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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.
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