Q: What’s an SNDA, and why does my commercial lender want my landlord and its bank to sign one?
A: Subordination, Non-Disturbance and Attornment Agreement, or SNDA, is an agreement among a tenant, a landlord, and the landlord’s lender. The landlord’s lender, or mortgagee, is the bank through which the landlord has financed the purchase of the leased property. The SNDA governs the relationship between the tenant and the mortgagee in the event the landlord defaults on its mortgage and the mortgagee foreclosures on the landlord’s property.
Without an agreement in place, the tenant’s right to stay in the leased property upon a foreclosure depends primarily on the state’s recording acts and foreclosure law. If the law’s interpretation and treatment of previous events results in the tenant being considered lower priority than the other parties involved, the mortgagee, upon taking ownership of the leased property, could legally terminate the tenant’s lease. And this could, in turn, result in the tenant’s eviction. While there is federal and state law protecting residential tenants in such circumstances, commercial tenants have less safeguards. Rather than being at the whim of state law and its determination of the priority of involved parties, a commercial tenant can enter into an SNDA with its landlord and the landlord’s bank. Doing so would allow the parties to pre-determine what would happen in the event of foreclosure and ensure the tenant’s right to remain on the property even if the landlord defaults on its mortgage.
The SNDA is made up of three parts, the first and third benefitting the mortgagee, and the second benefiting the tenant. Per the subordination, the tenant agrees that its leasehold interest in the property is inferior (or subordinate) to any rights of the mortgagee, specifically if the date of the lease comes before the date of the mortgage. Under the non-disturbance piece, the mortgagee agrees that should the landlord default on its mortgage and foreclosure ensue, the tenant will not be evicted, or disturbed. Lastly, attornment provides that, in the event of the landlord’s default and the property’s foreclosure, the tenant will recognize the mortgagee as its landlord and remain on the lease.
In most financing transactions, a commercial lender will require as a borrower’s closing condition that the borrower’s landlord and the landlord’s mortgagee sign an SNDA with the borrower. Sometimes, tenants will have already entered into such an agreement during the leasing transaction, but that is not the norm. Why would a tenant’s commercial lender care about this? Protecting the borrower protects the lender. Without an SNDA, foreclosure of the leased property could result in the borrower being evicted. This would undoubtedly disrupt the borrower’s business and its ability to pay back the commercial loan. To reduce the risk that the borrower will default, the commercial lender takes pro-active steps like requiring an SNDA.
Know the Law is a bi-weekly column sponsored by McLane Middleton. Questions and ideas for future columns should be emailed to knowthelaw@mclane.com. Know the Law provides general legal information, not legal advice. We recommend that you consult a lawyer for guidance specific to your particular situation.