What Commercial Tenants Need to Know About SNDA’s
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Reprinted with permission from Veronica C. Law, Esq. Ms. Law is an attorney with Decker, Jones, McMackin, McClane, Hall & Bates, P.C., in downtown Fort Worth, Texas. Ms. Law represents sellers, buyers, lenders, landlords and tenants in all types of commercial real estate transactions. Ms. Law can be reached at 817-336-2400 or by email to: vlaw@deckerjones.com.
by Veronica C. Law, Esq.
Fort Worth, Texas
If you are a commercial tenant, chances are that you will be presented with a Subordination, Nondisturbance, and Attornment Agreement (commonly referred to as an “SNDA”) at least once during your lease term. Most often an SNDA is negotiated when a landlord wants to use the real estate project (the “Property”) in which in which the tenant has a lease as collateral for a loan by putting a mortgage on the Property for the benefit of the lender. Therefore, every commercial tenant should understand what an SNDA is and the reasons why SNDA’s are necessary.
An SNDA is a written agreement between a tenant and its landlord’s lender and is comprised of the following: (i) an acknowledgement by the tenant that its rights under the lease are inferior/subordinate to the lender’s rights under the mortgage (commonly referred to as the “subordination agreement”); (ii) a promise by the lender that if it forecloses on the Property, the lender will not terminate the lease so long as the tenant is not in default (commonly referred to as the “nondisturbance agreement”); and (iii) a promise by the tenant that it will accept the purchaser at the foreclosure as its new landlord (commonly referred to as the “attornment agreement”).
The priority of rights of those having property interests in the same parcel of real property is determined by a rule of law known as “first in time, first in right” and commonly referred to as the “Rule of Priorities”. By way of example, this means that a tenant that signs a lease with a landlord for space in Building X on Monday will have superior rights as to the lender that takes Building X as collateral for a loan to the landlord on Tuesday. However, if that tenant enters into an SNDA with that lender, the effect of the Rule of Priorities is reversed. This is because the subordination agreement contained in the SNDA is a contractual agreement by the tenant to change the effect of the Rule of Priorities. The subordination agreement contained in an SNDA is very important to a lender because most lenders, as a matter of policy or because of applicable legal requirements, must obtain rights superior to any other person that has rights in the same parcel in order to have a “first lien” on the parcel.
From a tenant’s perspective, the most important part of the SNDA is the nondisturbance agreement because it insures the survival of the lease in the event of a foreclosure. When a tenant’s rights are subordinate to the rights of a lender, the lease is at risk for termination if the lender forecloses on the Property due to a default by the landlord under the loan. Consequently, without a nondisturbance agreement in place, a tenant could lose a valuable lease (i.e. one that is at below-market rent), as well as the place out of which it operates its business. And if rental payments are the primary source for repayment of the loan, the nondisturbance agreement is equally important to the lender because it will maintain the cash flow from the rents paid by the tenant.
The unusual phrase “attornment agreement” comes from the word “attorn”, which means “to agree to become tenant to one as owner or landlord of an estate previously held of another, or to agree to recognize a new owner or a property or estate and promise payment of rent to him”. Black’s Law Dictionary, 85 (Abridged 6th Ed., 1991). The attornment agreement keeps the tenant “on the hook” for paying rent to the purchaser at the foreclosure (which is often the lender) and for performing other lease obligations for such purchaser.
In addition to the subordination, nondisturbance and attornment agreements contained in a standard SNDA, a lender usually will want the SNDA to contain the following terms: (i) the tenant will not terminate the lease until the tenant has given written notice of landlord’s default to lender and the lender has failed to cure the default within a specified number of days; (ii) the lender will not be bound by an other agreement between the tenant and landlord that is not disclosed to the lender and/or made a part of the SNDA; (iii) the lender will not be liable to the tenant for damages incurred by the tenant due to a default by the landlord under the lease; (iv) the lender will not be bound by any fixed rent that the tenant paid in advance; and (v) the lender will not be bound by any security deposit paid by tenant unless the deposit is delivered to the lender. These terms generally should be acceptable to the tenant.
Although the basic terms of the standard SNDA are fairly simple, the negotiation of an SNDA can be complex depending on the nuances of the transaction rendering the need for an SNDA. Armed with the basics set forth above and a knowledgeable real estate attorney, a commercial tenant will be ready when presented with an SNDA.
