Negotiating a Subordination, Non-Disturbance, and Attornment Agreement (SNDA) can be challenging for property owners, mortgage lenders, and tenants alike. What makes an SNDA unique is that it involves two parties, the mortgage lender and the tenant, who are only connected through their contract with a common third party – the property owner/borrower/landlord. Consequently, finding common ground on the issues addressed in the SNDA can be difficult. Often, the owner/borrower/landlord needs to intervene in the negotiations to reach compromise solutions that satisfy both the mortgage lender and the tenant.
The Need for an SNDA
The primary purpose of an SNDA is to prevent unwanted consequences resulting from the interaction between a mortgage and a lease. While the specific laws may vary from state to state, the general rule is that foreclosure of a mortgage (due to default by the borrower) terminates any encumbrances on the property that are subordinate to the mortgage. Without an SNDA (and unless stated otherwise in the mortgage or lease agreements), a foreclosure would terminate a lease signed after the mortgage. The party acquiring the property at the foreclosure sale would then assume the role of the owner/landlord under the lease signed prior to the mortgage. This termination of the lease is usually undesirable for both the new owner and the tenant. Similarly, assuming all the landlord’s obligations under the lease may not be desirable for a new owner. The purpose of an SNDA is to predefine what happens in the event of a foreclosure, ensuring that neither the new owner nor the tenant suffers undesirable consequences as a result.
Understanding the Contents of an SNDA
An SNDA typically states that the lease is subordinate or junior to the mortgage. It further specifies that in the event of foreclosure, the new owner will not disturb the tenant’s possession under the lease as long as the tenant complies with the lease provisions. Additionally, the tenant is required to recognize the new owner as its landlord (attornment). This arrangement allows the lease to remain in effect, with the new owner assuming the role of the landlord. However, the initial draft of the SNDA is usually prepared by the mortgage lender, which means it includes certain provisions that protect the new owner who has become the landlord. Here is where the interests of the mortgage lender and new owner diverge from the tenant’s interests. For example, the mortgage lender’s SNDA may state that after foreclosure, the new owner will not be liable for the former landlord’s actions or omissions. The lender’s SNDA may also exempt the new owner from returning security deposits unless received by the lender and passed on to the new owner. Furthermore, it may release the new owner from obligations regarding advanced rent payments, lease amendments made without the lender’s consent, or any unfinished construction obligations in the tenant’s space. Many tenants may resist some or all of these provisions, especially when the landlord has extensive construction obligations under the lease. However, compromises can usually be reached that satisfy both parties. There are instances where agreement cannot be reached, and one or both parties decide not to execute an SNDA they deem too burdensome.
Additional Provisions in an SNDA
Sometimes, at the request of either the mortgage lender or the tenant, certain provisions may be included in an SNDA. Most SNDAs drafted by mortgage lenders will require the tenant to notify the lender of any defaults by the borrower/landlord under the lease. The lender is then given time to rectify the default before the tenant can exercise its remedies, which may include terminating the lease or receiving rent abatement. Additionally, many lenders will ask the tenant to agree to pay rent directly to the lender if the borrower/landlord defaults on the loan, assuming that such a remedy is included in the loan documents, as is often the case. Conversely, prominent retail tenants with bargaining power often request that the SNDA prioritize the lease’s casualty and condemnation provisions over conflicting provisions in the loan documents. Such lease provisions typically require insurance proceeds and condemnation awards to be used for rebuilding the property, while the loan documents may permit the lender to allocate those funds towards paying off the loan instead of rebuilding.
Negotiating an SNDA can sometimes be a contentious process. However, if both the mortgage lender and the tenant are willing to compromise, the end result will typically put both parties in a better, or at the very least, less risky position compared to not having an SNDA in place. To learn more about the legal services and solutions offered by Garrity Traina, visit Garrity Traina.