Subordination, Non-Disturbance and Attornment Agreements

Tenants should get a Subordination Non-Disturbance and Attornment Agreement (SNDA) from the landlord's lender to make sure that the lender agrees not to disturb the tenant's possession of the premises if there is a foreclosure. (For more on SNDAs, see “In the Spotlight,” infra.) Too often, the SNDA is an after-thought that is negotiated after the parties have grown weary from the lease negotiations. A tenant's goal in negotiating a SNDA is to protect the rights that it has negotiated with its landlord if the landlord's lender or any third-party purchaser acquires the property.

The vast majority of lenders provide their own form of SNDAs and, based on our recent experience, those forms are growing increasingly less tenant-friendly. As an attorney for a tenant, you may not have a lot of leverage to negotiate terms, and will need to focus on the most important provisions affecting your client's interest. This article discusses the top 10 items tenants should try to get in a SNDA.

1. Delineate Who Will Get the Benefit of the SNDA

As discussed below, it is common for SNDAs to include provisions that modify the lease effective upon a succession, such as the casualty, repair and condemnation clauses, to make them less favorable to the tenant. Lender-supplied SNDA forms typically apply the terms of the SNDA, including modifications to the lease provisions, to any other subsequent owner of the property. Such a broad application has undesirable results for a tenant who wants to limit those modifications. Such limitations would benefit only the lender or the immediate successor landlord that acquires title to the property directly pursuant to the exercise of any remedy provided for in the mortgage or deed of trust, and not the party that acquires title subsequent to those individuals. For example, if a tenant agrees that a lender is not liable to make capital repairs, the tenant does not want any landlords that purchase the property from the lender to have the benefit of that modification of the lease.

2. Ensure That the Mortgage Does Not Encumber the Tenant's Personal Property

A standard lender-supplied SNDA will not specifically address the tenant's personal property, and that omission could create ambiguity regarding ownership rights in the event of a foreclosure. Tenants should consider including language in the SNDA that defines the tenant's personal property and excludes it from the lender's lien. For example:

The Security Instrument will not cover or be construed as subjecting in any manner to the liens thereof, any trade fixtures, equipment, signs or other tangible or intangible personal property at any time located in the common areas or Tenant's premises and owned by Tenant or furnished or installed by, on behalf of, or at the expense of Tenant.

3. Record the SNDA

Although recording is not a requirement, it can provide constructive notice to future lenders or purchasers and help provide clarity regarding the priority of liens when there are multiple lienholders. If the current lender were to assign the lien to a second lender, having the SNDA recorded will provide constructive notice to the second lender that it is taking subject to the terms of the existing SNDA, particularly the non-disturbance agreement. Recording will also indirectly provide notice to prospective purchasers of the property that a lease exists on the property.

Include the following language and a notary block to preserve your right to record:

Any party to this Agreement may record this Agreement in the real property records of ______.

This suggestion assumes that recording costs are reasonable and will not trigger other types of fees.

4. Ensure That the Lender Will Not Join the Tenant in Any Action Against the Landlord

Tenants want to include an express provision in the SNDA that precludes the lender from naming the tenant as a party defendant in any suit the lender brings against the landlord/borrower to enforce the mortgage, unless the joinder is required by law. If joined, tenants want to make sure that they will not be required to defend their interests in such action. Sample language is as follows:

Lender shall not name or join Tenant as a defendant in any exercise of Lender's rights and remedies arising upon a default under the Security Instrument unless applicable law requires Tenant to be made a party thereto as a condition to proceeding against Former Landlord or prosecuting such rights and remedies. In the latter case, Lender may join Tenant as a defendant in such action only for such purpose and not to terminate the Lease or otherwise diminish or interfere with Tenant's rights under the Lease or this Agreement in such action.

5. Properly Preserve Any Prior Claims Under The Lease

Once a lender takes over the mortgaged property and becomes the “successor landlord,” there are a number of items that it typically tries to carve from its obligations as the new landlord. Successor landlords try to avoid liability for any acts or omissions of the prior landlord, and they do not want to be subject to offsets, defenses or counterclaims that shall have previously accrued to the tenant. The tenant will want the successor landlord to be liable at a minimum for claims arising after the date of the succession and for any defaults that are continuing in nature after the successor landlord takes title to the property. Tenants should include language in the SNDA that requires the successor landlord “to cure any defaults which are continuing in nature to the extent the same continue after the Lender or any subsequent owner obtains ownership or possession of the Property.”

Lenders may agree to be liable for acts or omissions of the prior landlord and for offsets, defenses and counterclaims the tenant has against the prior landlord if the tenant has given the successor landlord prior written notice and cure rights to the extent the liability is related to the default, act or omission of the prior landlord.

6. Amendments to the Lease

Most lender-supplied SNDA forms attempt to limit the ability of the tenant to modify the lease without the lender's consent. Tenants can protect themselves in several ways. First, a tenant can get the right to amend the lease without the lender's consent as long as the lender will not be bound by the amendment if it takes title to the property. This avoids a claim by the lender that the tenant defaulted under the SNDA.

Next, the tenant can request that the lender will not unreasonably withhold its consent to any amendments, and it can include language in the SNDA that requires the lender to respond to a request for consent within a narrow time frame. If the lender fails to respond, lender will be deemed to have consented to the amendment. Lenders may agree that tenants only have to get consent for certain types of amendments, such as those that result in a reduction of the rent, reduce the term of the lease, allow for payment of rent more than one month in advance, or materially increase the landlord's obligations under the lease.

Finally, a tenant should ensure that it does not have to get the lender's consent to amendments to the lease that are entered to allow a tenant to exercise rights granted under the lease such as renewal rights, termination rights and expansion rights.

7. Clearly Address Prepayments of Rent

A standard lender-supplied SNDA will not bind the successor landlord to honor any early payments of rent made to the landlord more than one month in advance, since the lender wants the benefit of the rent stream from the property. Lenders will typically agree to be bound by prepayments of rent made more than one month in advance if the lender actually receives the funds. If a prepayment, such as remitting monthly payments of estimated taxes or operating expenses, is expressly required in the lease, then the lender should agree to give the tenant a credit for that prepayment. Further, if the tenant has the right to terminate a lease upon payment of a termination fee tied to a certain number of months' rent, the SNDA should expressly allow that prepayment.

8. Limit Modification of Existing Lease Terms

Most lender-supplied SNDA forms attempt to limit liabilities or obligations that the lender does not want to assume as the successor landlord. Tenants should pay careful attention to these modifications to ensure that they understand the effects of any changes. Common examples include modifications to the casualty and condemnation sections of the lease, limitations on the construction obligations of the landlord, limitations on the tenant's right to offset or abate rent, and the lender's refusal to fund any allowances and modifications to the environmental provisions of the lease to delete any liability of the landlord for environmental matters.

For example, if you encounter a provision where the lender does not want to agree to make casualty repairs if it becomes successor landlord unless the landlord was obligated to make the repairs and it gets sufficient insurance proceeds to pay for the repairs, you need some remedy such as a termination right. This may not be viable if the location of the premises is critical to the operation of a business. A retail tenant with a prime location may not want to terminate its lease. The tenant may also want to include a specific provision that obligates a successor to make casualty and condemnation repairs, as required under the lease, for any such casualty or condemnation that occurs after the date of the attornment.

9. Set Forth the Process for Payments in Event of Default

A tenant does not want to be caught in the middle between its landlord and the landlord's lender if there is a default by the landlord under the loan, and the lender wants the rent payments to be made directly to it. Tenants typically do not have a problem directing payments to a lender as long as the landlord acknowledges that the tenant will have no liability to the landlord if it complies with a notice from the lender ' and the tenant has enough time to change the payment information in its vendor payment system. Suggested language is as follows:

Landlord hereby irrevocably authorizes and directs Tenant to pay to Lender, or to such person or firm designated by Lender, all rent and other monies due and to become due to Landlord under the Lease after written notice from Lender to Tenant that there has occurred and is continuing an Event of Default (as defined in the Loan Agreement). Tenant shall be entitled to rely upon any such notice received from Lender, and shall have no duty to inquire concerning the truth or efficacy of any such notice or to honor any contrary notice or demand received from Landlord. Landlord waives any right, claim, or demand it may now or hereafter have against Tenant by reason of such direct payment to Lender and agrees that such direct payment to Lender shall discharge all obligations of Tenant to make such payment to Landlord. Landlord and Lender agree that Tenant shall be credited under the Lease for any payments sent to Lender or Purchaser pursuant to this paragraph.

Make sure that the landlord signs as an additional party to the SNDA to ensure that the landlord is bound by this provision. On this same topic, some large corporate tenants require at least 30 days' notice to change the vendor payment addresses in their payment systems. Make sure that those tenants have adequate time before they have to direct payments to another party.

10. Allow for Recovery of Expenses

A tenant should include language that will allow it to recover costs, including reasonable legal fees, that it incurs in connection with the enforcement of the SNDA. A lender will often include one-sided language that allows it to recover its enforcements costs. Suggested language is as follows:

If any legal action, arbitration or other proceeding is commenced to enforce any provision of this Agreement, the prevailing party shall be entitled to an award of its reasonable and actual expenses incurred in such proceeding, including, without limitation, expert witness fees and attorneys' fees and disbursements.

Conclusion

In addition to what should be negotiated in the SNDA, tenants need to include language in the lease that addresses delivery of a SNDA. If there is an existing loan that encumbers the premises, tenants will want to receive a SNDA as a condition to the effectiveness of the lease, since the lease is automatically subordinate to the loan and can be terminated by the lender upon a foreclosure at the lender's election if there is not a non-disturbance agreement. The form of that SNDA can be attached to the lease. The lease should also include language that conditions any subordination of the lease to a future mortgage to the execution of a SNDA in a form acceptable to the tenant. Tenants should not agree to allow a landlord to subordinate the lease to a future mortgage without delivering an SNDA.

As the attorney for the tenant, you must be careful that the terms you so carefully negotiated in the lease do not get undermined in the SNDA. The competing interests of the lender, the landlord, potential purchasers, and the tenant can make negotiating the SNDA a delicate balancing act. Overlooking or under-negotiating the SNDA can have unexpected and undesirable consequences for tenants who fail to protect themselves.

Amy M. Mitchell is a senior counsel in the Austin, TX, office of Fulbright & Jaworski LLP. She has a diverse practice of real estate transactional matters. Lara Kirkham is an associate in the Austin office. She works with the real estate and health care groups.

Tenants should get a Subordination Non-Disturbance and Attornment Agreement (SNDA) from the landlord's lender to make sure that the lender agrees not to disturb the tenant's possession of the premises if there is a foreclosure. (For more on SNDAs, see “In the Spotlight,” infra.) Too often, the SNDA is an after-thought that is negotiated after the parties have grown weary from the lease negotiations. A tenant's goal in negotiating a SNDA is to protect the rights that it has negotiated with its landlord if the landlord's lender or any third-party purchaser acquires the property.

The vast majority of lenders provide their own form of SNDAs and, based on our recent experience, those forms are growing increasingly less tenant-friendly. As an attorney for a tenant, you may not have a lot of leverage to negotiate terms, and will need to focus on the most important provisions affecting your client's interest. This article discusses the top 10 items tenants should try to get in a SNDA.

1. Delineate Who Will Get the Benefit of the SNDA

As discussed below, it is common for SNDAs to include provisions that modify the lease effective upon a succession, such as the casualty, repair and condemnation clauses, to make them less favorable to the tenant. Lender-supplied SNDA forms typically apply the terms of the SNDA, including modifications to the lease provisions, to any other subsequent owner of the property. Such a broad application has undesirable results for a tenant who wants to limit those modifications. Such limitations would benefit only the lender or the immediate successor landlord that acquires title to the property directly pursuant to the exercise of any remedy provided for in the mortgage or deed of trust, and not the party that acquires title subsequent to those individuals. For example, if a tenant agrees that a lender is not liable to make capital repairs, the tenant does not want any landlords that purchase the property from the lender to have the benefit of that modification of the lease.

2. Ensure That the Mortgage Does Not Encumber the Tenant's Personal Property

A standard lender-supplied SNDA will not specifically address the tenant's personal property, and that omission could create ambiguity regarding ownership rights in the event of a foreclosure. Tenants should consider including language in the SNDA that defines the tenant's personal property and excludes it from the lender's lien. For example:

The Security Instrument will not cover or be construed as subjecting in any manner to the liens thereof, any trade fixtures, equipment, signs or other tangible or intangible personal property at any time located in the common areas or Tenant's premises and owned by Tenant or furnished or installed by, on behalf of, or at the expense of Tenant.

3. Record the SNDA

Although recording is not a requirement, it can provide constructive notice to future lenders or purchasers and help provide clarity regarding the priority of liens when there are multiple lienholders. If the current lender were to assign the lien to a second lender, having the SNDA recorded will provide constructive notice to the second lender that it is taking subject to the terms of the existing SNDA, particularly the non-disturbance agreement. Recording will also indirectly provide notice to prospective purchasers of the property that a lease exists on the property.

Include the following language and a notary block to preserve your right to record:

Any party to this Agreement may record this Agreement in the real property records of ______.

This suggestion assumes that recording costs are reasonable and will not trigger other types of fees.

4. Ensure That the Lender Will Not Join the Tenant in Any Action Against the Landlord

Tenants want to include an express provision in the SNDA that precludes the lender from naming the tenant as a party defendant in any suit the lender brings against the landlord/borrower to enforce the mortgage, unless the joinder is required by law. If joined, tenants want to make sure that they will not be required to defend their interests in such action. Sample language is as follows:

Lender shall not name or join Tenant as a defendant in any exercise of Lender's rights and remedies arising upon a default under the Security Instrument unless applicable law requires Tenant to be made a party thereto as a condition to proceeding against Former Landlord or prosecuting such rights and remedies. In the latter case, Lender may join Tenant as a defendant in such action only for such purpose and not to terminate the Lease or otherwise diminish or interfere with Tenant's rights under the Lease or this Agreement in such action.

5. Properly Preserve Any Prior Claims Under The Lease

Once a lender takes over the mortgaged property and becomes the “successor landlord,” there are a number of items that it typically tries to carve from its obligations as the new landlord. Successor landlords try to avoid liability for any acts or omissions of the prior landlord, and they do not want to be subject to offsets, defenses or counterclaims that shall have previously accrued to the tenant. The tenant will want the successor landlord to be liable at a minimum for claims arising after the date of the succession and for any defaults that are continuing in nature after the successor landlord takes title to the property. Tenants should include language in the SNDA that requires the successor landlord “to cure any defaults which are continuing in nature to the extent the same continue after the Lender or any subsequent owner obtains ownership or possession of the Property.”

Lenders may agree to be liable for acts or omissions of the prior landlord and for offsets, defenses and counterclaims the tenant has against the prior landlord if the tenant has given the successor landlord prior written notice and cure rights to the extent the liability is related to the default, act or omission of the prior landlord.

6. Amendments to the Lease

Most lender-supplied SNDA forms attempt to limit the ability of the tenant to modify the lease without the lender's consent. Tenants can protect themselves in several ways. First, a tenant can get the right to amend the lease without the lender's consent as long as the lender will not be bound by the amendment if it takes title to the property. This avoids a claim by the lender that the tenant defaulted under the SNDA.

Next, the tenant can request that the lender will not unreasonably withhold its consent to any amendments, and it can include language in the SNDA that requires the lender to respond to a request for consent within a narrow time frame. If the lender fails to respond, lender will be deemed to have consented to the amendment. Lenders may agree that tenants only have to get consent for certain types of amendments, such as those that result in a reduction of the rent, reduce the term of the lease, allow for payment of rent more than one month in advance, or materially increase the landlord's obligations under the lease.

Finally, a tenant should ensure that it does not have to get the lender's consent to amendments to the lease that are entered to allow a tenant to exercise rights granted under the lease such as renewal rights, termination rights and expansion rights.

7. Clearly Address Prepayments of Rent

A standard lender-supplied SNDA will not bind the successor landlord to honor any early payments of rent made to the landlord more than one month in advance, since the lender wants the benefit of the rent stream from the property. Lenders will typically agree to be bound by prepayments of rent made more than one month in advance if the lender actually receives the funds. If a prepayment, such as remitting monthly payments of estimated taxes or operating expenses, is expressly required in the lease, then the lender should agree to give the tenant a credit for that prepayment. Further, if the tenant has the right to terminate a lease upon payment of a termination fee tied to a certain number of months' rent, the SNDA should expressly allow that prepayment.

8. Limit Modification of Existing Lease Terms

Most lender-supplied SNDA forms attempt to limit liabilities or obligations that the lender does not want to assume as the successor landlord. Tenants should pay careful attention to these modifications to ensure that they understand the effects of any changes. Common examples include modifications to the casualty and condemnation sections of the lease, limitations on the construction obligations of the landlord, limitations on the tenant's right to offset or abate rent, and the lender's refusal to fund any allowances and modifications to the environmental provisions of the lease to delete any liability of the landlord for environmental matters.

For example, if you encounter a provision where the lender does not want to agree to make casualty repairs if it becomes successor landlord unless the landlord was obligated to make the repairs and it gets sufficient insurance proceeds to pay for the repairs, you need some remedy such as a termination right. This may not be viable if the location of the premises is critical to the operation of a business. A retail tenant with a prime location may not want to terminate its lease. The tenant may also want to include a specific provision that obligates a successor to make casualty and condemnation repairs, as required under the lease, for any such casualty or condemnation that occurs after the date of the attornment.

9. Set Forth the Process for Payments in Event of Default

A tenant does not want to be caught in the middle between its landlord and the landlord's lender if there is a default by the landlord under the loan, and the lender wants the rent payments to be made directly to it. Tenants typically do not have a problem directing payments to a lender as long as the landlord acknowledges that the tenant will have no liability to the landlord if it complies with a notice from the lender ' and the tenant has enough time to change the payment information in its vendor payment system. Suggested language is as follows:

Landlord hereby irrevocably authorizes and directs Tenant to pay to Lender, or to such person or firm designated by Lender, all rent and other monies due and to become due to Landlord under the Lease after written notice from Lender to Tenant that there has occurred and is continuing an Event of Default (as defined in the Loan Agreement). Tenant shall be entitled to rely upon any such notice received from Lender, and shall have no duty to inquire concerning the truth or efficacy of any such notice or to honor any contrary notice or demand received from Landlord. Landlord waives any right, claim, or demand it may now or hereafter have against Tenant by reason of such direct payment to Lender and agrees that such direct payment to Lender shall discharge all obligations of Tenant to make such payment to Landlord. Landlord and Lender agree that Tenant shall be credited under the Lease for any payments sent to Lender or Purchaser pursuant to this paragraph.

Make sure that the landlord signs as an additional party to the SNDA to ensure that the landlord is bound by this provision. On this same topic, some large corporate tenants require at least 30 days' notice to change the vendor payment addresses in their payment systems. Make sure that those tenants have adequate time before they have to direct payments to another party.

10. Allow for Recovery of Expenses

A tenant should include language that will allow it to recover costs, including reasonable legal fees, that it incurs in connection with the enforcement of the SNDA. A lender will often include one-sided language that allows it to recover its enforcements costs. Suggested language is as follows:

If any legal action, arbitration or other proceeding is commenced to enforce any provision of this Agreement, the prevailing party shall be entitled to an award of its reasonable and actual expenses incurred in such proceeding, including, without limitation, expert witness fees and attorneys' fees and disbursements.

Conclusion

In addition to what should be negotiated in the SNDA, tenants need to include language in the lease that addresses delivery of a SNDA. If there is an existing loan that encumbers the premises, tenants will want to receive a SNDA as a condition to the effectiveness of the lease, since the lease is automatically subordinate to the loan and can be terminated by the lender upon a foreclosure at the lender's election if there is not a non-disturbance agreement. The form of that SNDA can be attached to the lease. The lease should also include language that conditions any subordination of the lease to a future mortgage to the execution of a SNDA in a form acceptable to the tenant. Tenants should not agree to allow a landlord to subordinate the lease to a future mortgage without delivering an SNDA.

As the attorney for the tenant, you must be careful that the terms you so carefully negotiated in the lease do not get undermined in the SNDA. The competing interests of the lender, the landlord, potential purchasers, and the tenant can make negotiating the SNDA a delicate balancing act. Overlooking or under-negotiating the SNDA can have unexpected and undesirable consequences for tenants who fail to protect themselves.

Amy M. Mitchell is a senior counsel in the Austin, TX, office of Fulbright & Jaworski LLP. She has a diverse practice of real estate transactional matters. Lara Kirkham is an associate in the Austin office. She works with the real estate and health care groups.