Demystifying Subordination, Non-Disturbance, and Attornment Agreements
If you are a commercial lender, tenant, or landlord, you probably see the term “SNDA agreement” come up often. SNDA stands for “Subordination, Non-Disturbance and Attornment” and while the name insinuates a convoluted indecipherable legal document, SNDA agreements are easily broken down into their three core functional components:
- Subordination
- Non-Disturbance
- Attornment
The interaction between these three components serves to protect the competing interests between commercial lenders, tenants, and landlords. A well-balanced SNDA agreement promotes the smooth functioning of leases in the commercial lending landscape.
Before breaking down the three components, let’s consider a hypothetical.
A commercial landlord owns a shopping center in Maryland with 20 retail spaces. 17 of those spaces are occupied by tenants under existing leases while three are vacant.
The landlord has existing debt on the property from when the shopping center was purchased. Due to the current favorable interest rate market (remember, this is hypothetical), the landlord decides to refinance with another lender.
Unsurprisingly, the new lender is requiring a first-position lien on the property. As a condition of lending, the lender is requiring SNDA agreements for 15 out of the 17 existing tenants.
Why only 15 tenants? Why not all 17? We will discuss that later.
As we explore what each of the core components of an SNDA agreement does, we will consider the practical and legal implications of each component from the perspective of our hypothetical lender, tenants, and landlord.
Subordination
The “S” in SNDA stands for “subordination”.
The default rule in real estate law when it comes to the priority of rights is “first in time, first in right”.
Subordination primarily establishes and protects a lender’s lien priority in the landlord’s property. In the SNDA agreement, the tenant is agreeing to subordinate its rights under its lease agreement to the lender’s lien created by the deed of trust which secures the loan.
Let’s look at the shopping center in our hypothetical. Those existing 17 tenants have lease agreements that precede the lien created by the deed of trust that will be recorded in connection with the refinance. Without an SNDA agreement from those existing tenants, our lender’s lien will be subordinate to the tenancies created by the leases already in place, whereas if those three vacant spaces are leased by tenants following the recordation of the deed of trust, those three new leases will be subordinate to the deed of trust. This is a problem for our lender because without the existing tenants’ subordination if our lender foreclosures under its deed of trust, the foreclosure will not terminate the leases, and our foreclosing lender or purchaser in a foreclosure sale would take title to the property subject to those leases. This could be problematic because a foreclosing lender or foreclosure purchaser will want to have control over what to do with the property and not be limited by the “first in time, first in right” default rule. If at the time of foreclosure or purchase there are problematic tenants (maybe some tenants aren’t paying rent on time or at all or some businesses are underperforming and not bringing enough cash flow to the shopping center), or perhaps the leases are at below market undesirable rental rates, the lender or purchaser will want the option to wipe out those tenants and put better ones in the building.
What many do not know is that the subordination provision in an SNDA agreement goes beyond just establishing priority. The subordination provision also provides that certain critical lease provisions such as insurance, casualty, and condemnation, are subordinated to the terms of the deed of trust and if circumstances arise that implicate any of these terms, the applicable provisions of the deed of trust control.
For example, if our hypothetical shopping center suffered a casualty event that resulted in an insurance payout, by the subordination agreement, the lender, tenant, and landlord would look to the insurance provision in the deed of trust, rather than the lease agreements, to determine how these proceeds are applied.
For this same reason, even though those three new tenants in our hypothetical are by default subordinate to the lender’s lien, it may still be advisable to obtain SNDA agreements from them to ensure that the controlling provisions for those terms are uniform across the shopping center.
Non-Disturbance
The “N” in SNDA stands for “non-disturbance”.
While the subordination agreement gives the lender priority over the tenant’s rights under its lease, the non-disturbance agreement (NDA) is designed to protect the tenant’s rights under the lease in the event of a foreclosure. The NDA in the SNDA agreement is essentially the equivalent of the quiet enjoyment covenant that most commercial leases contain. The NDA curtails the strong-arm power of the subordination agreement by providing that, so long as certain conditions are met, a tenant won’t be disturbed notwithstanding a foreclosure under the deed of trust. The tenant’s assurance under the NDA that its lease will not be terminated or disturbed by the actions of the foreclosing lender or foreclosure purchaser is typically conditioned upon the tenant not being in default and otherwise in good standing under the terms of the lease. The NDA provides the tenant with some security and continuity of their occupancy despite changes in property ownership. If our hypothetical shopping center tenants have invested a large amount of time and money into their leased space (maybe some tenants have invested a substantial amount of money into tenant build-out), it is fair and reasonable to provide them with the assurance that they will be left undisturbed as long as they are abiding by the terms of their lease.
Attornment
The “A” in SNDA stands for “attornment”.
Attornment is the tenant’s agreement in the event of foreclosure to recognize the foreclosing lender or a purchaser in a foreclosure sale as the tenant’s new landlord. If the hypothetical lender forecloses, it is critical that the tenants look to the lender or foreclosure purchaser as the new landlord and agree to continue to abide by the terms of their current leases; otherwise, a tenant could try to re-trade and negotiate for better lease terms, such as a lower rental rate.
Limitation of Liability
An SNDA agreement contains more than just the subordination, non-disturbance, and attornment agreements. SNDA agreements also often contain terms that limit the foreclosing lender or foreclosure purchaser’s liability by providing that they are not liable for any acts or omissions of the landlord if the lender forecloses and either it or a foreclosure purchaser steps into the landlord’s shoes as the new property owner. The scope of liability limitation in an SNDA agreement can vary and tends to be one of the more heavily negotiated provisions between the lender and tenant.
Estoppel
Lastly, SNDA agreements often contain a representation and warranties section which essentially functions as a tenant estoppel. The tenant will typically represent and warrant to the lender when the lease commenced, that the tenant and landlord are not in default under the lease, the tenant has not paid rent more than one month in advance, the tenant has not transferred or otherwise assigned its rights in the lease, etc. While the scope of the estoppel can vary from one SNDA agreement to the next, some sort of estoppel is important as it puts the lender on notice as to what sort of conditions and problems it may be inheriting in the event of foreclosure.
An SNDA agreement can take a variety of forms and usually contains other key terms in addition to what is discussed above. Not all three components need to be in the same agreement, and each could be a separate agreement. There are also many practical considerations to account for when it comes to SNDA agreements. Why would our hypothetical lender not want SNDA agreements from all 17 existing tenants? Let’s imagine those two tenants are in the last few months of their lease terms and will vacate the shopping center soon. Our hypothetical lender likely decided the time and cost to obtain SNDA agreements from those tenants were not worth the low risk those two soon-to-be-expiring tenancies pose to the security of the lender’s lien and did not otherwise materially impact how the lender underwrote the credit for the refinance.
SNDA agreements provide security and predictability in commercial real estate and lending. For lenders, SNDA agreements preserve the lender’s lien priority and lower the risk of conflict between lease agreements and the deed of trust. Tenants that are abiding by the terms of their leases benefit from the assurance of lease continuity and protection of their occupancy rights and landlords similarly benefit, as they can attract new tenants to the property by assuring them that their interests under their leases will be reasonably protected by the NDA.
Authored by:
Kelly Callahan, Associate Attorney, Liff, Walsh & Simmons
