A Subordination, Non-Disturbance and Attornment Agreement (an “SNDA”) is often an underappreciated but extremely important document in a commercial lease transaction.  An SNDA is an agreement among a lender, its borrower (the landlord), and the tenant, detailing the rights of the parties in the event the landlord defaults on the loan and the lender forecloses and becomes the property owner/landlord.

An SNDA most often arises in one of two scenarios: (1) during a commercial real estate loan transaction where the lender informs its borrower (the landlord) that (as a requirement of closing and funding the loan) all existing tenants must sign an SNDA; or (2) during lease negotiations between a landlord and a prospective tenant where the leased premises is already encumbered by a deed of trust in favor of the landlord’s lender.  In either scenario, the tenant should seek legal counsel before signing an SNDA in order to confirm that it contains reasonable and customary terms, and most importantly, a non-disturbance clause.

There are three main components of a typical SNDA: (1) the subordination provision (2), the non-disturbance provision; and (3) the attornment provision, each of which are briefly discussed below:

The Subordination Provision:

The subordination portion of an SNDA allows the lender’s lien to be deemed superior to the tenant’s previously acquired leasehold interest.  Once in a superior lien position, the lender can, in a foreclosure action, eliminate the leasehold interest as a junior lien.  To counterbalance this risk, if possible, the tenant should insist on a non-disturbance provision.

The Non-Disturbance Provision:

In return for the tenant subordinating its leasehold interest to the lender’s loan, a tenant (depending upon its negotiating strength) should insist that the SNDA include a non-disturbance provision whereby the lender agrees that so long as the tenant is not in default under the lease, it will not disturb the tenant’s occupancy of the leased space after the property is sold or foreclosed upon.  This provision is of particular importance for tenants who have expended large sums in leasehold improvements which could be lost if the new owner/lender is not obligated to honor the tenant’s rights under the existing lease.  Whether and to what extent a non-disturbance provision obligates the foreclosing lender to honor all of the landlord’s obligations under the lease varies depending on the negotiating power of the tenant.  Why would a successor landlord terminate existing leases? This could come into play with a long-time tenant whose rental rate, due to the passage of time, is far below the current market rate, thereby giving a successor landlord/new owner incentive to terminate that lease and find a new tenant willing to pay market rent, or to use the threat of termination as leverage for a renegotiation of the rental amount with the existing tenant.

The Attornment Provision:

An attornment is an agreement by the tenant that it will recognize the new owner as the landlord (and most importantly, continue paying rent) in the event of a sale of the property by the landlord or through foreclosure action.

As you can see, SNDAs play a pivotal role in a commercial leasing transaction, particularly for the tenant and for the landlord’s lender.  If you have any questions regarding SNDAs or any other lease related matters, please contact Joshua Pope or another attorney in MPBA’s Real Estate Department.