What are SNDA Agreements?
Subordination, Non-Disturbance, And Attornment Agreements, commonly referred to as "SNDA" agreements, are important documents in the context of real estate transactions and leases. They serve three purposes, with language that can be interchanged among the three areas.
Subordination provisions provide lenders with the ability to record their mortgages senior to leases and other interests pursuant to the terms of the lease. Should a lender foreclose on the property , this provision preserves the lender’s right to terminate these subordinated leases and interests.
Non-Disturbance provisions protect tenants in cases where their lease has been subordinated in favor of a mortgagee. This preserves the tenant’s rights notwithstanding a lender’s right to foreclose on the property.
Attornment sections codify the tenant’s agreement to attorn (to pay rent to) the lender, should it become the owner of the property.
The negotiation of these provisions will depend upon the parties and their relative bargaining strength. However, lenders will almost always insist on their rights to terminate leases in the event of a foreclosure. Thus, while you want to tightly negotiate your rights, it is unlikely that the lender will agree to the same terms that were placed into effect at the time of original execution of the lease.
Essential Elements of SNDA Agreements
Subordination comes before the rights of the holder of a security interest in the fee estate (i.e., the landlord). Subordination requires that the lease be made subordinate to the lien of any mortgage and that the tenants agree to attorn, or recognize the lender as their landlord, in the event the lender elects to foreclose upon the property. Not only does such subordination protect the lender’s interest in the property, it protects the tenant by assuring him of continued occupancy.
Non-disturbance assures the tenant that he can remain in his leasehold, even if the lender who has subordinated its lien ultimately forecloses. Importantly, the non-disturbance agreement promises to restrict the lender’s otherwise extensive remedies if the tenant is in compliance with the terms of its lease.
Finally, attornment assures the lender that, if a foreclosure occurs, the tenant will seek to attorn to the new owner of the property. This transfer of rights promises the lender that he will receive the value of the lease during the remaining term.
Subordination: How Tenant and Lender Needs Line Up
Subordination – whether in a mortgage or an SNDA agreement – in general, requires a tenant to agree for its lease to be subordinate to another interest holder. Given that most leases are long-term and that any related lending is short-term, lenders generally do not want the longer-term leverage (i.e., rent) to be subjugated to their short-term lending interest.
In an SNDA, the tenant’s concessions in subordination are, however, offset on the lender’s part by the concessions that the lender makes in non-disturbance, such as providing assurance of continued tenancy. A tenant will usually agree to a subordination because it is a junior, subordinate position that primarily protects against the risk of foreclosure. A typical subordination clause might read as follows:
(a) Tenant hereby agrees that this Lease is subject and subordinate to (i) any Mortgage, now or hereafter placed on the Property and (ii) all renewals, modifications, refinancing and extensions thereto. Tenant agrees to carry out the reasonable requests of Superior Mortgages to further subordinate this Lease and its interest therein to such Superior Mortgages.
(b) Notwithstanding anything herein to the contrary, Landlord covenants and agrees with Tenant that if (i) a Superior Mortgagee succeeds to the interest of Landlord under this Lease as a result of (A) foreclosure of the Superior Mortgage; or (B) transfer in lieu of foreclosure, assessment in an eminent domain proceeding or otherwise, or (ii) a prospective Superior Mortgagee agrees to accept a subordination of its Mortgage to this Lease, then no such termination shall be effective unless Tenant is provided with not less than the following notice period:
(A) Thirty (30) days’ prior written notice of such termination of the Lease to the address for notices to Tenant set forth in the Lease or such other address for notices as Tenant may have given Landlord; and
(B) Tenant is not in default, beyond applicable periods of grace, under the Lease at the time of such termination or would not be in default upon the giving of notice of default and the expiration of any applicable cure period after the date of such notice.
(c) Tenant agrees that it will, upon request of any Superior Mortgagee, attorn to such Superior Mortgagee and recognize such Superior Mortgagee as the landlord under the Lease, so long as such Superior Mortgagee agrees to accept the Lease and make the same effective; provided, however, that unless Tenant otherwise agrees in writing, such attornment shall be conditioned on such Superior Mortgagee agreeing to be bound by all the terms, conditions and provisions of this Lease upon the following terms:
(A) Any obligations of Landlord thereunder accruing from and after the date of such attornment shall be performed by such Superior Mortgagee; and
(B) Such attornment shall not impair any rights which Tenant has under this Lease against the party holding or taking possession of the Property.
Subordination clauses often run to the benefit of the lender. From the perspective of the Property owner and landlord, subordination of long-term revenue is a small price to pay for the possibility of short-term financing. Lenders will generally not accept security from a borrower until payment priority is established.
Non-Disturbance: Keeping the Tenant Safe
Non-disturbance is the section of the subordination, non-disturbance and attornment agreement that focuses on the relationship between the tenant and the lender/mortgagee. It is the non-disturbance element that guarantees to the tenant that it will not be disturbed in its possession of the premises if the mortgagee-law lender and/or the mortgagee-law holder takes remedial action under the terms of the loan, including through foreclosure. In many instances, the non-disturbance element can be referred to as the "anti-disruption" clause. The lender typically requires that the tenant delete in the lease any reference to the priority of the lease or the subordination provision in the lease. The non-disturbance provision is often an effort by the lender to expressly subordinate the lease in favor of the lender, but it likewise obligates the lender to honor the lease after foreclosure.
An example of a standard non-disturbance clause is as follows: Notwithstanding any subordination provided for herein, Lender agrees that, if it succeeds to the interest of Landlord in the Leased Premises, the Lease shall not be affected during the term of the Lease by reason of foreclosure or enforcement or realization of the Security Instrument provided Tenant is not in default under the Lease beyond any applicable notice and cure period provided therein.
The non-disturbance provision typically contemplates that the tenant will continue in occupation of the premises if the property is sold at foreclosure, so long as the tenant has not committed an event of default under the lease.
Attornment: Recognizing the Change in Ownership
The next piece of a standard SNDA agreement is an attornment clause. The attornment clause is a provision through which a tenant acknowledges that the new owner of a property is the owner of the property for the purpose of the lease and any lease agreements between the tenant and the former owner survive as agreements solely between the parties and their respective assignees, successors, purchasers or subtenants.
Attornment is essentially a recognition by the tenant that the new person or entity (new owner or lender) is the same party as the party to whom the Old Tenant originally leased the premises. This means the new recipient of the rent payments is the same party to whom the Old Tenant once paid rent. It’s much like a parent who adopts a child; the adopted child is now legally bound to the new parent for all purposes and has no assumptions made by the new parent that they must behave as the biological parents and maintain the old relationships.
There may be situations in which a tenant does not agree with the transition of the old updated relationship to the new updated relationship. It may be that the old parent may not have brought the child to his or her full potential or believes the child is better off with a new set of parents. Regardless of the previous relationship between the tenant and the landlord, the new owner or lender of the property cannot be held responsible for the preexisting relationship. For the third-party beneficiaries to the agreement, it means the legal benefit of the original agreement cannot be diminished, eroded or otherwise altered by the events causing the transfer.
A failure by the new owner or lender to execute the SNDA agreement does not relieve a tenant from the obligation to pay rent and observe all covenants under its lease with its landlord or Landlord’s successor. A tenant has not suffered any injury simply because the land owner may have changed. This is the case because the SNDA agreement is a mere declaration of the relationship. Nothing in an SNDA, however, confers rights to the third party beneficiaries to the covenant.
An SNDA is not a sublease and does not create a landlord-tenant relationship between the lender and the tenant. It is not a novation of the lease obligation of the tenant. Rather, the SNDA merely recognizes the new relationship that was previously addressed.
The Legal Basics on SNDA Agreements
SNDA agreements have several legal under-pinnings that, while not always necessary, are nonetheless relevant. These include the conditional limitation clause, the use of subordination agreements and doctrines of estoppel and of relaxed enforceability of restraints on alienation. A conditional limitation clause provides that a lease will cease to operate in the event of foreclosure (without any intervening taxes, income, ground leases or improvement liens). The clause goes on to say that if foreclosure happens, then the lease will become subordinate to the mortgage even though it hadn’t been subordinated. Such a clause avoids the necessity of getting an SNDA from the mortgagee because, by the incorporation of this clause, the lease is forever subject to the mortgage, and thus, regardless of whether the mortgagee signs the SNDA, this "subordination" has in fact already been accomplished. Subordination agreements are device by which the tenant and mortgagee agree to make the lease subject and subordinate in accordance with the priority of the rights under the mortgage . Normally, the mortgagee desires the subordination so that the lessee does not have the rights of party in possession prior to foreclosure, and/or so that the lessee cannot rely on a purported waiver of subordination as a basis for the lessee’s rights. Estoppel doctrines relate to principles that latently lurk in the background of real estate law, although are seldom, if ever, expressly made part of an agreement. In addition to principles of equitable subordination and superior equity, estoppel doctrines include quiet enjoyment, covenant of construction, right to possession, and rights of entry and re-entry and separation of the contract rights under the lease, notwithstanding a mortgage. Relaxed enforcement of restraints on alienation is mainly applicable in the case of leases subject to mortgages or deeds of trust. Generally, upon the granting of a deed of trust or the giving of a mortgage, the interests of the tenant become subordinate to those of the mortgagee. However, in the absence of such a provision, the lower tenant’s rights under the lease will prevail over those of an encumbering creditor of the lessor’s interest during the life of the lease.
Getting to “Yes” with SNDA Agreements
In negotiating an SNDA, the tenant will want to address a few items with the landlord. First, when practical, the tenant should request that its SNDA be on the landlord’s standard form. Getting any revisions to a landlord’s standard form to have the landlord agree to those changes can be very time consuming. Also, from a cost perspective, many landlords do not charge their tenant clients any preparation or legal fees for preparing the SNDA forms. From an administrative perspective, getting the lawyers and management personnel for the tenant and landlord on the same form and agreeing to the final document can be much easier.
The tenant should also make sure to obtain a fully executed copy of the SNDA from the landlord, not just a copy with the signatures. There have been cases where a tenant has not obtained the original document. When the tenant goes to perform an act that requires the tenant to present the document, the original is not available because it is among the records of the lender or the record with the mortgages in the land records. Last, the tenant will want to review the SNDA for any special provisions that require the tenant’s consent. For example, the document may grant the lender the right to enter into a lease with an option tenant (e.g. a party who initially leases the premises with an option to purchase). While granting this right may provide some protection if the tenant does perform under the lease with the landlord, such as by assuming the lease and making payments to the new landlord, the original tenant may not be able to continue to remain in the leased space if the new landlord wants to undertake renovations to the space that would interfere with the tenant’s operations.
The landlord will want to include certain provisions in its covenant of further assurances. One such provision could address if the lease should terminate, in event the lender forecloses on the property, how the tenant should make future payments. In another provision, the lender will want to establish conditions on how the unit of the secured property can be transferred. Often, this provision will include the condition that the former owner of the leased premises will not be able to receive any income from the tenant’s occupancy if the lender takes over the property. Another common provision that the lender will want is that it has the right to perform tenant’s obligations under the lease if the tenant fails to do so.
Both parties should also consider how "attornment" will occur. In the event the tenant wants to sublease part of the leased premises or sell its leasehold interest, the lease may provide that the lender will have the right to assume the lease and deny the sublease or sale. The lender may want to change the language so that if the tenant sells its leasehold interest, the lender could reject a proposed sublease or assignment.
The landlord and tenant should also consider incorporating additional provisions into its SNDA that fit the transaction. Often, it is important that there be provisions that set out the scope of collateral. If the lender wants to have the right to lease the space to someone else, the landlord will want a provision that addresses how the tenant will be compensated for such rental. It is also common to develop provisions that address what happens if the tenant no longer occupies the space or other events that could impact the transaction.
Common SNDA Agreement Issues and Solutions
Common Issues and Resolutions in Subordination, Non-Disturbance and Attornment Agreements
While the importance of a SNDA agreement is clear, what to do when one party does not agree to the provisions contained in the agreement? We see the most problems arise with respect to the timing of the SNDAs. This is important because, if the SNDAs are not executed prior to the financing by the lender, the lender may require its subordination and non-disturbance agreement to take effect and be recorded, without regard to the subsequent lease entered into by the landlord. If the tenant has already entered into a new lease during the interim period, there may be a conflict and the lender may not be bound by the new lease, even though the landlord intends it to operate as a subordination, non-disturbance and attornment agreement.
One particular problem was highlighted in a District of Columbia case, Shadetop Tenants Co. v. Shadetop Realty Associates LLC. In this case the landlord and tenant had entered into an amendment to lease, which extended the terms of the lease for 15 additional years. The landlord entered into a mortgage that required all lessors to execute an SNDA in order to not disturb the mortgage. The landlords sent out a form of SNDA, but the tenant did not sign the SNDA. The tenant then sued the lender for tortious interference with contract as the lender did not recognize the amendment to lease. The court stated that the issue was whether the landlord could require tenant to subordinate its lease to the first deed of trust. The court stated the following: In Maryland, an amendment to the original lease is a new lease. Since the tenant’s occupancy under the lease was lawful, the tenant had an interest in the land that could not be taken from it, except on condition subsequent or by eminent domain.
Once a tenant is in possession under a valid lease, the lessee cannot be excluded or evicted by a third party. In this case, the new deed of trust prohibited the lender from entering onto the property and interfering with the tenant’s right to occupy. Whether the title to the property will be subject to the subordination clause depends on the purchaser’s rights. Here, the purchaser would have notice of the tenant’s rights because the tenant intends to not vacate the property during the lease term. Therefore, unless the lease was in writing, the borrower, the beneficiary, or their successors in interest had no right to rely exclusively on the subordination clause. They must obtain the tenant’s consent or notice of the lease. The purchaser’s due diligence will be to inspect and take notice of any recorded leases. Therefore, the tenant’s rights will "stick to the property," despite the subordination clause.
However, the tenant could be forced to subordinate the lease in certain circumstances: 1) they consented to the new mortgage; 2) the lender is unaware of the tenant’s interest in the land; or 3) the lender agreed to proceed at its own risk.
The practical result is that tenants of rental property need to be aware of SNDA rights and review carefully any requests by the landlords or lenders to enter into the agreement.
SNDA Agreement Case Examples
While there’s no denying the importance of a SNDA agreement, their use is not universally observed. For example, in a 1999 New York case, a tenant took out a $25 million loan to finance a development project, using a purchase money mortgage. The landlord, a principal of the tenant, held a second position mortgage on the property, plus an assignment of the leases. The lender filed a complaint against the tenant and the landlord in 2003, seeking to foreclose the tenant’s interest in the property. However, the lender was unaware that the landlord had moved all of the tenant’s more valuable assets — the equipment, furniture and existing permits — to another property and then put the property back on the market for sale. In 2004, a joint venture between a bank and a developer purchased the property, subject to the second position mortgage but without notifying the tenant or the lender, who allegedly breached obligations under the tenant’s lease and the landlord’s assignment of leases.
The State Supreme Court, Fulton County, recognized that an assignment of leases was perfectible by filing with the county clerk pursuant to the Lien Law (Real Property Law). The court also ruled that the landlord breached the 2001 lease by not subordinating its second position mortgage to the lender’s first position mortgage. Unless the tenant received the benefit of a non-disturbance agreement—something in writing from the landlord and the bank—the tenant had no obligation to pay rent to the bank or its designee. In other words, without SNDA agreements, the tenant had no obligation to obey the lease or to suffer the consequences of the landlord’s breach.
In a similar case, a tenant had leased property for a term of 25 years, opting for the building to be constructed by the landlord. The lease contained several options for renewal and the right to acquire a long-term interest in the property, in the form of a 99-year, renewable ground lease. The tenant agreed to consecutively pay monthly advance rent, annual base rents, and additional rents for insurance, maintenance and other property-related expenses. The lease required the tenant to file for a building permit for the proposed construction within 30 days of its execution. The tenant failed to do so. Another section of the agreement stated that the tenant was in default if it failed to commence construction by a certain date . Importantly, the tenant never received the landlord’s consent to mortgage the property or issues bonds to finance the construction. Before the expiration of the lease term, the tenant mortgaged the property and encumbered its leasehold interest in it to secure payments on a bond issue to build the facility. The bank ultimately assigned its rights, title and interest in the bond for no consideration.
When the landlord learned that the tenant had borrowed against its leasehold interest, it attempted to terminate the lease because it had not consented to the mortgage. One court noted that "the right of a tenant to assign a lease of real property without the landlord’s consent is subject to the power of a mortgagee to foreclose on the property." In other words, when the landlord took back the property because the tenant had defaulted, the tenant remained liable for principal and interest anyway. Absent a non-disturbance agreement, the outcome would have been very different.
In another case, a tenant and a landlord clearly defined the provisions of the SNDA agreement to bind the parties and anyone who comes after them. However, many courts decline to enforce terms in a document that are not clear, even if the document is part of an agreement previously created by the parties. Such was the alleged situation in a case from British Columbia in which a landlord had a registered mortgage on a property and granted a development lease to a tenant. The tenant then obtained a commitment for financing and at the same time, granted a second mortgage on the property to the lender. However, the lender did not obtain an SNDA from the landlord to subordinate its first position mortgage to the second mortgage. When the tenant defaulted on its payments, a court found that the lender’s mortgage was not subject to the landlord’s obligations under the SNDA.
This is an example of a situation in which a lease included an agreement that extinguished prior rights and obligations; however, the parties then went their separate ways and failed to agree on new terms. It was the latter terms that reigned in this case. Courts rarely take into consideration oral agreements among the parties. If the terms of an agreement are not clear, the litigation will often end up in appellate court.