What is an SNDA?
An SNDA, or Subordination, Non-Disturbance and Attornment Agreement, is a legal document frequently found in commercial real estate and lease transactions. Its purpose is to clearly state the relationship between a tenant, a property owner and a mortgage lender. In a typical scenario, the landlord and tenant of a property sign a commercial real estate lease. At some point, if not already done, the property owner will enter into a mortgage loan of the property to finance it or for other reasons. The mortgage lender will want a document that provides for the subordination of the leasehold interest to the lender’s mortgage. This means that the lender wants to ensure its rights to the underlying property are not adversely affected by a lease between the property owner and a tenant.
The mortgage lender will want assurances that the lease shall remain in full force and effect , even if the holder of the lender’s mortgage is to foreclose on its mortgage. The document also gives the tenant’s continued rights to possess and occupy the property, independent of the lender, who has possession as the holder of the mortgage during any foreclosure. The "attornment" portion of the SNDA document is essentially a confirmation by the tenant that it agrees to continue to be bound by the lease should the lender come into possession of the property as a result of a foreclosure on its mortgage.
The SNDA has utility in both refinancing and workouts of commercial real estate mortgages. A first mortgage lender may request an SNDA in connection with underwriting of the mortgage loan. A second mortgage lender may request an SNDA to give them the right to assume the lease, in lieu of foreclosure, under agreed terms and conditions agreed to by all parties, not unlike a loan workout.
The Essentials of an SNDA
One of the first things that landlords and tenants recognize as being critical when addressing SNDA agreements is an identification of the key components of an SNDA agreement itself. A SnDA agreement, which stands for "subordination, non-disturbance and attornment," is basically an agreement that defines the obligations and responsibilities of the parties to the subject lease in relation to mortgages encumbering the property, or other liens affecting the property. The components of an SNDA agreement generally fall into one of three categories:
Subordination.
The subordination provisions described in an SNDA agreement basically mean that the rights and obligations of parties to an SNDA agreement are "subordinated" to the rights of the mortgagee under the mortgage, i.e., the SNDA agreement will be "secondary" in priority to the rights of the mortgagee in the event of foreclosure. While one could supplement an SNDA agreement with more detailed subordination provisions, an SNDA agreement generally does not need to detail or do much more than address the fact that the SNDA agreement is being made on a subordination basis.
Non-Disturbance.
From the perspective of the tenant, the non-disturbance provisions of a subject SNDA agreement will afford the tenant the right to be able to "continue on" in possession of the leased premises in the event that there is a foreclosure or other change in ownership of the property. The non-disturbance provisions in a subject SNDA agreement would essentially include a covenant by the lender that in the event of a foreclosure or some other change in ownership of the property the lender, a subsequent purchaser or any other person then in ownership will provide to the tenant under the subject lease a subordination and non-disturbance agreement that will allow the tenant to continue to remain in possession of the leased premises, and that any subsequent purchaser or other owner will perform or assume, as applicable, the obligations of the landlord (or "lessor") under the subject lease.
"Attornment" Provisions.
The optional "attornment" provisions of the subject SNDA agreement will effectively and formally "trigger" the provisions of the non-disturbance section of the SNDA agreement so that the new owner has the benefit of the non-disturbance provisions of a subject SNDA agreement. In order to give effect to the non-disturbance provisions of a subject SNDA agreement, the tenant must "attorn" to the new owner, i.e., acknowledge the new owner as the "landlord" under the subject lease, and agree to perform and be bound by the remaining terms and conditions of the subject lease. A typical SNDA agreement will include an "attornment" provision entitling the tenant to the benefits of the non-disturbance provisions to which it is entitled immediately prior to foreclosure or change in ownership, and requiring the tenant to attorn to the new owner.
The Advantages of SNDA Agreements for Tenants and Landlords
A Subordination, Non-Disturbance and Attornment Agreement – commonly abbreviated as SNDA – is both a tenant and landlord-friendly document that provides a number of benefits to both parties.
Benefits for Landlords
For tenants leasing space in commercial real estate developments, the benefit of an SNDA is that it gives the tenant security knowing that, in the event the landlord defaults on its mortgage obligations, the tenant will be able to maintain its leasehold interest in the premises and continue to operate its business without interruption. SNDA’s also grant landlords peace of mind, assuring them that if their tenants have executed this sort of agreement with their lenders, they will be able to restrict the tenants from claiming an interest in the leased property over the rights of the landlord’s lender in the event of a foreclosure.
Benefits for Tenants
The lack of an SNDA could leave the tenant without a remedy in the event of a foreclosure. Without an SNDA, a lender could terminate or refuse to comply with certain provisions of the lease (such as tenant inducement agreements), and a tenant may have no other recourse. An SNDA reduces or eliminates these risks for tenants and allows them to continue conducting their business operations. Because of the nature of real estate investments, tenants are often at a disadvantage. Real estate is a valuable asset and tenders for mortgages that are often much higher in value than the amount of rent payable under a lease. This disproportionate value often leaves tenants concerned that they are "out in the cold" and lose the benefit of their lease should the landlord default on the loan it used to acquire the property. Even though courts have afforded tenants some protection against being dispossessed of their leasehold interests, tenants generally have little recourse if a foreclosure occurs and they do not have an SNDA in place. At foreclosure, tenants often lack the ability to challenge the validity of a mortgage lien because these issues should have been resolved prior to the execution of the lease. Furthermore, even if the tenant can establish in court that the balance due under the lease was not tendered to the landlord when due, the tenant may only get a few days grace to tender the balance due. This leaves tenants vulnerable.
Negotiating an SNDA Agreement
If you’re a tenant’s counsel, the first thing you will want to see is that the ground lease permits them to grant the SNDA. You will also want to make sure that the tenant doesn’t need to obtain the ground lessor’s consent to any amendment or extension of the lease.
Next, take a look at the accounting requirements for the tenant. The tenant will want some discretion to provide information to the ground lessor’s lender, rather than a pro forma financial report that may not provide the lender sufficient information to determine whether any breaches exist. A loan policy will not cover all scenarios, so what is boilerplate because it’s free or inexpensive to use should not preclude the proper flow of pertinent information to the ground lessor’s lender.
Often, ground lessors will want copies of the leases, but unless the tenant must provide them under applicable law, a tenant’s counsel should resist providing a copy of a lease that has not previously been disclosed to the ground lessor’s lender. Otherwise, there’s a risk of unanticipated terms being disclosed to the lender (and being used against the borrower tenant).
Landlord’s Counsel:
When negotiating an SNDA, one should assume that the lender’s interest will not be adverse to that of the ground lessor and therefore it should cooperate with the lessor to ensure the SNDA provides the lender with a senior lien in the ground lease. The bottom line is that the lessor’s financing of the land will not affect the tenant’s right of possession. It is important that the tenant provide as much information as possible so that the lessor can provide the necessary information to the lender.
By providing the tenant with a pro forma SNDA that protects the lessor from its tenant, both the lender and the tenant should be motivated to provide the necessary information and execute the instrument.
Common Challenges and Misinterpretations
A common misunderstanding with SNDA’s is that they are simple or easier because they are just a document confirming that a lease is in existence between two parties. However, the exact opposite is often true as some of the most complex issues in a commercial real estate transaction often come up when the question of what to do with existing leases arises. It is critical to properly address issues such as "What if both the landlord and tenant have entered into an SNDA with the lender?" or "Who decides which leases will be subordinate to which mortgages?" With these issues in mind, following are some typical issues a party should be aware of when presented with a SNDA:
1. Improper Understanding of Terms
Parties typically focus solely on the two main terms in a SNDA, namely subordination and attornment, while overlooking potentially problematic issues in areas such as non-disturbance provisions and the effect of modifications to the lease. This can result in a SNDA that can be particularly one-sided. For this reason, both landlords and tenants should be certain to look over all the terms and conditions in the SNDA prior to execution, and request any changes to the language to address their unique concerns.
2. Misunderstanding the Attornment Provision
Many misunderstandings arise out of the interpretation of the attornment provision in a SNDA. Lenders will often believe that the language in their SNDA takes the place of standard lease language requiring tenants to attorn to a landlord or the landlord’s lender. Accordingly, it is critical for the tenant to confirm that if they attorn to a lender pursuant to a SNDA, the lease language requiring attornment is also changed or eliminated.
3. SNDA Language Conflicts with the Lease
A dispute commonly arises when SNDA language contradicts the tenant’s lease . One example is where a standard SNDA form requires the landlord to provide a copy of the current lease to the lender, but the lease contains language that prohibits the landlord from disclosing the lease to the tenant’s lender. Another example is when an SNDA requests that a Subordination, Non-Disturbance and Attornment Agreement be delivered to the lender annually, but the lease language calls for one-time delivery. Unless the tenant notices the conflict in the language, it will be bound to the lease language. This will leave the landlord in a position of empowerment to provide the tenant with an annual document that may violate the lease, while the tenant is left unable to enforce the terms of the lease. Accordingly it is critical for a tenant to review the SNDA to confirm that the language does not contradict the lease.
4. Revisiting the Proper Subordination of All of the Leases
Most leases contain language that will provide for the senior lender to be entitled to superior leasehold rights. This way, the lender has the option to have the tenant attorn to the lender, or decide to terminate the tenant’s lease. While this is the normal state of affairs for the landlord’s loans, there may be times when a tenant prefers that a certain lease be superior to the lender’s loans. Examples include where the leaseholder has a long-term lease. In those situations the priority of the leasehold rights can be a major issue, and any SNDA language arguing otherwise may need to be negotiated.
Each particular deal will require a detailed review of the SNDA to make sure it is in line with the current lease, as well as with the current and future market of the property. It is always a good idea to have language regarding SNDAs reviewed by an attorney so that the parties are protected from adverse consequences that could occur if the document does not reflect the parties’ wishes.
SNDA in the Legal Context
Like any other contract, a SNDA agreement is enforceable by law as long as it is reasonable and fair. Adherence to specific terms may be required, but a strict adherence to a term may not be the only method available for compliance. A reasonable time limit or a reasonable exercise of discretion in accordance with the general purposes is sufficient. Generally speaking, the courts will enforce the parties’ intent to execute a contract unless the performance of a provision would be impossible. Thus, if performance absolutely must occur within the timeframe of a strict adherence to the term, the parties must make a clause for excusable non-performance, which could potentially be enforced through specific performance.
Courts can decide a SNDA agreement in favor of the party who would benefit from the terms of the SNDA. In the event of a SNDA dispute, a court may choose to enforce the terms contained in the SNDA agreement rather than the primary lease terms. The priority of the SNDA agreement depends on the language between the parties involved and the terms negotiated. For example, if a tenant’s priority of a lease has been expressly disclaimed by the landlord, the tenant’s interest will not be supported by a subordination agreement.
The priority of leases and security interests exists in hierarchy: (a) a purchase money mortgage; (b) a non-purchase money mortgage (later in time); (c) a subordination agreement; (d) a landlord’s lien; and (e) intervening rights of a mortgagee.
By agreeing to subordinate their interests, a lender acknowledges that its mortgage will be subject to the rights of the tenant, even if the mortgage were to be recorded after the lease was executed. It is important to note that subordination does not give the tenant superior rights to the property. It only affords the tenant security in the event of a foreclosure executor of the primary lease. A SNDA agreement is closely related to subordination agreements, because these types of documents are executed together in most real estate transactions.
Examples of an SNDA Agreement
Primarily in the last five years, we have witnessed a small increase in the official cases published to deal with the interplay between the lease and the mortgage. However, a significant number of these recent cases have involved wrap-around mortgages. Regardless, almost all can be used to help demonstrate a problem that could arise if an SNDA were not executed or becomes void.
In Southington Bank v. Troupe and Giroux Properties, LLC, this dispute arose in the wake of the collapse of the real estate market. In the fall of 2005, Troupe sold its office building in Bristol, Connecticut, to Giroux. To finance the purchase of the property, Giroux secured a mortgage from Southington Bank (the "bank"). The mortgage was recorded and an SNDA was executed among Giroux, the bank, and Troupe; however, the SNDA was not recorded. The parties adopted the SNDA as a useful "device" to ensure that Giroux would obtain a future renewal or replacement of the mortgage loan with the bank.
About six months prior to the expiration of the balloon mortgage, the mortgage was modified and extended for an additional three years. All parties signed the modification agreement, and the recording information of the mortgage was cross-referenced on the modification. Shortly thereafter, Giroux defaulted on its mortgage with the bank, and he recorded a quitclaim deed conveying the property to Giroux. Troupe claimed to be unaware of the SNDA, and accordingly, the SNDA was held to be void and unenforceable.
Had an SNDA been properly recorded, there was a beneficial aspect of the Giroux/Bank transaction that would have been preserved. Failure to record the SNDA positioned the bank to lose the benefit of its loan to Giroux. At the time of the default, Giroux’s debt to the bank was $1,098,547.38. Giroux conveyed the property to Troupe for a recited price of $735,000.00, which should have been the amount of the debt under the SNDA. Instead, Troupe paid less than 67 percent of what Giroux had owed the bank, and it was without recourse to any personal liability beyond the transferred property.
While not directly applicable to the SNDA process, a case in Nova Scotia that went to the Nova Scotia Supreme Court demonstrates the importance of ensuring that the documents are executed and recorded by all members of the document process. In that case, the vendor, in order to avoid execution of the transfer of property, told the purchaser that the agreement was only a draft, and asked that it be returned. However, there is a fine line between "retaining dominion and control," and using improper channels to retain the property. In re Metro V-Ranch South, LP shows that you can have more of an impact with an SNDA than you think.
In the Bank of America v. Vail Village Center Development Corporation decision, the court stated, "The parties agree that if the Subordination Agreement is valid, the Lender’s rights and remedies provided therein govern the relationship between the Developers, Rountree and the Bank of America." This statement was made in lieu of the issue of whether the SNDA was valid. A bank in Colorado signed a Subordination Agreement on behalf of a lender that owned a given property. Subsequently, that bank mistakenly recorded it with the county clerk as the holder of the proper mortgage. When the developer of a given property went bankrupt, the court, in an attempt to be fair, decided that it was not in the best interests of the trustee to void the transaction between the lender and the bank.
We see various circumstances involving SNDA agreements in practice when a financial institution calls for an SNDA (or something similar) in conjunction with a mortgage that it holds. As previously discussed, many companies see the benefit of an SNDA in almost any transaction in which they have an interest in the property. As we see in the cases above, for all of this to work properly, you should make sure that you not only have a proper claim to the property but also that you decide which party will take ownership of a property. Having an SNDA in place helps avoid many potential issues that can be detrimental to your company.
How to Draft and Review an SNDA
Before executing an SNDA, it should be drafted to mirror the following considerations (considerations in italics are examples that should be tailored and incorporated specific to the particular airport lease and situation):
-What if the Tenant desires to offer extensions of the SNDA agreement to someone who has interest in the property?
-Are there other agreements that should be referenced as well?
-To what extent has the Landlord agreed to these terms?
-Who will be responsible for drafting the agreement?
-Who will pay for the preparation and recordation of the SNDA agreement?
-Typically, SNDA agreements have a three-party form: the Landlord, Lender, and Tenant.
-If a Tenant is not careful, they may be "clipped" and forced to comply with onerous provisions that the Lender and Landlord negotiated without much thought or legal advice to the Tenant.
-Likewise, the Landlord may approve terms that are not in their best interest, especially concerning the timing to cure or vacate the premises .
-There may be concerns as to how a change in control of the Tenant or a structural change to a parent organization could impact terms that the Lender has agreed to with the Landlord:
– If the Mortgage has a change-of-control, or assignment clause, it could give the Landlord a right to disapprove of consent to an extension of the term of the SNDA, even though the Lender has agreed to it. This may be particularly problematic where a Lender has not required an SNDA.
-A Landlord might be adamantly opposed to approving a change in control of the Tenant that opens the door for a subtenant to potentially extend beyond the original Landlord-Tenant contract term.
-A Tenant who has not regulated itself to request and receive legal advice may be at risk of agreeing to a subordination, non-disturbance and attornment (SNDA) agreement that is contrary to the Landlord and Lender’s intentions outlined in the mortgage paperwork.
-Greater coordination with your lender to ensure that they can comply with the terms of the SNDA agreement and all documents executed by the Landlord and Tenant to avoid an improper finding of breach of the lease.