Corporate / 4 min read
Picture a creditworthy tenant that spends over $1 million building out a retail space in a suburban office park, signs a ten-year lease with several renewal options, and pays rent on time every month. Two years in, the landlord misses its mortgage payments, the bank forecloses, and the tenant gets a letter from the new owner proposing a much higher rent or an exit date. Whether the tenant can wave its lease at the new owner, or has to start packing, may depend on a short document the tenant barely looked at when the lease was signed, or on whether any such separate agreement even exists. A lease feels like a private bargain between landlord and tenant. But when the building is financed, the landlord’s lender sits quietly behind that bargain, and its rights often come first. A Subordination, Non-Disturbance and Attornment Agreement (SNDA) is the document that sets out the relationship between the tenant and that lender. A tenant who signs one without reading it closely, or who never asks for one, may find that its lease rights are much weaker than it assumed. The risk comes from priority. A lease signed after a mortgage is recorded is generally subordinate to that mortgage. Many leases also contain a clause automatically subordinating the lease to any future mortgage. If the landlord defaults and the lender forecloses, a subordinate lease can be wiped out in many jurisdictions. That leaves the tenant exposed to eviction or to renegotiating on the new owner’s terms, even though the tenant paid rent on time and built out its space at its own expense. For a tenant that has invested heavily in improvements, equipment or a customer-facing location, that is a serious business risk. The “non-disturbance” part of the SNDA is what protects against it. In exchange for the tenant agreeing to subordinate its lease and to “attorn” (recognize the lender or the foreclosure buyer as its new landlord), the lender promises not to disturb the tenant’s possession as long as the tenant does not default under its lease. In practice, nondisturbance is the reason a tenant should want an SNDA. Subordination without nondisturbance gives the lender everything and the tenant nothing. So the best time to deal with SNDAs is at lease negotiation. The tenant should make any subordination of the lease conditional on receiving a commercially reasonable non-disturbance agreement from both current and future lenders. The details matter as much as getting the document at all. Lender-form SNDAs usually say the lender won’t be bound by certain landlord obligations after foreclosure. Common examples are liability for the prior landlord’s defaults, offset rights, rent paid more than one month in advance, and lease amendments the lender never approved. Tenants should pay particular attention to these carve-outs when the lease includes: (a) an unfunded tenant improvement allowance, (b) free-rent periods, (c) rights to offset rent against amounts the landlord owes, or (d) purchase options, rights of first refusal, or expansion rights. The same considerations apply to any later lease amendment that grants such rights or provides additional financial concessions. A lender that takes over and refuses to fund the remaining allowance or honor an offset right can quietly undo key economic terms the tenant negotiated with the landlord. Timing also matters. Tenants are often asked to sign an SNDA quickly when the landlord refinances or sells, sometimes under a lease clause requiring execution within ten days or so. Because the landlord’s loan closing may depend on it, the tenant actually has some leverage. A tenant can ask for changes to the lender’s form, but only if the lease doesn’t already lock it into “the lender’s standard form.” Tenants should therefore negotiate the SNDA standard up front, ideally by attaching an agreed form as a lease exhibit or requiring that any SNDA be “commercially reasonable” and include non-disturbance protection. Looking back at the initial example above, with a well-negotiated SNDA, the foreclosure would have been little more than a change in who receives the rent check. Without one, the tenant’s build-out, customer goodwill and remaining lease term would have been at the mercy of a buyer it had never dealt with. That is the real job of an SNDA. It decides whether a tenant’s lease (including the various financial incentives negotiated by the tenant) survives its landlord’s financial trouble. Tenants should consider whether requiring an SNDA at signing is a significant concern given the circumstances of their lease, such as the length of the term, the size of any tenant improvement allowance or other financial incentives, and the tenant’s own investment in the premises. Where it is, tenants should make subordination depend on getting non-disturbance, read the lender’s carve-outs against the lease’s economic terms, and avoid giving away the right to negotiate the form later. A few hours of attention during lease negotiation costs far less than a dispute with a lender that owes the tenant nothing beyond what it signed.