SNDA. The acronym is commonplace in commercial real estate circles. But what is an SNDA and why do we care about them?
An SNDA, or Subordination, Non-Disturbance and Attornment Agreement, is an agreement between a Lender providing financing to a landlord and the tenants of the mortgaged property. In the absence of an SNDA, the Lender and tenant do not have a signed agreement between them (i.e. no “privity of contract”) and the relationship between the lender and the tenants both before or after a foreclosure of the mortgage by the lender could be detrimental to one or both parties.
Most jurisdictions, including Massachusetts, adhere to the “first in time, first in right” principle. In this context, a tenant with a recorded Notice of Lease will by default take priority over a Lender whose Mortgage is recorded thereafter. Therefore, any Lender providing mortgage financing to a Borrower should require that the tenant’s interest in the mortgaged property be subordinated to s the lender’s mortgage. An unsubordinated senior lease could contain provisions with which a lender would not ordinarily be comfortable such as purchase options or tenant improvement requirements. The SNDA, therefore, is the preferred method for subordinating such rights of a tenant and allowing the financing to still take place. Well drafted leases typically anticipate this situation and require tenants to subordinate their leases to the rights of a mortgage lender.
Tenants under long term leases often want the comfort of knowing that, despite being subordinate to Lender’s mortgage, their lease will be honored (i.e. not “disturbed”) in the event of a foreclosure, provided the tenant is not in default under its lease. A non-disturbance provision is often vital to a tenant since, without it, a foreclosing lender could choose not to recognize a tenant’s right of possession and right to operate under its lease which would then result in the termination of the lease by operation of law. In addition, non-disturbance provisions are also typically protective of a lender (or successor owner via foreclosure) and can “insulate” the lender and successor owner from liabilities under the lease created by the landlord/borrower whose ownership interest was foreclosed.
Where the Lender is agreeing under the non-disturbance provision to recognize the tenant and its corresponding lease after a foreclosure, the attornment provision ensures that the tenant will attorn to (i.e. “recognize”) the Lender (or other successor owner) as the Landlord. Without this provision, it could be argued that the tenant could walk away from its lease should the original landlord be foreclosed upon.
More generally speaking, the purpose of obtaining an SNDA from a Lender’s perspective is to be sure that the tenant’s lease, and the rental cash flow stream that comes along with it, will stay in place even after a foreclosure sale. A mortgage foreclosure terminates all existing leases unless (i) there was a notice of lease recorded prior to the mortgage, or (ii) the lender and the tenant entered into an SNDA. Lenders who are relying in their underwriting upon cash flow from tenants should want to ensure that the cash flow remains in place post-foreclosure. The only way to do so is to require an SNDA from each tenant.
Depending on the size of the mortgaged property, the number of leases involved and the relationship the borrower has with its tenants, borrowers will sometimes object that requiring an SNDA from every tenant is too onerous and will request that only major tenants or a certain percentage of tenants be required to deliver SNDAs. The danger here is that lenders who agree to such requests and only obtain SNDAs from a portion of the tenants (e.g. 75%) will only have rights against that 75% of the tenants after a foreclosure. Tenants without SNDAs could leave post-foreclosure if they so desire since by law their leases would have been terminated by the foreclosure and their tenancies converted to tenancies at will. New leases can of course be negotiated with the post-foreclosure landlord, but the rental revenue may not match what was originally underwritten for the loan and the financial health of the property could be jeopardized. We recommend that lenders obtain at least a sufficient number of SNDAs from tenants such that the anticipated cash flow from such tenants would satisfy the lender’s required debt service coverage ratio for the mortgaged property.
Lenders are often disappointed after a foreclosure sale when they cannot enforce what is then an above market lease at the property they just foreclosed. Tenants are often dismayed to discover that their lease has been terminated after a foreclosure sale due to the lack of an SNDA after the tenant has invested significant funds into tenant improvements and now faced with the need to change locations or possibly pay a higher newly negotiated rental rate than under their original lease. SNDAs, although often overlooked as an important factor in a mortgage loan transaction due to the legal expense and time involved in negotiating and obtaining acceptable forms of SNDAs from tenants, are a crucial component for making sure that the cash flow from a mortgaged property, post foreclosure, lives up to the original underwriting for the loan.
As always, please contact us if you have questions on this or any other lending or business topic.
This communication is for informational purposes only and should not be construed as legal advice on any specific facts or circumstances.