Property owners know the importance of getting the deal terms of a lease to fit their requirements. But, many landlords would prefer to dispense with those clauses in the lease that are bothersome and difficult to understand. A client once left our lease negotiations when we got to the “tions”: indemnification, destruction, condemnation, integration, and subordination. Her approach was that the “tions” belonged to the lawyers. That approach offers trust in the attorney’s judgment, but it is the property owner that will need to deal with a lender’s requests for subordination. And, that can be more than bothersome.
Most well drafted leases provide that the lease is subordinate to any mortgage placed on the property by a lender of the landlord. However, lenders typically also require a separate document, known as an SNDA, to confirm the subordination. “SNDA” stands for Subordination, Non-Disturbance and Attornment. An SNDA is a three-party agreement between the landlord, the lender, and the tenant governing the relationship among them with respect to the lender’s rights as mortgagee. Oftentimes, an estoppel is a document requested along with an SNDA.
These documents will be requested of the tenant when the landlord is obtaining a new loan on the property, or when the landlord is selling the property. Most well-drafted commercial leases require the tenant to execute these documents, though the tenant often has the ability to request reasonable revisions.
A few definitions are in order:
Subordination: This means that even if the lease precedes the mortgage in time, the mortgage will take precedence over the lease. The rights of the tenant are subordinated to the rights of the lender. If the lender forecloses on the property, the lease does not need to be addressed as a separate interest. The lender only needs to concern itself with extinguishing the owner’s interest, as the tenant’s interest is not considered.
Non-Disturbance: This means that despite the subordination, the lender agrees not to disturb the tenancy upon foreclosure. It is the “carrot” to the tenant for agreeing to subordinate the lease. Wise tenants never agree to subordination without non-disturbance.
Attornment: This means that following the foreclosure (and any ultimate sale of the property to a third party), the parties agree to “attorn” to each other as (or be bound to each other as) the landlord and tenant. Attornment expresses the parties’ desire for the lease to continue between the tenant and the new owner.
Estoppel: This is a factual statement by the tenant regarding conditions and circumstances of the lease as of a certain date (i.e. - whether rent is current, whether landlord has any unperformed obligations, etc.). It is a “snapshot” of the lease at a point in time. An estoppel does not contain obligations that extend into the future.
What’s a landlord to do and what should a landlord know to move the transaction along?
Expediency. When requested to obtain an SNDA or an estoppel, the landlord should forward the documents to the tenant at the earliest possible date upon which the transaction can be known to tenants. Leases typically provide for a limited time period for return of an SNDA or estoppel, but parties are always slow in providing documents for review by counsel. Moving ahead of schedule makes a timely sale or loan closing possible.
Separating the Documents. As the estoppel is only a snapshot of the facts at a certain time, savvy counsel correctly resist putting ongoing obligations into an estoppel document. The SNDA is the document that should describe the ongoing obligations of the parties. The SNDA is recorded to reflect the lender’s interest. Estoppels are typically not recorded.
Understanding the Tensions. Lenders and tenants find conflict over the extent to which a new owner (including the lender upon foreclosure) should be liable for the defaults of the prior landlord. Lender-drafted SNDA documents often include provisions requiring the tenant to give notice of landlord defaults to the lender. However, tenants resist obliging themselves to the landlord’s lender in this manner, particularly because the SNDA typically provides that the lender is not obliged to assume responsibility for defaults of the landlord.
In other words, lenders want notice and opportunity to cure, but not the obligation to cure. They also want extended periods to cure if they elect to do so. Tenants justifiably struggle with the absence of an active landlord in these circumstances. Although it may be reasonable that the lender not be required to assume responsibility for defaults of the landlord, it is similarly reasonable that the obligation for notice to the lender of landlord defaults should fall upon the lender.
In particular, lenders do not want to be liable for the security deposit paid by the tenant to the original landlord, as they may not be the recipient of that amount. Tenants expect to retain the benefit of their bargain and often require the lender to acknowledge payment of the security deposit.
As to estoppels, tenants expect that an estoppel will only recite those facts known to the tenant. Lenders insert statements into estoppels that are beyond the tenant’s knowledge and should, more appropriately, be a landlord’s estoppel statement.
The foregoing illustrates the importance of the “tions”. Parties negotiating a commercial lease should work with their counsel to carefully consider these items. Though they may seem arcane and remote, if and/or when these issues arise in real life, they can have profound impact on the ability of the landlord or the tenant to continue conducting business.