What’s the Worry With SNDA’s and Estoppels in Commercial Leases?
When tenants get that first draft of a commercial lease, the size of the package can be daunting. Part of the girth can be attributed to the Subordination, Non-Disturbance and Attornment Agreements (“SNDA”) and Estoppel Certificates that are attached as exhibits. By the time you’ve read the lease itself, do you really want to read two more documents? How do they affect a tenant and should a tenant be concerned? While these documents are included and the requirement to sign them in the lease are often necessary because of the landlord’s current or future financing plans, they do in fact, help the tenant and should be carefully reviewed by the tenant as should the corresponding provisions in the lease.
SNDA – The SNDA is 3 agreements in one. First is the subordination. The tenant agrees to subordinate its rights under the lease to the lender’s mortgage. Why? In a new project, the lease might be signed prior to the mortgage so the tenant’s rights would be superior to the lender. But that is not always the case. Usually, the mortgage is in place and the lease is junior to the mortgage. Unless, of course, the landlord re-finances, in which case, the new mortgage would be subject to the rights of all existing tenants and the leases. The landlord should include a provision in its form lease that the lease is automatically subordinate to landlord’s current mortgage and all subsequent mortgages. Major tenants will push back and request an SNDA, requiring that the mortgagee provide a Non-Disturbance Agreement in exchange for tenant’s subordination. Major tenants include tenants who have spent significant dollars in tenant improvements, not just anchor tenants or large space holders. Local tenants won’t have leverage to require a Non-Disturbance Agreement and Lenders won’t be willing to give every small tenant one. Landlords should carefully consider which tenants should be provided Non-Disturbance Agreements and add the provision to each lease. Upon execution of the Subordination, the lease will be subordinate to the mortgage and the lender will be able to foreclose the lease upon a default by the landlord.
The second component of the SNDA is the Non-Disturbance Agreement. Here the lender agrees that if the landlord defaults under the loan and lender institutes foreclosure proceedings or otherwise acquires the property, lender will not join the tenant in the forecosure proceedings or otherwise take steps to evict the tenant or terminate the lease as long as the tenant continue to pay rent and attorn to the lender.
The final component is the Attornment Agreement. The tenant provides assurance to lender that if lender acquires title to the property, by foreclosure, deed in lieu or otherwise, tenant will recognize lender as the landlord (attorn to lender). This agreement creates privity of contract between lender and tenant. While there are 3 components to the SNDA, they work together to help the lender and the tenant and by extension, the landlord.
Estoppel Certificate – The Estoppel is confirmation from the tenant to the lender or a prospective buyer of the property that there is a lease in effect as to the space, that it is in good standing and the landlord is not in default. It confirms the material terms of the lease, such as the remaining term and current rent.
When negotiating the lease, the landlord should attach the basic forms of the SNDA and Estoppel as exhibits to show the general terms that the tenant will be expected to provide upon request. Tenants should review these forms during negotiation and make changes prior to lease execution so that they are not surprised when the time comes to provide signed copies to lenders. The SNDA should provide, at minimum, lender’s full recognition of the tenant and the lease and confirmation that tenant shall have the right to continue to occupy the premises following lender’s acquisition of the premises as long as tenant continues to pay rent. Tenant should not be held in default for failure to timely provide an SNDA or Estoppel, especially if the lease is subordinate to all mortgages by its terms.
SNDA’s and Estoppels are important protections for tenants and should be reviewed and negotiated. They should not be overlooked upon receipt of a lease proposal nor should they cause worry. Expectations should be stated up front so that they will be met at the time the documents are required.