03.09.2018 | Articles

HF Insight: SNDA Traps for the Unwary

By Scott C. Altonian
Estate Planning

Traps for the Unwary in Subordination, Non-Disturbance and Attornment Agreements

Subordination, Non-Disturbance and Attornment Agreements, commonly known as SNDAs, are ubiquitous legal documents present in most all real estate finance transactions in which improved real estate is subject to one or more commercial leases. The SNDA typically is a three-way agreement among the owner of the real estate, a tenant that leases some or all of the real estate from the owner/landlord and a lender that is providing or contemplating providing mortgage financing to the owner.  The basic elements of the SNDA are contained in the name:  (i) the tenant Subordinates its lease to the lender’s mortgage; (ii) the lender agrees Not to Disturb the tenant’s quiet enjoyment of the leased property if the lender forecloses on the landlord and takes possession of the property; and (iii) the tenant agrees to Attorn (a fancy word for acknowledge) to the lender, and acknowledge the lender as the landlord under the lease, if the lender forecloses on the landlord and takes possession of the property.

Why SNDAs Are Necessary

Any lender contemplating providing financing secured by real estate that is subject to one or more commercial leases must decide whether to require SNDAs from the tenants under some or all of those leases. Most institutional lenders and banks, as a matter of policy, require that mortgages securing real estate loans be first in priority. SNDAs are necessary because, pursuant to the real estate law of most states (e.g., recording acts, foreclosure laws and common law), leases of real estate that exist prior to the date when the lender makes its mortgage loan to the landlord, and of which the lender is aware, are superior in title to the lender’s mortgage, regardless of whether the leases are recorded or unrecorded. Unless the tenants under those leases subordinate their interests to the lender’s mortgage, any foreclosure by the lender would be subject to the leases.

In other words, after the lender’s foreclosure, the lender would step into the shoes of the owner under the leases, including any issues or controversies that may have arisen thereunder between the landlord and the tenant. For this reason, SNDAs typically include a few additional protections particular to the lender’s negotiating perspective (e.g., the tenant agrees to notify the lender of any defaults by the owner/landlord and provide the lender with a right to cure owner/landlord defaults, the tenant agrees not to amend the lease without the lender’s consent, the lender is not liable for the actions of the owner/landlord and the lender is not subject to offsets and counterclaims that the tenant may have against the owner/landlord).

In addition to the foregoing, the SNDA creates contractual privity between the lender and the tenant, allowing the lender to enforce the tenant’s obligations under the lease after the owner/landlord has been removed from the situation. By having privity of contract directly with the tenant, the lender can enforce its rights to receive rent payments directly from the tenant pursuant to the terms of the assignment of leases and rents with the owner as well as the SNDA.  Contractual privity with the tenant also helps to ensure to the lender that the tenant will stick around after any foreclosure and continue paying rent to the lender and its successors.

For these reasons and others, at the outset of a loan, institutional lenders typically require that some or all of the tenants subordinate their leasehold interests to the lender’s mortgage pursuant to an SNDA. In return for the tenant concessions typically present in an SNDA, the lender agrees that if the lender forecloses, the lender will recognize the lease and will not disturb the tenant’s enjoyment of the leased property for so long as the tenant is not in default of its obligations under the lease.  In other words, the lender and tenant will carry on as landlord and tenant.

From the tenant’s perspective, if a tenant is contemplating executing a lease with an owner who has already granted a mortgage on the real estate to an institutional lender, the mortgage would be superior to the tenant’s lease, which means that if the lender were to foreclose its mortgage, pursuant to most states law, the tenant’s lease with the owner would be extinguished. For this reason, any tenant contemplating a lease with an owner that has already granted a mortgage should ask for an SNDA in which the lender agrees not to terminate the lease in the event of foreclosure.

What does the owner need from an SNDA? Typically, not much, other than to satisfy the different needs of its lender and tenants.

Battle of the Forms

Most institutional lenders have their own approved form of SNDA that includes all of the negotiating points from the lender’s perspective. Many larger regional and national tenants also have their own forms of SNDA, containing their own important negotiating points. SNDAs could and can be very short documents – all of the basic elements can be accomplished in one or two pages – however, most lender and tenant forms of SNDAs contain a fair amount of extra “bells and whistles” particular to each party’s negotiating perspective, some of which are described above, and, therefore, typically run much longer than a few pages.  It is important to note that the interests of the lender and tenant in the SNDA can conflict to a certain extent.  Lenders can run into unanticipated issues, sometimes at the last minute prior to the closing of a loan, if the lender and its counsel do not pay careful attention to the negotiation and documentation of the SNDAs, in particular where a form of SNDA other than the lender’s approved form is used.

A Trap for the Unwary Regarding Casualty and Condemnation

Before using tenant forms of SNDAs or agreeing to tenant requested modifications to the lender’s form of SNDA, Lenders and their counsel should conduct a careful review of the relevant provisions in the loan documents, lease and SNDA. Because SNDAs typically are three-party agreements, provisions can be added to an SNDA that can and do sometimes amend or modify standard provisions in the lender’s mortgage and loan documents.  One area in which this issue can arise is casualty, condemnation and the use of insurance proceeds and condemnation awards.  Larger regional and national tenants with more negotiating power often negotiate provisions into their leases requiring the landlord to always use insurance proceeds received after a casualty and condemnation awards received after a condemnation to restore the property to its prior condition.  They may also negotiate tenant termination rights into the lease.

A landlord restoration obligation in the lease may conflict with the lender’s mortgage, given that lender’s typically want to have maximum flexibility with respect to the use of insurance proceeds and condemnation awards after a casualty or condemnation. Standard loan documents for many large institutional lenders typically require that any insurance proceeds or condemnation awards above a threshold amount be distributed directly to the lender but permit proceeds and awards in smaller amounts to be distributed directly to the borrower/owner.  In the event of any significant casualty or condemnation, however, institutional lenders typically want to control the insurance proceeds and condemnation awards, given that the original collateral for the loan, the real estate, is now compromised.  The loan documents typically permit insurance proceeds and condemnation awards to be distributed by the lender to the owner, to be applied towards a rebuild of the property, subject to various conditions precedent.

Notwithstanding the willingness of lenders to apply the insurance proceeds and condemnation awards towards a rebuild of the property, most institutional lenders also want the flexibility and right to be able to apply the insurance proceeds and condemnation awards to pay down the outstanding principal balance of the loan, rather than distributing such funds to the owner to pay the costs of the rebuild. Lenders may require this flexibility in various circumstances, for example, if the casualty or condemnation occurs close to the maturity date of the loan, if the lender does not believe that the insurance proceeds, together with any other funds provided by the owner, are sufficient to restore the property to its prior condition or if some or all of the tenants have termination rights or the ability to walk away from the property as a result of the casualty/condemnation.

The lender’s interests in connection with a casualty or condemnation affecting the collateral for its loan typically conflict with the tenant’s interests. Set forth below is an example of how such a conflict can play out in the competing provisions of a mortgage and lease, that are tied together, to a certain extent, by virtue of an SNDA executed by the lender, owner and tenant.  Note that I have summarized the legal provisions from the relevant documents, rather than reproducing them in their entirety.

Relevant Provisions from the Mortgage: With respect to any insurance proceeds received by mortgagee following a casualty, mortgagee may: (i) retain and apply the insurance proceeds or any part thereof in satisfaction or reduction of the indebtedness secured by the property; or (ii) pay the same, in whole or in part, to the owner/borrower, to be applied towards the repair or replacement of the property, subject to the conditions precedent and procedures set forth in the mortgage.  Mortgagee agrees to release the insurance proceeds for restoration of the premises so long as the proceeds do not exceed $x and the following additional conditions are satisfied: (1) No event of default under the loan exists; (2) No more than x% of the rentable square footage of the premises has been damaged or destroyed; (3) In mortgagee’s judgment, the sum of all insurance proceeds and other funds provided by the owner/borrower are sufficient to restore the property; (4) Owner/borrower demonstrates to mortgagee’s satisfaction that owner/borrower has the financial ability to repay the loan, as and when due during restoration; (5) Income from leases that will survive the restoration of the property is sufficient to satisfy all of the owner’s financial covenants in the loan agreement; (6) Mortgagee is satisfied that restoration will return the premises to a substantially similar state to that existing prior to the casualty and can be completed prior to the maturity date of the loan; and (7) Restoration of the premises is authorized by all applicable zoning and other laws.

Relevant Provisions from the Lease: If the premises or a material portion are damaged or destroyed by casualty, landlord shall promptly commence and diligently pursue repair and restoration of the damaged or destroyed premises.  If landlord does not commence repair within ninety (90) days after the damage or if the damage is not repaired or restored within eighteen (18) months after the date of damage, tenant has the right to: (i) repair and restore the premises itself and pass the costs on to the landlord; (ii) seek to obtain specific performance of landlord’s repair obligation; or (iii) terminate the lease.  In addition, if the premises are damaged or destroyed during the last two (2) years of the lease term, either the landlord or the tenant shall have the right to terminate the lease.

Relevant Provisions from the SNDA: Notwithstanding any provision in the mortgage to the contrary, with regard to the property damage insurance required by the lease, or condemnation proceeds paid with respect to the premises, landlord and lender agree that all insurance proceeds or condemnation proceeds paid with respect to the premises and received by lender shall be applied by lender to pay for the reconstruction of the improvements, if either the landlord or the tenant has elected or is obligated to repair or restore such improvements, as set forth in and subject to the terms and conditions of the lease.


From the lender’s perspective, the problem with the SNDA described above is that the SNDA explicitly overrides some or all of the lender’s protections and conditions in the mortgage. One result of the lender executing such an SNDA is that, at least with respect to a casualty/condemnation scenario, the lease provisions would be superior to the mortgage provisions.  The SNDA essentially requires the lender to advance the insurance proceeds towards a restoration of the premises, regardless of the mortgage provisions that permit the lender to apply the insurance proceeds to pay down the loan if various conditions set forth in the mortgage are not satisfied.  This particular SNDA also permits the tenant to terminate the lease and walk away from the property if the restoration is not completed within a certain time frame or if the casualty occurs in the last two years of the lease term, regardless of the fact that the lender is committed to applying the proceeds towards the rebuild.

Because the lender and the borrower are parties to the SNDA, the SNDA provisions effectively provide the borrower with a better deal than it had under the mortgage without the SNDA. Although the lender still has its mortgage, and all of the rights set forth in the mortgage with respect to casualty and condemnation proceeds, a lender that has signed an SNDA with the provisions described above would potentially be inviting a lawsuit from the tenant or the borrower if it refused to apply the proceeds towards restoration in accordance with the lease and SNDA, and instead applied the proceeds to pay down the loan, in accordance with its mortgage.

Possible Solutions

One way to solve this problem, and the best for the lender, is to delete the offending provision from the SNDA and fully subordinate the lease provisions regarding casualty and condemnation to the mortgage. A credit-worthy tenant who negotiated favorable terms in its lease, however, may not be so amenable to fully subordinating to its landlord’s mortgage on these points.  Adding protective language to the mortgage may help clarify matters as between the lender and the owner/landlord, however, because the tenant is not a party to the mortgage, modifying the mortgage to address the SNDA provision will not help the lender vis a vis the tenant, whose rights are set forth in the SNDA.

A more middle-ground approach to the issue could be to modify the SNDA to require that the tenant agree to relinquish its right to terminate the lease in exchange for the lender’s agreement to advance the insurance or condemnation proceeds towards restoration in accordance with the lease, notwithstanding the lender’s rights under the mortgage. In such a scenario, the lender would not be faced with the double indignity of being forced to apply the insurance proceeds towards a rebuild of the property, only to have the most important tenant terminate its lease sometime thereafter, in the middle of restoration, if unanticipated issues arose with the reconstruction.  Without such a compromise, the tenant would be in the enviable position of having an obligation from the lender to advance the proceeds towards restoration, while retaining a termination right if the restoration is not completed in a timely fashion.


Solving issues like the one presented above requires an understanding of the lease, the relevant provisions of the loan documents and, most importantly, paying close attention to the forms of SNDA to be used. Lenders and their counsel must track all of the potential issues down before the parties execute and deliver the SNDA. Often, executed SNDAs are not returned to lender’s counsel until a few days before closing.  Issues hidden in SNDAs, or with provisions that tenants have added to the lender’s form of SNDA, may arise late in the deal process, many weeks after forms of SNDA were sent out.  If the lender and its counsel have not been apprised of the issues as they arise, they may find themselves addressing them at the last minute, when the parties are eager to close the loan.  Best practice is to try to get all parties to agree on a form of SNDA at the outset, and if the parties agree to use a tenant form, lender’s counsel should carefully review the form well in advance of closing in order to flush out any potential issues.

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