Tenants Beware!

This two-part article focuses on how the SNDA can have other impacts that are at least as important as a tenant's concern not to be disturbed in its possession of the premises. The first part addressed subordination, attornment and nondisturbance. The conclusion herein discusses lender issues.

Limited Liability of Lender

Boilerplate

The partners, shareholders, directors, officers and principals, direct and indirect, of Lender as a Successor Landlord (collectively the “Exculpated Parties”) shall not be liable for the performance of such Successor Landlord's obligations under this Agreement and the Lease. The liability of Lender as a Successor Landlord for its obligations under this Agreement and the Lease shall be limited to its interest in the Property and Tenant shall not look to any of the other property or assets of the Lender or the property or assets of any of the Exculpated Parties in seeking either to enforce Landlord's obligations against Lender as Successor Landlord or to satisfy a judgment for its failure to perform such obligations.

Comment

Lender should acknowledge that the property could be stripped of its value under certain circumstances and should not force the tenant to look to the interest in the property which would have no value under those conditions. In the event that any liability of lender does arise pursuant to the SNDA or the Lease, such liability should be limited and restricted to its interest in the property or any portion thereof, including: (w) the rents and profits thereof; (x) the proceeds of any insurance policy payable or received by lender; (y) eminent domain awards payable to or collected by lender; and (z) sales, financing, or similar proceeds payable to or received by lender, and shall in no event exceed such interest. This section should not limit any right that tenant may otherwise have to obtain injunctive relief against lender. Except as set forth herein, the lender should be protected in the same manner as the landlord under the lease. If the successor purchaser is not the lender or an affiliate of the lender, the exculpation provision in the Lease should prevail.

Direct Payments to Lender

Boilerplate

Tenant agrees that after Lender gives notice to Tenant stating that a default has occurred under the Mortgage or under the loan documents delivered in connection with the Mortgage and that rent under the Lease should be paid to Lender, Tenant will pay to Lender, or in accordance with the directions of Lender, as and when due, all rent, additional rent and other monies due and to become due to Landlord under the Lease.

Comment

Some organizations are very small and not much notice is needed to make sure that the tenant's payments are sent to the right party. On the other hand, large tenants may not even have their accounting departments in the same location as their legal or real estate departments. In those instances, a practitioner may seek to give his client some time to react to the notice from the lender. Tenant is not asking that it skirt its obligation to pay rent in accordance with the provisions of the lease. Tenant, however, should ask for at least 20 days notice as a fair request of a lender before it is obligated to send rent payments to a lender acting as a successor landlord.

Notice to Lender and Right to Cure

Boilerplate

Tenant shall notify Lender of any default by Landlord under the Lease and agrees that, notwithstanding any provisions of the Lease to the contrary, no notice of cancellation thereof or of an abatement shall be effective unless Lender shall have received notice of default giving rise to such cancellation or abatement. After Lender receives a default notice, Lender shall have the following periods of time to cure Landlord's default and avoid a termination or abatement, as the case may be: (a) to the extent of a default by Landlord that can be cured by the payment of money, Lender shall have ten (10) days from the date of Tenant's notice to make such payment; and (b) to the extent that a default by Landlord is otherwise curable, Lender shall commence such cure within thirty (30) days after the date of Tenant's notice to commence such cure and if Lender thereafter diligently prosecutes such cure and such cure was not reasonably capable of being cured within thirty (30) days after the date of Tenant's notice, Lender shall complete its cure as soon thereafter as reasonably possible, and Tenant shall not otherwise be required to forebear from executing its remedies for a period of sixty (60) days after the date of Tenant's notice.

Comment

Here, the goal is achieving a fair balance. It is important to make sure that the lender does not have an unlimited amount of time to effectuate a cure. The practitioner must understand that a lender may need time to obtain possession and he must weigh that time factor against the tenant's need to have effective use and occupancy of the premises. Usually, a tenant does not completely lose possession when a landlord defaults. Nevertheless, a tenant's business activities are being adversely affected by such conduct. Examples of such defaults are leaking roofs, potholes, non-functioning lights, and entrances that are blocked. The economic reality is that a tenant is frequently willing to stay because it cannot replace the location sooner. It would move if it could. Although the tenant is entitled to the benefit of its bargain, it can be in a tenant's best interests to work together with the lender to get the property working again. There is a point where the tenant and lender's interests diverge. Agreeing to a 90-day outside date for the cure to be completed should be a fair allocation of the risks involved because a tenant cannot be out of business nor have its business hindered for an indefinite period of time.

Conclusion

Lenders must remember that tenants are a vital part of the lending relationship in a commercial lease. They are as important as a third leg of a three legged stool. Without the tenant, the economics of the loan do not make sense. The landlord would be left with vacant space that is not providing income to pay off the loan. The payment of rent thus gives the landlord the means to pay the lender without diminishing its other assets. An underwriter will consider whether the space is leased when it determines the amount of the loan and also when it determines whether it will offer the loan at all. Therefore, a tenant's concerns deserve to be respected, not only because a tenant has the right to rely on what it bargained for in its lease but also because it brings value to the property, and that value is the lender's collateral for the loan. A tenant needs an experienced and savvy attorney to champion its cause when negotiating an SNDA. It can make all the difference between having a leasing transaction that is “almost” done right and one that fully protects a tenant's interests.

Mark Morfopoulos is a Retail Real Estate Law attorney with the firm of Meislik & Meislik in Montclair, NJ. For more information, contact him at 973-783-3000 or visit www.meislik.com.

This two-part article focuses on how the SNDA can have other impacts that are at least as important as a tenant's concern not to be disturbed in its possession of the premises. The first part addressed subordination, attornment and nondisturbance. The conclusion herein discusses lender issues.

Limited Liability of Lender

Boilerplate

The partners, shareholders, directors, officers and principals, direct and indirect, of Lender as a Successor Landlord (collectively the “Exculpated Parties”) shall not be liable for the performance of such Successor Landlord's obligations under this Agreement and the Lease. The liability of Lender as a Successor Landlord for its obligations under this Agreement and the Lease shall be limited to its interest in the Property and Tenant shall not look to any of the other property or assets of the Lender or the property or assets of any of the Exculpated Parties in seeking either to enforce Landlord's obligations against Lender as Successor Landlord or to satisfy a judgment for its failure to perform such obligations.

Comment

Lender should acknowledge that the property could be stripped of its value under certain circumstances and should not force the tenant to look to the interest in the property which would have no value under those conditions. In the event that any liability of lender does arise pursuant to the SNDA or the Lease, such liability should be limited and restricted to its interest in the property or any portion thereof, including: (w) the rents and profits thereof; (x) the proceeds of any insurance policy payable or received by lender; (y) eminent domain awards payable to or collected by lender; and (z) sales, financing, or similar proceeds payable to or received by lender, and shall in no event exceed such interest. This section should not limit any right that tenant may otherwise have to obtain injunctive relief against lender. Except as set forth herein, the lender should be protected in the same manner as the landlord under the lease. If the successor purchaser is not the lender or an affiliate of the lender, the exculpation provision in the Lease should prevail.

Direct Payments to Lender

Boilerplate

Tenant agrees that after Lender gives notice to Tenant stating that a default has occurred under the Mortgage or under the loan documents delivered in connection with the Mortgage and that rent under the Lease should be paid to Lender, Tenant will pay to Lender, or in accordance with the directions of Lender, as and when due, all rent, additional rent and other monies due and to become due to Landlord under the Lease.

Comment

Some organizations are very small and not much notice is needed to make sure that the tenant's payments are sent to the right party. On the other hand, large tenants may not even have their accounting departments in the same location as their legal or real estate departments. In those instances, a practitioner may seek to give his client some time to react to the notice from the lender. Tenant is not asking that it skirt its obligation to pay rent in accordance with the provisions of the lease. Tenant, however, should ask for at least 20 days notice as a fair request of a lender before it is obligated to send rent payments to a lender acting as a successor landlord.

Notice to Lender and Right to Cure

Boilerplate

Tenant shall notify Lender of any default by Landlord under the Lease and agrees that, notwithstanding any provisions of the Lease to the contrary, no notice of cancellation thereof or of an abatement shall be effective unless Lender shall have received notice of default giving rise to such cancellation or abatement. After Lender receives a default notice, Lender shall have the following periods of time to cure Landlord's default and avoid a termination or abatement, as the case may be: (a) to the extent of a default by Landlord that can be cured by the payment of money, Lender shall have ten (10) days from the date of Tenant's notice to make such payment; and (b) to the extent that a default by Landlord is otherwise curable, Lender shall commence such cure within thirty (30) days after the date of Tenant's notice to commence such cure and if Lender thereafter diligently prosecutes such cure and such cure was not reasonably capable of being cured within thirty (30) days after the date of Tenant's notice, Lender shall complete its cure as soon thereafter as reasonably possible, and Tenant shall not otherwise be required to forebear from executing its remedies for a period of sixty (60) days after the date of Tenant's notice.

Comment

Here, the goal is achieving a fair balance. It is important to make sure that the lender does not have an unlimited amount of time to effectuate a cure. The practitioner must understand that a lender may need time to obtain possession and he must weigh that time factor against the tenant's need to have effective use and occupancy of the premises. Usually, a tenant does not completely lose possession when a landlord defaults. Nevertheless, a tenant's business activities are being adversely affected by such conduct. Examples of such defaults are leaking roofs, potholes, non-functioning lights, and entrances that are blocked. The economic reality is that a tenant is frequently willing to stay because it cannot replace the location sooner. It would move if it could. Although the tenant is entitled to the benefit of its bargain, it can be in a tenant's best interests to work together with the lender to get the property working again. There is a point where the tenant and lender's interests diverge. Agreeing to a 90-day outside date for the cure to be completed should be a fair allocation of the risks involved because a tenant cannot be out of business nor have its business hindered for an indefinite period of time.

Conclusion

Lenders must remember that tenants are a vital part of the lending relationship in a commercial lease. They are as important as a third leg of a three legged stool. Without the tenant, the economics of the loan do not make sense. The landlord would be left with vacant space that is not providing income to pay off the loan. The payment of rent thus gives the landlord the means to pay the lender without diminishing its other assets. An underwriter will consider whether the space is leased when it determines the amount of the loan and also when it determines whether it will offer the loan at all. Therefore, a tenant's concerns deserve to be respected, not only because a tenant has the right to rely on what it bargained for in its lease but also because it brings value to the property, and that value is the lender's collateral for the loan. A tenant needs an experienced and savvy attorney to champion its cause when negotiating an SNDA. It can make all the difference between having a leasing transaction that is “almost” done right and one that fully protects a tenant's interests.

Mark Morfopoulos is a Retail Real Estate Law attorney with the firm of Meislik & Meislik in Montclair, NJ. For more information, contact him at 973-783-3000 or visit www.meislik.com.