Got an SNDA? Why You May Want One
By Erich M. Paetsch
SAALFELD GRIGGS PC
To date, commercial property owners, tenants, and lenders have weathered the great recession and thereby avoided the historic delinquency and foreclosure rates affecting residential property. However, the storm appears to be growing more ominous in the commercial property markets. Payment delinquencies on commercial mortgage-backed security loans hit a record high of 9.01% in July of 2011, according to Fitch Ratings. Landlords, tenants, and lenders should anticipate seeing significant turnover in the ownership of commercial properties in the coming years, particularly through commercial foreclosure actions.
Despite a recent flurry of legislation and regulatory activities, commercial foreclosure laws remain relatively unchanged. Many states, including Oregon, permit a lender to terminate a subordinate lease following the completion of a commercial foreclosure. In an environment of economic uncertainty, many lenders and commercial tenants are insisting upon the use of a Subordination, Non-Disturbance and Attornment Agreement (“SNDA”). By addressing the relationship between lender, landlord, and tenant in a contract, the legal uncertainty that a commercial foreclosure presents can be eliminated.
An SNDA permits the lender and tenant to confirm or shift rights and address many of concerns that a commercial foreclosure creates. Typically, a lender wants to preserve a rental income stream following foreclosure. When commercial vacancy rates increase, the value of retaining a tenant increases. A commercial tenant will want to ensure that if the landlord defaults to its lender, the tenant will not forfeit its lease. Given growing incentives and attractive leases being offered by landlords to obtain or retain commercial tenants, ensuring the lease survives foreclosure is crucial. Moreover, any commercial tenant who invests significant capital for tenant improvements has an added incentive to ensure a commercial lease survives foreclosure. Finally, landlords may wish to preserve the value of a commercial income producing property to limit any deficiency recovery the lender can obtain following a foreclosure proceeding. A carefully drafted and negotiated SNDA between the lender, landlord, and tenant can help balance these concerns.
An SNDA consists of three distinct sections: (1) an agreement by the tenant to subordinate its lease to the lender’s security interest; (2) an agreement by the lender to not disturb the tenants lease interest after foreclosure; and (3) an agreement to the tenant to recognize the lender as its landlord after foreclosure. These three components together help a lender, tenant, and landlord resolve potential conflicts and challenges that can arise in a commercial foreclosure proceeding.
Subordination. For a lender, the subordination provision is critical. If the lease predates a loan, ensuring that the lease is subordinate is important if the lender wishes to terminate the lease in the future or, if the tenant and owner are related parties, ensuring that the lender can control the property without being trapped in an awkward relationship with someone they just foreclosed upon. In addition, should the lender wish to take possession of the property quickly and avoid foreclosure, having a clear subordination agreement in place may avoid the need to foreclose on a commercial tenant. However, a prudent tenant will also insist upon the inclusion of a non-disturbance provision within the SNDA to protect itself against the rights of the lender.
Non-Disturbance. The non-disturbance provision allows a tenant to ensure that its lease survives a commercial foreclosure, so long as it is not in default. Typically, a lender and tenant agree in the non-disturbance clause that, if a foreclosure occurs, the lender is bound to honor the lease. Such a provision provides certainty and stability to the tenant and can encourage the tenant to invest in greater improvements to the property or to agree to longer lease terms than might otherwise exist. As a party to the lease, the lender and tenant must also agree how the lease terms will apply to each of them following a foreclosure.
Attornment. The attornment portions of an SNDA permit a lender to assume the rights and obligations of the landlord following foreclosure. More importantly, it binds the tenant to the lease, regardless of whether the tenant is in default under the lease.
The three parts of an SNDA should work in concert with each other. Without each of the three provisions, one party or the other is in a position to dictate the outcome of a commercial foreclosure. For example, an SNDA without attornment leaves the tenant in the position to terminate the lease as the market might dictate.
The approaching storm of commercial defaults makes the use of an SNDA increasingly important for lenders, landlords, and tenants in commercial transactions. As lenders evaluate refinancing existing commercial property loans or negotiate workout agreements with past due landlords, a current SNDA for tenants is critical should a foreclosure occur in the future. A commercial tenant renewing or entering into a new commercial lease should carefully consider the terms of any SNDA and, if one is not presented, insist upon it as part of any lease transaction. Given the growing potential for commercial foreclosure, a clear understanding of the risks as a tenant at the outset of a lease is important. Finally, a landlord can benefit by ensuring that an SNDA is in place. Should a commercial foreclosure occur, ensuring that a long-term tenant remains in the property will retain value for a property and help to avoid potential lender deficiency claims for the amount owed upon the loan in excess of the value of the property. While numerous form SNDA agreements exist on the internet, such forms are ill suited to address the specific issues and interests of a party in any given transaction.
Ensuring that an SNDA addresses your specific risks, issues, and concerns is something that the lawyers of Saalfeld Griggs are educated about and trained to accomplish.