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September 13, 2011

What is an SNDA? Frequently Asked Questions about Subordination and Non Disturbance Agreements

 

 

By Joel Patrick Erb, Esq.

Often overlooked by lenders and parties negotiating a lease when real estate is booming, the importance of SNDAs has been highlighted by the recent turbulence of the current commercial real estate market and the prevalence of foreclosures.

 

What are they?

Subordination and Non Disturbance Agreements, commonly referred to as “SNDAs,” are typically an agreement between a tenant, a landlord and the landlord’s lender.

 

What is their purpose?

They have two primary purposes.

  1. The tenant subordinates its lease to the lender’s interest in the property and agrees to attorn to the lender in the event the lender acquires the property.
  2. The lender agrees not to disturb the tenancy in the event the lender acquires the property.

 

What do “attorn” and “non-disturbance” mean in this context?

Attorn means to treat the lender as the new landlord and pay rent directly to the lender in the event of foreclosure.  Non-disturbance means that the tenancy continues uninterrupted after foreclosure.  A subordinate lease can be wiped out in foreclosure without a prior non-disturbance agreement, which can be quite a shock to a tenant in good standing.  Similarly, foreclosing lenders can maintain the value and income of their collateral if important tenants have already agreed to attorn to them.

 

Who may need one?

  1. Commercial tenants who are investing either a lot of time or money into a leasehold property that is subject to a deed of trust.  Absent an SNDA, a tenant can in some circumstances be wiped out in the event that its landlord defaults on its mortgage.  In the current economic climate, this is a greater concern than ever.
  2. Lenders for commercial property, particularly where the lease predates the loan or refinancing, and where the lease generates much of the value of the collateral.  The subordination and attornment provisions ensure that an important tenant stays with the property in the unfortunate event of foreclosure.
  3. Subtenants of a Ground Lease (see below).
  4. Landlords whose tenants or lender requests an SNDA

 

Is there anything in it for the Landlord?

Indirectly, yes.  Getting the subordination and attornment from the tenant can make Landlord’s property more attractive/valuable as collateral to a lender.  In addition, the non-disturbance provision can be a requirement of (and a benefit offered to) larger tenants, and so landlords should be prepared to ask their lenders for one.

 

Should a Landlord be concerned about asking their lender for one?

Most lenders will not hesitate to offer an SNDA to larger tenants, as it adds stability and value to their collateral; of course, most lenders will also require the SNDA to be on their form, or at least a form acceptable to them.  For smaller spaces in a multi-tenant project (or below-market leases), lenders often prefer to have the option to wipe out the lease in the event of foreclosure.  Even then, asking rarely hurts, and lenders are usually very familiar with SNDAs, so it should not be a surprise.

 

When should I ask for one?

As a tenant, the request should be made as early as possible during lease negotiations.  A lease provision can be added requiring the landlord to provide a commercially reasonable SNDA from its lender (or other lienholder or ground lessor).  As a landlord, as soon as one determines that an SNDA will be needed for the lease, to avoid having the paperwork involved in the SNDA delay the execution of a valuable lease.  Landlords should be careful that any promise to provide an SNDA provides an out if their lender turns out to be uncooperative.

 

What should I do with an SNDA when I receive the form (or request for a form)?

Have it prepared or reviewed by an attorney experienced in real estate transactions and contracts.  While in theory, SNDAs are simple agreements, they come in many shapes and sizes, and it is important that they accomplish their intended goal.

 

What other circumstances might require SNDAs?

Ground leases often generate the need for many different SNDAs because there are more parties involved who might have their leases “disturbed”.  Often, a subtenant of a ground lessee will want an SNDA from the ground lessor (in case the ground lessee defaults) AND the ground lessee’s leasehold lender, and/or the ground lessee will want an SNDA from the ground lessor’s lender.

 

As a Lender, are there circumstances where giving an SNDA may be undesirable?

Occasionally.  Guaranteeing not to disturb smaller tenants in a larger project could hinder efforts to restructure or rethink a project/property in the event that economic changes result in a foreclosure.  Careful business consideration is always warranted to determine whether the benefits of lease subordination and attornment outweigh the risks associated with the promise of non-disturbance.

By Joel Patrick Erb, Esq.

 

Joel Patrick Erb is a founding partner of Pioneer Law Group, LLP and has over 13 years experience drafting and negotiating complex commercial real estate documents.

(916) 496-8500

joel@pioneerlawgroup.net

 

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