“SNDA” stands for subordination, nondisturbance, and attornment agreement, the least-understood document in commercial real estate finance. An SNDA is an agreement among a commercial mortgage lender, its borrower (in its capacity as landlord), and the borrower's tenant, establishing the parties' legal rights should the landlord (borrower) default on the loan and the lender forecloses and becomes landlord to the tenant.
The tenant agrees that its lease is subordinate to the mortgage. If the mortgage is foreclosed upon, the lease may be extinguished.
Because the average tenant is rightfully reluctant to agree to such an arrangement, the lender typically agrees not to disturb the tenant's possession following foreclosure in exchange for subordination, so long as the tenant performs all obligations under the lease.
The tenant agrees to "attorn to" and accept the lender as its landlord following the foreclosure.
The SNDA has potential benefits and pitfalls for each of the involved parties.
A. Landlord's View: The need for an SNDA most commonly arises at the origination of a commercial real estate loan, when the lender informs its borrower that it needs SNDAs from tenants. Because the SNDA is primarily an agreement between the lender and tenant, the landlord is generally not concerned about its specific terms. As a requirement for the funding of the loan, however, the landlord is vitally concerned that the SNDA be signed. The landlord should take three steps:
1) Determine whether its leases require the tenant to sign an SNDA in the form specified by the lender. This will dictate whether the landlord is requesting the tenant to sign or demanding that it do so.
2) Determine whether the lender will require SNDAs from all tenants or whether it is willing to accept SNDAs from tenants occupying a certain percentage of the square footage of the premises or only from certain major tenants.
3) Most importantly, stay involved in the process of obtaining the tenants’ signatures on the SNDAs. The landlord, not the lender, has a relationship with the tenants and is more likely to be successful in obtaining their signatures.
B. Lender's View: If the lender can obtain the subordination agreement from the tenant without giving the nondisturbance agreement in return, then the lender is in the supreme position following foreclosure of being able to decide whether it wants to keep the lease or terminate. If the lender finds that rent under the lease is below market, it can insist upon an increase upon threat of termination of the lease. If the tenant insists on a nondisturbance clause, the lender still receives the following benefits from a typical SNDA:
The attornment provision establishes privity of contract between the lender and the tenant, which allows the lender to enforce each and every term of the lease. Without such privity of contract, the lender can enforce only those covenants in the lease that "run with the land."
The lender will be relieved from honoring rent that has been paid to the landlord more than 30 days in advance, as well as any security deposits that were paid to the landlord/borrower but not delivered to the lender.
The tenant will be required to notify the lender of any default under the lease by the landlord and to give the lender an opportunity to cure the default.
The landlord and tenant will be prohibited from materially amending or terminating the lease without the lender's consent.
The tenant will be required to pay the rent directly to the lender if the lender notifies the tenant that the landlord has defaulted on the loan.
C. Tenant's View: When presented with an SNDA, a tenant should make certain that it includes a nondisturbance clause that is effectively a full recognition clause.
In a minimal nondisturbance clause, the foreclosing lender merely agrees that if it becomes the landlord, it will not disturb the tenant's possession, so long as the tenant performs under the lease; the foreclosing lender does not agree to undertake any of the landlord’s obligations under the lease. This may be significant because some leases impose major obligations on a landlord (e.g., to build tenant improvements, maintain the premises, or pay taxes). While such minimal nondisturbance clauses were once common, today most tenants can negotiate for and obtain a nondisturbance clause in which the lender agrees that it will fully recognize the lease and perform all the obligations under the lease imposed on the landlord that accrue while the lender holds title to the premises.
When entering into a new lease, a tenant should consider requiring that its landlord provide an SNDA from its existing lender. Failure to obtain a nondisturbance agreement from the existing mortgagee will mean that the lease is subject to being terminated if the mortgage goes into default and the lender forecloses. This can be disastrous for a tenant that has invested substantial sums in improvements or has even constructed entire buildings, for example, under a ground lease.
The SNDA is confusing to most real estate professionals and many lawyers who are not experienced in commercial real estate. If appropriately drafted, it can be beneficial to all three parties: the lender, the landlord, and the tenant. Yet it can also carry significant pitfalls. Guidance from an experienced real estate lawyer is strongly recommended when presented with an SNDA.
A similar version of this article first published in the Portland Business Journal on March 2, 2012.