that you retain an attorney’s services.
A standard SNDA’s non-disturbance language should assure that a new lanlord, acquiring through purchase at foreclosure, does not disturb tenant’s operation under the current lease. In turn, the tenant agrees, through attornment language, to pay rent to the new landlord and continue its operations under the lease.
While the parties are free to amend their lease or enter into a new one, that process would generally need to be a mutual effort, and should not be dictated individually by either party.
Finally, regarding the security deposit, a foreclosed owner should retain a deposit account for the security deposit, separate from other funds. Along with foreclosing the property, the lender generally has a security interest in those accounts, which would be foreclosed simultaneously. In other words, the purchaser should be purchasing the accounts too, giving them the tenant’s security deposit and the obligation to honor it.
If for some reason the prior owner mismanaged the security deposit, and the subsequent owner was not able to obtain it, the tenant should have an individual cause of action against the original owner for the deposit.
As you can see, there are some moving parts to these issues, and that is why I would recommend retaining an attorney if you intend to pursue this process further. Best of luck.
By: Brian Baker on July 16, 2010
at 7:12 pm