Special to The Daily Record//January 16, 2014
//Special to The Daily Record
//January 16, 2014
One of the closing documents in a real estate financing transaction involving leased property is a subordination, non-disturbance, and attornment agreement (an “SNDA”). SNDAs have a number of purposes. They serve to connect the lender with the tenant, and they provide other uses as well.
Basic provisions of an SNDA
Let’s consider each of the terms in the title of the agreement.
— Subordination. Priority among documents is typically established by order of their creation under the rule: first in time is first in right. If one instrument is superior to another, the provisions of the superior instrument will control over those of the other to the extent of any conflict between them. If a landowner mortgages its property and then enters into a lease for all or part of it, the mortgage is senior to the lease, and the lease is subordinate to the mortgage. On the other hand, if the lease is executed before the mortgage, the mortgage is deemed subordinate to the lease.
If a fire damages or destroys all or part of the property or if a condemnation takes all or a part of it, questions regarding application of insurance or condemnation proceeds will be decided based upon the relative priority of the lease and mortgage. If the lease has priority, the lease provisions will control. These may require that the landlord use insurance proceeds to rebuild the premises. In contrast, if the mortgage is superior, the mortgagee will be entitled to take all of the insurance proceeds and use them to reduce the debt, if the mortgage so provides.
A lender typically wants to have an SNDA because of its subordination clause if in the absence of such an agreement the lease would be prior to the mortgage. In order to ensure that the terms of the mortgage will govern, the lender will insist that its borrower (which is also the landowner and the landlord) and the tenant enter into an SNDA with the lender.
Furthermore, and often of greater consequences to the parties, a general principle is that the termination of a senior instrument will terminate all instruments that are junior to it. Therefore, if a mortgage is senior to a lease, the foreclosure of the mortgage will terminate the lease unless there is an agreement that provides otherwise. However, if the lease is senior to the mortgage, the foreclosure of the mortgage will not affect the lease – other than a new party will become the landlord.
— Non-Disturbance. Because the subordination of the lease to the mortgage could have the disastrous consequence to the tenant of terminating the lease if the mortgage is foreclosed, subordination of its lease, by itself, is usually unacceptable to a tenant. The non-disturbance portion of the SNDA addresses this problem. To avoid the lease’s being put in peril of its existence, in the SNDA the lender agrees that if it forecloses on the property or if the property is transferred by a deed in lieu of foreclosure the lease will continue. When there is a non-disturbance clause the tenant remains in possession of the property, and the new owner of the property (whether it be the purchaser at a foreclosure sale or the transferee of a deed in lieu of foreclosure) becomes the successor landlord, but the terms of the lease remain the same.
Typically, the non-disturbance right under an SNDA is premised on the tenant’s not being in default under its lease.
The lender often wants some or all of the leases relating to the property to continue after a foreclosure sale or a transfer in lieu of foreclosure, even if there is not a non-disturbance agreement. Section 7-105.6(c) of the Real Property Article of the Maryland Code (“RP”) enables lenders to choose which subordinate leases they want to continue after the sale by stating in the advertisement for the foreclosure sale which will survive.
— Attornment. The final term in the name of an SNDA is “attornment,” which is the act by a person agreeing to become the tenant of the holder of the remainder or reversionary estate of real property. (The word “attornment” has the same root as “attorney” which literally means one who is appointed to act in place of another.) Under the attornment provisions of an SNDA, the current tenant agrees to be bound by all of the terms of the lease to anyone to whom the remainder or reversion is transferred by foreclosure of or other proceedings brought pursuant to the loan documents. These provisions are supplemented by RP §8 101 which provides that transferees of the reversion in leased property are entitled to the same remedies, and are subject to the same obligations contained in the lease, as the original landlord.
Additional Provisions in SNDAs
These three provisions in an SNDA are typically and generally non-controversial in most instances. Many SNDAs contain other terms that provide certain benefits to lenders. Many of these may be objectionable to tenants.
— Estoppel provisions. SNDAs may include estoppel certificates from the tenants. These may include a statement identifying the original lease, all amendments to it, and all collateral agreements regarding it; an acknowledgment that the landlord does not have any remaining construction obligations; an assertion that the tenant is not in default under the lease and has always used the lease in a manner consistently with the terms of the lease; a statement that the landlord is not in default under the lease and that the tenant has no claim against the landlord (or a description of any defaults or claims); and a representation that the tenant has not assigned, sublet, or mortgaged its interest in the property. The estoppel provisions may also include other information that the lender may consider relevant, such as whether the tenant has exercised any option or rights under the lender; whether the tenant has any remaining options or rights under the lease; or whether other agreements, such as reciprocal easement agreements, are in effect.
— Additional notice. SNDAs frequently provide that the tenant will give to the lender copies of all notices that the tenant is required to furnish to the landlord, and they sometimes state that the lender will have an additional period of time to cure any defaults by the landlord under the lease. Lenders may include in the SNDA a statement that if the landlord is in default under the lease, the lender will be given as much time as it needs to complete a foreclosure of the property or otherwise to gain possession of the property before the cure period commences. SNDAs may also provide that the lender will not be held accountable for defaults of the landlord that the lender cannot cure, such as the landlord’s bankruptcy.
— After the foreclosure sale. The lender may also request certain agreements from the tenant with regard to what happens if the lender forecloses or the property is transferred by action in lieu of foreclosure, including requiring that the tenant execute estoppel certificates in the future and that it agree that without the lender’s consent the tenant will not surrender, cancel, or terminate its lease, except due to an uncured default by the landlord. The lender may ask the tenant to agree that the lender has no liability to the tenant for any defaults that the original landlord may have committed under the lease. Additionally, the lender may disclaim any liability to the tenant for the return of its security deposit except to the extent that the lender, or other successor of the landlord, has actually received the security deposit. These latter two provisions in particular are likely to be of concern to the tenant.
So who needs an SNDA?
The lender that takes a lien on real property subject to an existing lease wants an SNDA so that its loan documents will control, vis-à-vis the lease, and it wants the benefit of the additional provisions described above immediately and if it becomes the owner of the property.
The tenant that signs its lease when a mortgage or deed of trust already encumbers the property, or if its lease contains a subordination provision, wants the assurance that if its landlord (the loan borrower) defaults under the loan the tenant will be able to remain in possession of the property under its lease.
The landlord (the loan borrower) does not care about the terms of an SNDA. The most important provisions of an SNDA will be effective when the borrower has defaulted and has lost its interest in the property. The borrower’s primary interest is that the process in obtaining an SNDA is not costly and will not delay the loan closing.
Edward J. Levin is Chair of the Real Estate Practice Group at Gordon Feinblatt LLC. He may be reached at [email protected] or (410) 576-1900. Copyright Edward J. Levin 2013. All rights reserved.