Demystifying Subordination, Non-Disturbance, and Attornment (SNDA) Agreements
What is an SNDA Agreement?
If you are a commercial lender, tenant, or landlord, you probably see the term “SNDA agreement” often. SNDA stands for “Subordination, Non-Disturbance and Attornment.” These agreements break down into three core components:
- Subordination
- Non-Disturbance
- Attornment
Together, these three components protect the competing interests of lenders, tenants, and landlords. A balanced SNDA supports stable commercial leasing.
A Hypothetical
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 its original purchase. Because rates are favorable, the landlord refinances 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 review each SNDA component, we will consider its practical and legal effects on the 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 protects a lender’s lien priority in the landlord’s property. In an SNDA, the tenant agrees to subordinate lease rights to the lender’s deed of trust.
Connecting Subordination to the Hypothetical
Consider the shopping center in our hypothetical. The existing 17 tenants signed leases before the deed of trust securing the refinance is recorded. As a result, unless those tenants sign SNDAs, their leases will have priority over the lender’s lien. By contrast, any leases signed for the three vacant spaces after recordation of the deed of trust will be subordinate to it. This matters because, if the lender later forecloses, the foreclosure would not terminate the earlier leases. Instead, the lender or a foreclosure purchaser would take title subject to those existing tenancies. That limits the lender’s flexibility and can be a serious concern if some tenants are not paying rent, are underperforming, or are locked into below-market rental rates. In those circumstances, a foreclosing lender or purchaser may prefer the ability to terminate those leases and replace the tenants with stronger ones.
Many people do not realize subordination does more than establish priority for the SNDA. It can also make lease terms on insurance, casualty, and condemnation subject to the deed of trust.
For example, after a casualty event, the lender, tenant, and landlord would follow the deed of trust to apply insurance proceeds.
For that reason, the lender may still want SNDAs from the three new tenants for consistent terms across the center.
Non-Disturbance
The “N” in SNDA stands for “non-disturbance”.
A non-disturbance agreement protects the tenant if foreclosure occurs. In an SNDA, it works much like a quiet enjoyment covenant. It allows the tenant to stay in possession if certain conditions are met. Usually, that protection applies only when the tenant is not in default. The NDA gives tenants added security if ownership changes. This matters most when tenants have invested heavily in their space.
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 Overall
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.
About Liff, Walsh & Simmons
Liff, Walsh & Simmons is a full-service law firm based in Annapolis, Maryland, serving businesses, individuals, and institutions throughout the Mid-Atlantic region. The firm’s Real Estate practice provides comprehensive legal support across all stages of real estate transactions, including acquisitions, dispositions, financing, leasing, development, and land use matters. With a practical, business-minded approach, the team works closely with clients to navigate complex transactions efficiently and strategically. The practice is led by Jonathan W. McGowan, who brings deep experience and leadership to guiding clients through a wide range of commercial real estate matters.
Authored by:
Kelly E. Callahan, Partner
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