In the Spotlight: SNDAs: Insights From the Lender Side

When negotiating a lease, it may be easy to skim over the subordination clause and trust that the boilerplate is sufficient. In many cases, the party that will give this section the most attention is a future lender who will review the lease in connection with its loan due diligence. Tenants and landlords alike may not have a full appreciation for the analysis that a lender undertakes in assessing the leases affecting a property that will serve as collateral for the proposed loan. This article highlights the issues and concerns that a lender faces when determining whether to require a separate subordination agreement ' typically, a Subordination, Non-Disturbance and Attornment Agreement or a SNDA ' and in negotiating a SNDA with the tenant.

When the Subordination Provision Is Not Enough

One of the first pieces of due diligence a lender will undertake in connection with approving financing of a commercial property is determining whether the leases affecting the property are acceptable. Aside from the economics of a lease ( i.e. , the rent schedule and the length of the remaining term), a lender must feel comfortable that the leases will not have priority over the proposed mortgage or, if a lease will be superior to the proposed mortgage, that such lease does not afford the subject tenant rights that would ultimately hinder the lender's ability to foreclose or sell the property. To that end, the lender will carefully assess the subordination provisions in the lease. If a lease is self-subordinating ( i.e. , the lease expressly provides that the lease is unconditionally subordinate and subject to all existing or future mortgages), a separate SNDA is generally unnecessary.

In the case of a lease for which subordination is conditioned upon the lender agreeing not to disturb the tenant's rights following a foreclosure, a lender may still determine that a separate SNDA is unnecessary if the lease is on terms that are not problematic to the lender or if the lease is with a small tenant that the lender is willing to risk losing. However, a SNDA will typically be required for leases that: 1) are silent as to subordination; 2) provide the tenant rights that contain purchase options, out-of-market renewal terms, landlord indemnification obligations and the like; or 3) expressly require delivery of a SNDA as a condition to subordination.

In addition, regardless of whether a lease is expressly subordinate to existing or future mortgages, a lender will typically require a SNDA with any tenant under a “major” lease (i.e., a lease that covers a certain percentage of square footage in the subject property or that produces rent above a certain amount). A SNDA will serve to create certainty in a post-foreclosure setting that, for the lender, the critical rental stream from these major leases will keep flowing and, for the tenant, that the lease terms ' which may have been heavily negotiated ' will be preserved.

Drafting and Negotiating A SNDA

After determining the tenants from whom a SNDA will be required, the lender will produce the requested form. If a form SNDA is attached to the subject lease, lenders will start with such form, revised only to reflect deal-specific terms. In addition, tenants with a national or global presence regardless of the size of the lease at issue will reject many lender forms and insist that the tenant form be used. This scenario is common with national retail tenants that operate hundreds of individual locations and are looking to avoid the administrative headache that would ensue from having each lease subject to a different SNDA. In most instances, however, the SNDA will usually be based on the lender's form.

It is common for only the lender and the tenant to be parties to the SNDA, with the landlord/borrower only added if needed (i.e., one common scenario in which the landlord/borrower is added as a party is if the landlord/borrower agrees in the SNDA to allow rent to be paid directly to the lender following notice to the tenant from the lender). The basic provisions of a SNDA establish: 1) subordination of the lease to the mortgage; 2) an obligation that the lender not disturb the tenant in the event the lender takes over as landlord; and 3) a requirement that the tenant recognize the lender as its new landlord in the event of such succession in title by the lender.

In addition to these basic provisions, a SNDA will commonly include provisions that establish notice and cure rights in favor of the lender, and limitations on the lender's liability following a succession in title. The limitation of liability provisions are often broad and will provide that a lender will not be liable for or bound by, among other things: 1) any defaults of the existing landlord; 2) any payment of tenant allowances or leasing commissions that were due before the lender took title; 3) any amendment to the lease that is made without notice (and consent, if applicable); or 4) any rental payments made more than one month in advance. Given that the positions of the lender and the tenant will be conflicting on these issues, the limitations of the lender's liability are often the most negotiated provisions in a SNDA. Not surprisingly, larger, more significant tenants will have increased bargaining power in negotiating these provisions.

In any event, landlords and lenders should expect that tenants of all sizes will require time to process and negotiate a SNDA and, accordingly, delivery of the initial draft SNDAs should be prioritized at the onset of a financing transaction.

Conclusion

Both lenders and tenants want to achieve certainty and predictability with respect to a lease in a post-foreclosure setting. Still, a lender's objective of minimizing its future liability under a lease and a tenant's objective of preserving its negotiated rights under the same lease are inherently at odds with one another. A Subordination, Non-Disturbance and Attornment Agreement can help establish a middle ground and potentially smooth the transition in the event the lender steps into the landlord's shoes.

Alison Boyer is an associate in the Real Estate Practice Group of Seyfarth Shaw LLP (Atlanta office). Her practice concentrates primarily on the financing, acquisition, disposition and leasing of commercial properties. She can be reached at 404-881-5476 or [email protected].

When negotiating a lease, it may be easy to skim over the subordination clause and trust that the boilerplate is sufficient. In many cases, the party that will give this section the most attention is a future lender who will review the lease in connection with its loan due diligence. Tenants and landlords alike may not have a full appreciation for the analysis that a lender undertakes in assessing the leases affecting a property that will serve as collateral for the proposed loan. This article highlights the issues and concerns that a lender faces when determining whether to require a separate subordination agreement ' typically, a Subordination, Non-Disturbance and Attornment Agreement or a SNDA ' and in negotiating a SNDA with the tenant.

When the Subordination Provision Is Not Enough

One of the first pieces of due diligence a lender will undertake in connection with approving financing of a commercial property is determining whether the leases affecting the property are acceptable. Aside from the economics of a lease ( i.e. , the rent schedule and the length of the remaining term), a lender must feel comfortable that the leases will not have priority over the proposed mortgage or, if a lease will be superior to the proposed mortgage, that such lease does not afford the subject tenant rights that would ultimately hinder the lender's ability to foreclose or sell the property. To that end, the lender will carefully assess the subordination provisions in the lease. If a lease is self-subordinating ( i.e. , the lease expressly provides that the lease is unconditionally subordinate and subject to all existing or future mortgages), a separate SNDA is generally unnecessary.

In the case of a lease for which subordination is conditioned upon the lender agreeing not to disturb the tenant's rights following a foreclosure, a lender may still determine that a separate SNDA is unnecessary if the lease is on terms that are not problematic to the lender or if the lease is with a small tenant that the lender is willing to risk losing. However, a SNDA will typically be required for leases that: 1) are silent as to subordination; 2) provide the tenant rights that contain purchase options, out-of-market renewal terms, landlord indemnification obligations and the like; or 3) expressly require delivery of a SNDA as a condition to subordination.

In addition, regardless of whether a lease is expressly subordinate to existing or future mortgages, a lender will typically require a SNDA with any tenant under a “major” lease (i.e., a lease that covers a certain percentage of square footage in the subject property or that produces rent above a certain amount). A SNDA will serve to create certainty in a post-foreclosure setting that, for the lender, the critical rental stream from these major leases will keep flowing and, for the tenant, that the lease terms ' which may have been heavily negotiated ' will be preserved.

Drafting and Negotiating A SNDA

After determining the tenants from whom a SNDA will be required, the lender will produce the requested form. If a form SNDA is attached to the subject lease, lenders will start with such form, revised only to reflect deal-specific terms. In addition, tenants with a national or global presence regardless of the size of the lease at issue will reject many lender forms and insist that the tenant form be used. This scenario is common with national retail tenants that operate hundreds of individual locations and are looking to avoid the administrative headache that would ensue from having each lease subject to a different SNDA. In most instances, however, the SNDA will usually be based on the lender's form.

It is common for only the lender and the tenant to be parties to the SNDA, with the landlord/borrower only added if needed (i.e., one common scenario in which the landlord/borrower is added as a party is if the landlord/borrower agrees in the SNDA to allow rent to be paid directly to the lender following notice to the tenant from the lender). The basic provisions of a SNDA establish: 1) subordination of the lease to the mortgage; 2) an obligation that the lender not disturb the tenant in the event the lender takes over as landlord; and 3) a requirement that the tenant recognize the lender as its new landlord in the event of such succession in title by the lender.

In addition to these basic provisions, a SNDA will commonly include provisions that establish notice and cure rights in favor of the lender, and limitations on the lender's liability following a succession in title. The limitation of liability provisions are often broad and will provide that a lender will not be liable for or bound by, among other things: 1) any defaults of the existing landlord; 2) any payment of tenant allowances or leasing commissions that were due before the lender took title; 3) any amendment to the lease that is made without notice (and consent, if applicable); or 4) any rental payments made more than one month in advance. Given that the positions of the lender and the tenant will be conflicting on these issues, the limitations of the lender's liability are often the most negotiated provisions in a SNDA. Not surprisingly, larger, more significant tenants will have increased bargaining power in negotiating these provisions.

In any event, landlords and lenders should expect that tenants of all sizes will require time to process and negotiate a SNDA and, accordingly, delivery of the initial draft SNDAs should be prioritized at the onset of a financing transaction.

Conclusion

Both lenders and tenants want to achieve certainty and predictability with respect to a lease in a post-foreclosure setting. Still, a lender's objective of minimizing its future liability under a lease and a tenant's objective of preserving its negotiated rights under the same lease are inherently at odds with one another. A Subordination, Non-Disturbance and Attornment Agreement can help establish a middle ground and potentially smooth the transition in the event the lender steps into the landlord's shoes.

Alison Boyer is an associate in the Real Estate Practice Group of Seyfarth Shaw LLP (Atlanta office). Her practice concentrates primarily on the financing, acquisition, disposition and leasing of commercial properties. She can be reached at 404-881-5476 or [email protected].