In a time when many commercial real estate properties are at risk of foreclosure, it is important for commercial tenants to obtain an “SNDA” agreement with their leases to protect their rights to occupy the property.
An SNDA agreement is a “Subordination, Non-Disturbance, and Attornment” agreement. The landlord, tenant, and the landlord’s lender are parties to an SNDA. SNDA agreements are typically referenced in a lease as a separate agreement, with the lease requiring the landlord and tenant to enter into the SNDA contemporaneously with the lease.
Generally, a commercial tenant may not have any ongoing rights to occupy a leased premises if the landlord defaults on its mortgage and the lender forecloses on the premises. Mortgages are typically subordinated to the lender’s interest in the property, and without the protection of an SNDA, a lender may be able to terminate the lease upon foreclosure. It may seem unwise for a lender to terminate the lease of a tenant that is providing rental income, but market forces and other issues may factor into a lender’s decision. The unknown poses a risk to the commercial tenant that it will lose its premises. This risk can be minimized through a well-negotiated SNDA.
An SNDA should address three main topics:
- Subordination – The tenant agrees that its leasehold rights are subordinated, or placed in a junior position, to the lender’s mortgage lien.
- Non-Disturbance – The lender agrees that if it forecloses upon the property, it will not disturb the tenant’s rights under the lease. The Non-Disturbance provision is a critical provision for the tenant – it allows the tenant ongoing occupancy of the premises. The language of most SNDAs essentially provides that the lender or the purchaser at the foreclosure sale will step into the place of the landlord in the event of a foreclosure.
- Attornment – The tenant agrees that it will recognize – or attorn to – the lender or purchaser of the premises at the foreclosure sale and continue to perform its obligations under the lease.
Lenders often have form SNDAs they prefer to use, but in most situations lenders are open to some revisions of their form to include more tenant-friendly clauses.
If you are a commercial tenant negotiating a lease or lease extension, I recommend speaking with an attorney such as myself who has experience in drafting and negotiating commercial leases, to make sure your lease addresses potential issues that could arise during the lease term.
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