The Pros and Cons of SNDAs

Lawyers familiar with commercial leasing and lending transactions should be well-versed in the concepts of subordination, nondisturbance, and attornment. It is advantageous for both landlords and tenants to negotiate mutually satisfactory provisions in leases that address such concepts. The parties should also discuss the form of document the tenant may be required to enter into with the lender that will govern their relationship in the event the landlord's mortgage is foreclosed upon. This document fulfills the need for the lender (or its successor) and the tenant to predispose of various issues before the lease is wiped out or the parties are forced into a landlord-tenant relationship following a foreclosure.

First and foremost, the lender wants to make sure that the mortgage is superior to all other claims against the leased property in the event its borrower, the landlord, defaults under the mortgage loan. From a landlord's perspective, a tenant's interest in the leased property should automatically be deemed to be subordinate to the lender's interest; the tenant should attorn to the new owner of the property following a foreclosure, if in the absence of a nondisturbance agreement, the landlord does not elect to have the lease terminate as a result of the foreclosure. In any event, it is of critical importance to the lender that it not inherit certain of the landlord's obligations.

The SNDA Agreement

On the other hand, the tenant will want to be assured that its leasehold interest will not be disturbed so that it can retain possession of the leased property so long as the tenant does not default on its lease obligations. The agreement between the lender and the tenant spelling out the lender/tenant relationship in the event of a foreclosure is typically called a Subordination, Nondisturbance and Attornment Agreement (“SNDA”), and it is incumbent upon the landlord and tenant to include provisions in their lease agreement that require the lender and tenant to execute an SNDA that meets their respective needs. The failure of the landlord and tenant to negotiate mutually satisfactory SNDA provisions in a lease may leave the landlord unable to secure financing or require the tenant to sign an onerous agreement with its landlord's lender that effectively diminishes the rights of the tenant under its lease following a foreclosure.

While SNDAs have become a common component for commercial leasing and lending transactions, practitioners in the field have recently noted two curious trends:

• Lenders are demanding SNDA provisions that include increasingly onerous waivers of the rights of tenants under their leases.
• When leases omit nondisturbance rights in favor of the tenant, but only include a provision indicating that the rights of the tenant under the lease are subordinate to those of existing and future lenders, many such lenders are electing to forego the SNDA completely, thereby doing without the benefit of the onerous tenant waivers that typically come into play only when nondisturbance rights in favor of the tenant are granted.

Waivers

In negotiating SNDAs, lenders often insist that tenants waive certain of their rights in exchange for nondisturbance provisions. The goal of lenders is to protect their pocketbooks in the event of a foreclosure, regardless of rights secured by the tenant from the landlord during the original lease negotiation. A lender does not want to be put in a position of needing to satisfy pre-foreclosure liabilities that its borrower, as landlord, owes to the tenant. Hence, tenants are being asked to waive certain rights they may have under their leases, if the lender (or its successor) forecloses and assumes the role of landlord.

There are many types of waivers that lenders ask of tenants under SNDAs. Some of these provisions are benign concessions by the tenant; others ask the tenant to give up valuable rights. For instance, the general obligations waiver releases the lender from any obligation to cure a pre-foreclosure default of the landlord. Defaults may come in many forms, but if the default involves a leaky roof, for instance, a tenant who exercised self-help rights to remedy the problem is not going to be happy if the landlord faces foreclosure and is replaced by a lender who is not obligated to reimburse the tenant for the roof repairs.

Another example is the construction waiver. If the tenant is responsible for its buildout, but the landlord must pay the cost of the improvements, the construction waiver releases the lender following a foreclosure from any responsibility the landlord had under the lease to pay these costs. The tenant is stuck with the bills.

Last, the dual default notice requirement is both a notice requirement and the waiver of a right. Ordinarily, the tenant has no obligation to notify the lender if the landlord commits a default under the lease that may give the tenant the right to terminate the lease. To remedy this problem, lenders often include in the SNDA a provision that requires the tenant to give dual notices of defaults; one to the landlord and one to the lender. The notice language is often followed by a provision giving the lender an additional cure period on top of the cure period provided to the landlord. The tenant waives its default rights against the lender (or its successor) if the lender does not receive the required default notice.

Additional Provisions

Lenders are routinely proposing additional SNDA provisions to protect lenders, including environmental clauses that require certifications by the tenant that the leased property contains no hazardous substances. The waivers ask for concessions by the tenant and seek the tenant's waiver of future unknown rights, which are difficult to analyze in advance. In all of these instances, the tenant's lease rights have been amended by the SNDA. Of course, unless required to do so by their lease, there is no need for a tenant to sign an overreaching SNDA. Absent lease language mandating execution of an onerous SNDA, a tenant may refuse to do so, leaving the landlord with difficulty financing its property. Hence, landlords are well advised to include in their leases either: 1) subordination and attornment language only; or 2) SNDA language that specifies that the tenant must sign any future lender's customary form of SNDA, which of course, is likely to include onerous provisions.

Some practitioners have recently observed an increasing reluctance by lenders to negotiate SNDAs and benefit from the tenant waivers if a lease contains only self-executing subordination and attornment language. To understand why, it is important to consider what the lender is giving up in the SNDA. Nondisturbance provisions protect the tenant from being evicted in the event of foreclosure. While it is often the case that the lender prefers to keep the tenant and the income stream that exists at the time of foreclosure, sometimes the lender may prefer to oust the tenant. The lender may bet that the locked-in lease rate will be substantially lower than the market rate at the time of foreclosure.

Conclusion

Ultimately, it is essential that landlords anticipate and address these issues during the negotiation of the lease. Landlords need to be increasingly vigilant. When it comes to determining the subordination, nondisturbance and attornment terms lenders are willing to accept, landlords need to know the needs of lenders before a lease is signed. It is dangerous to assume that tenants will be willing to sign waivers or other agreements after a lease is signed. The rules of the game must be set out in the lease. The landlord must anticipate the needs of the lender and be able to satisfy these needs.

Paul R. Diamond, a member of this newsletter's Board of Editors, is a Partner at Wildman, Harrold, Allen & Dixon LLP. David McClintick was a Summer Associate at the firm.

Lawyers familiar with commercial leasing and lending transactions should be well-versed in the concepts of subordination, nondisturbance, and attornment. It is advantageous for both landlords and tenants to negotiate mutually satisfactory provisions in leases that address such concepts. The parties should also discuss the form of document the tenant may be required to enter into with the lender that will govern their relationship in the event the landlord's mortgage is foreclosed upon. This document fulfills the need for the lender (or its successor) and the tenant to predispose of various issues before the lease is wiped out or the parties are forced into a landlord-tenant relationship following a foreclosure.

First and foremost, the lender wants to make sure that the mortgage is superior to all other claims against the leased property in the event its borrower, the landlord, defaults under the mortgage loan. From a landlord's perspective, a tenant's interest in the leased property should automatically be deemed to be subordinate to the lender's interest; the tenant should attorn to the new owner of the property following a foreclosure, if in the absence of a nondisturbance agreement, the landlord does not elect to have the lease terminate as a result of the foreclosure. In any event, it is of critical importance to the lender that it not inherit certain of the landlord's obligations.

The SNDA Agreement

On the other hand, the tenant will want to be assured that its leasehold interest will not be disturbed so that it can retain possession of the leased property so long as the tenant does not default on its lease obligations. The agreement between the lender and the tenant spelling out the lender/tenant relationship in the event of a foreclosure is typically called a Subordination, Nondisturbance and Attornment Agreement (“SNDA”), and it is incumbent upon the landlord and tenant to include provisions in their lease agreement that require the lender and tenant to execute an SNDA that meets their respective needs. The failure of the landlord and tenant to negotiate mutually satisfactory SNDA provisions in a lease may leave the landlord unable to secure financing or require the tenant to sign an onerous agreement with its landlord's lender that effectively diminishes the rights of the tenant under its lease following a foreclosure.

While SNDAs have become a common component for commercial leasing and lending transactions, practitioners in the field have recently noted two curious trends:

• Lenders are demanding SNDA provisions that include increasingly onerous waivers of the rights of tenants under their leases.
• When leases omit nondisturbance rights in favor of the tenant, but only include a provision indicating that the rights of the tenant under the lease are subordinate to those of existing and future lenders, many such lenders are electing to forego the SNDA completely, thereby doing without the benefit of the onerous tenant waivers that typically come into play only when nondisturbance rights in favor of the tenant are granted.

Waivers

In negotiating SNDAs, lenders often insist that tenants waive certain of their rights in exchange for nondisturbance provisions. The goal of lenders is to protect their pocketbooks in the event of a foreclosure, regardless of rights secured by the tenant from the landlord during the original lease negotiation. A lender does not want to be put in a position of needing to satisfy pre-foreclosure liabilities that its borrower, as landlord, owes to the tenant. Hence, tenants are being asked to waive certain rights they may have under their leases, if the lender (or its successor) forecloses and assumes the role of landlord.

There are many types of waivers that lenders ask of tenants under SNDAs. Some of these provisions are benign concessions by the tenant; others ask the tenant to give up valuable rights. For instance, the general obligations waiver releases the lender from any obligation to cure a pre-foreclosure default of the landlord. Defaults may come in many forms, but if the default involves a leaky roof, for instance, a tenant who exercised self-help rights to remedy the problem is not going to be happy if the landlord faces foreclosure and is replaced by a lender who is not obligated to reimburse the tenant for the roof repairs.

Another example is the construction waiver. If the tenant is responsible for its buildout, but the landlord must pay the cost of the improvements, the construction waiver releases the lender following a foreclosure from any responsibility the landlord had under the lease to pay these costs. The tenant is stuck with the bills.

Last, the dual default notice requirement is both a notice requirement and the waiver of a right. Ordinarily, the tenant has no obligation to notify the lender if the landlord commits a default under the lease that may give the tenant the right to terminate the lease. To remedy this problem, lenders often include in the SNDA a provision that requires the tenant to give dual notices of defaults; one to the landlord and one to the lender. The notice language is often followed by a provision giving the lender an additional cure period on top of the cure period provided to the landlord. The tenant waives its default rights against the lender (or its successor) if the lender does not receive the required default notice.

Additional Provisions

Lenders are routinely proposing additional SNDA provisions to protect lenders, including environmental clauses that require certifications by the tenant that the leased property contains no hazardous substances. The waivers ask for concessions by the tenant and seek the tenant's waiver of future unknown rights, which are difficult to analyze in advance. In all of these instances, the tenant's lease rights have been amended by the SNDA. Of course, unless required to do so by their lease, there is no need for a tenant to sign an overreaching SNDA. Absent lease language mandating execution of an onerous SNDA, a tenant may refuse to do so, leaving the landlord with difficulty financing its property. Hence, landlords are well advised to include in their leases either: 1) subordination and attornment language only; or 2) SNDA language that specifies that the tenant must sign any future lender's customary form of SNDA, which of course, is likely to include onerous provisions.

Some practitioners have recently observed an increasing reluctance by lenders to negotiate SNDAs and benefit from the tenant waivers if a lease contains only self-executing subordination and attornment language. To understand why, it is important to consider what the lender is giving up in the SNDA. Nondisturbance provisions protect the tenant from being evicted in the event of foreclosure. While it is often the case that the lender prefers to keep the tenant and the income stream that exists at the time of foreclosure, sometimes the lender may prefer to oust the tenant. The lender may bet that the locked-in lease rate will be substantially lower than the market rate at the time of foreclosure.

Conclusion

Ultimately, it is essential that landlords anticipate and address these issues during the negotiation of the lease. Landlords need to be increasingly vigilant. When it comes to determining the subordination, nondisturbance and attornment terms lenders are willing to accept, landlords need to know the needs of lenders before a lease is signed. It is dangerous to assume that tenants will be willing to sign waivers or other agreements after a lease is signed. The rules of the game must be set out in the lease. The landlord must anticipate the needs of the lender and be able to satisfy these needs.

Paul R. Diamond, a member of this newsletter's Board of Editors, is a Partner at Wildman, Harrold, Allen & Dixon LLP. David McClintick was a Summer Associate at the firm.