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.
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.”
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.”
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.