Anyone involved in commercial real estate, either as a landlord or as a tenant, has probably at least heard the acronym SNDA, and may have been asked to sign one on occasion. Requests for SNDAs are common enough – and the typical SNDA is short enough – that many landlords and tenants may be tempted to sign one without completely understanding its ramifications. After all, if it’s only a few pages long, how important can it be?
Well, pretty important. For tenants, the specific terms of a SNDA will dictate whether the tenant may remain in its premises following a foreclosure of its landlord’s mortgage. For landlords, their ability to get executed SNDAs from their tenants may determine whether they can finance or refinance their property.
A SNDA — short for Subordination, Non-Disturbance and Attornment agreement — is a three-party agreement between a tenant, a landlord, and the landlord’s lender. SNDAs govern the relationship between a tenant and a lender in the event of a default by the landlord under its loan documents and a subsequent foreclosure by the lender. Without a SNDA, the relative priorities of the tenant and lender, and the corresponding consequences of a foreclosure sale, are controlled by state recording acts, state foreclosure law, and applicable common law principles.
Oregon, like many other states, has a “race-notice” recording act. See ORS 93.640. Under a race-notice recording act a grantee that pays valuable consideration for its real property interest has priority over (a) the grantee of a previously created real property interest that the subsequent grantee had no notice of, and (b) the grantee of a subsequently created real property interest that had notice of the prior grantee’s interest.
Based on that general rule, if a tenant enters into a lease and takes possession of the premises before its landlord finances the property, then the tenant’s lease will have priority over a subsequent lender’s mortgage lien. The tenant’s occupancy of the premises puts subsequent lenders on constructive notice of the existence of the tenant’s lease and serves as the basis for the lease’s priority. Another way for a tenant to establish constructive notice of its lease is to record copy or memorandum of the lease in the county real property records. The result of a lease having priority over a mortgage is that a foreclosure of the mortgage will not terminate the lease and the lender or other foreclosure sale purchaser will take title to the property subject to the tenant’s rights under its lease. That means the foreclosure sale has no effect on the tenant and it gets to remain in its space.
If, on the other hand, a tenant leases property that is already encumbered by a recorded mortgage, then the lease will be subordinate to that lender’s mortgage lien. In that case, a foreclosure of the existing mortgage may terminate the subordinate lease along with the tenant’s right to occupy the premises. That means, without the protection of a SNDA, a tenant that has done nothing wrong, that has never missed a rent payment, runs the risk of being evicted from its premises. In some jurisdictions, by selectively making particular tenants parties to a judicial fore-closure action or in the case of a non-judicial foreclosure by delivering notices to certain tenants but not others, the lender has the ability to “pick and choose” which leases will be extinguished by the foreclosure action, and which will survive. In other states, such as Oregon, a foreclosure sale automatically terminates all subordinate leases.
Parties seeking to avoid the happenstance of the priorities and the priority-dependent idiosyncrasies of state foreclosure law typically make their own arrangements on these matters by negotiating and executing a SNDA. As the name suggests, SNDAs have three central components: the subordination, the non-disturbance, and the attornment provisions. Appreciating the differences between these provisions is the key to understanding the general effect of a typical SNDA and the basic motivations of the parties.
The subordination provision of a SNDA is critical for lenders because it assures the lender’s mortgage lien has priority over the lease. To the extent the tenant’s lease previously enjoyed priority over the lender’s mortgage lien by virtue of state law, the subordination provision of the SNDA results in a reversal of the original priority of the documents. Demoting the priority of the lease below the mortgage lien means that the lender would enjoy “first-priority lien” status and would not face the risk of taking title to the property subject to any undesirable obligations of the landlord under the lease, such as the responsibility for honoring prepaid rent, refunding a security deposit or paying for the build-out of the premises. Consider the position of a tenant that signs a lease where the landlord agreed to construct or fund substantial tenant improvements, only to have the landlord default on its mortgage and have its property foreclosed before completing those improvements. Depending on the details of its SNDA, that tenant may be stuck paying for its own build-out, without any ability to walk away from its lease or seek redress from the foreclosure sale purchaser.
Understandably, a tenant enjoying priority over a subsequent mortgage normally would not volunteer to weaken its position by agreeing to subordinate its lease simply as a favor to its landlord’s lender. However, the tenant usually has already agreed in advance to do just that by virtue of a subordination provision in its lease. Without that subordination clause in the landlord’s form of lease, a tenant could refuse to subordinate its lease, making it difficult, if not impossible, for the landlord to finance or refinance the property in the future.
The non-disturbance component of a SNDA is the agreement by the lender not to disturb the occupancy of a tenant under a subordinate lease following a foreclosure action. A subordinate lease technically would be wiped out in a foreclosure of a senior mortgage lien. However, the non-disturbance provision of a SNDA requires the lender or foreclosure sale purchaser to recognize the rights of the tenant under the original lease. This permits the tenant to remain in possession of the premises and continue paying the same rent specified in its lease for the duration of the lease term. Accordingly, the lender’s non-disturbance obligation is the essential protection the tenant obtains from a SNDA in exchange for its agreement to subordinate. With this in mind, when negotiating a new lease, a tenant should ensure that the lease’s subordination clause is made contingent upon the lender agreeing not to disturb the tenant’s right of possession. At the very least the lease should require the landlord to use commercially reasonable efforts to obtain a non-disturbance agreement from its lender. Otherwise, the lease may require the tenant to subordinate its lease but offer no assurance that the lender will agree not to disturb its tenancy following a foreclosure.
A SNDA’s attornment element represents the tenant’s agreement to recognize the lender or other foreclosure sale purchaser as its new landlord following a foreclosure sale and to continue to abide by the terms of the lease. In this way the attornment provision counterbalances the effect of a SNDA’s non-disturbance provision. Without an agreement from the tenant to attorn to a foreclosure sale purchaser, the tenant would have the right to stop paying rent and move out of the premises following a foreclosure sale. This would be true even if the foreclosure sale purchaser was obligated to accept the tenant on the terms of the original lease due to a non-disturbance agreement. The cumulative effect of the non-disturbance and attornment provisions is to create a new direct lease between the original tenant and the foreclosure sale purchaser on the terms of the original lease, as modified according to the terms of the SNDA. This protects lenders against lost or diminished cash flow resulting from a lease being inadvertently terminated by a foreclosure sale. That makes the attornment piece of a SNDA particularly important to lenders in states like Oregon, where a foreclosure sale automatically terminates subordinate leases and lenders do not have the luxury of picking and choosing which leases survive foreclosure.
In most cases a SNDA will be an ancillary document in a financing or leasing transaction. Normally, the need for a SNDA will arise as one of a lender’s closing conditions for funding a loan. Certain tenants may also request a SNDA as a closing condition or post-closing obligation to be satisfied by its landlord in a leasing transaction, but this is less common. Since a SNDA will not be one of the primary documents in a loan transaction, there is sometimes a tendency for the landlord and lender to treat it as an innocuous “checklist” item and wait until late in the transaction to circulate the lender’s form to any tenants. But commercial tenants should not let the attitude of their landlord or its lender towards SNDAs, or any last minute rush, fool them. The stakes are high and tenants should carefully review the terms of a SNDA and consult with legal counsel before signing.
Ben Leedy’s practice focuses on the areas of commercial real estate, real estate development and finance, and retail and office leasing. You can contact him directly at ben.leedy@samuelslaw.com.
