I thought I understood a few things about Subordination, Non-disturbance, and Attornment Agreements (SNDAs) and could offer some answers until another attorney refused to allow a fully executed SNDA to be recorded because “it would encumber his client’s property.” I was and remain stumped. If anyone can figure out why he so insisted, please let this Ruminator know. I couldn’t figure out how this moderately experienced attorney in a firm with a decent size real estate practice would believe such a thing, let alone could I figure out how to respond. The lender freely granted an otherwise acceptable SNDA, fully expecting that it would be recorded. Send your answers or comments to www.retailrealestatelaw.com.
Now, for what I think I have figured out.
First, most lenders will freely grant some form of SNDA, though their attorneys and most (CMBS) servicers seem far more reticent to do so. This leads to point number one (and this works), landlords should negotiate into their loan commitments a provision wherein the lender agrees to grant SNDAs, if not under all circumstances, then at least to tenants with approved leases covering more than, say, 5,000 square feet of floor area. Then, the landlord’s attorney and the lender’s attorney won’t do the Dance of the Seven Veils in the House of the Seven Gables when the lender’s attorney refuses to include the very same obligation in the loan documents. Yes, sometimes lender’s attorneys are absolutely unwilling to give what their lender clients have no problem giving. And, with such a promise to give an SNDA built right into the loan documents, servicers (and the lender’s loan administration departments) fold their tents and cooperate. That will cut down on how much time and money it takes to get a lease done.
Second, in almost (note, the caveat “almost”) all situations where a lender takes over a property by foreclosure, a tenant will be just as undisturbed in its tenancy whether it has an SNDA or not, so long as it is paying anything approaching marketplace rent and has generally behaved itself in the past. Certainly, a handful of tenants find themselves “disturbed,” (read that: “thrown out”), but only when there is a good reason for a foreclosing lender or the buyer at a foreclosure sale to want to get rid of a good, rent-paying tenant. Even if all of that is true, no tenant’s attorney could feel safe in forgetting to ask for an SNDA or in easily acceding to a landlord’s refusal to obtain one for a client. On the other hand, actual tenants may find that, as a business matter, the transaction costs to fight for an SNDA may not be worth the effort. I know of at least one major tenant with thousands of 1,500 square foot spaces who has made the decision to get one if it can, even on the lender’s standard form, but if that’s not going to happen, then to “let it go.” And, this tenant’s fit-up costs are relatively high – no pipe rack store here. Its policy is based on comparing the transaction costs to get SNDAs against its experience of having lost only one store in a foreclosure situation. Don’t ask for the tenant’s identity. Though it isn’t a client, I’m not passing along its secret.
That having been said, and given that the prevailing wisdom is that a tenant NEEDS an SNDA, here are some general thoughts. In a few weeks, or maybe next time, Ruminations will drill down to specific SNDA issues, but for now – we offer only more general thoughts. Sorry, you’ll have to wait for the nuts and bolts. Don’t let that stop you from pitching in with your own comments. That’s how conversations work. And, the goal of Ruminations is to generate conversations.
First, the “S” in “SNDA” means “subordination.” In the context of an SNDA, that means the mortgage, in some or all respects, will be more important, i.e., will have higher priority, than the lease. That will be the case if the mortgage was already in place when the lease was executed. That would also be the case if, as is nearly universally true, the lease says it will be subordinate to all mortgages, even later recorded ones. [Now, the astute observer will note that this writer is not sitting in a jurisdiction where deeds of trust are used, so he says “mortgages” to cover both.] Lenders are leery to lend if leases don’t say the lease will be subordinate to all mortgages. Therefore, a landlord would be really stupid not to have its leases say so.
Without an SNDA, by choice, accident or as a result of a lender’s (rare) refusal to grant one, a tenant will be without the benefit of the “N” word – Non-Disturbance. Yes, “N” stands for Non-Disturbance and that means even if the lease is subordinate to a mortgage, if the lender forecloses on the property, the tenancy will continue in place, i.e., its possession will not be disturbed (hence, “non-disturbance”). That doesn’t mean the tenant will be “untouched,” but most, if not all, of the lease’s provisions will remain in effect and the lender or a buyer at a foreclosure sale will be the new landlord under the old lease, with most or all of the lease’s provisions intact. More about the “most” part will be discussed in a follow-up blog entry, but that’s enough of a teaser for now.
That having been said, tenants would be really stupid to plunge head-on into a lease and not have an SNDA unless they have carefully weighed the risk of not having one against their desire to get into a particular space or unless they have decided that the transaction cost to get an SNDA isn’t worth it, at least not from the existing lender. But, as a future installment of Ruminations will explore, simply agreeing to have one’s lease be subordinate to all mortgages, present and future, may have some collateral, unwanted effects.
Here’s a good place to explain why a Lender would agree to grant an SNDA, thereby giving up some of its rights. It’s really pretty simple. The borrower may sign the note and agree to repay the loan, but it is the tenant’s money that the borrower uses to make its loan payments. No tenant means no rent, and that means no repayment. So, does a lender want to see a leasable space “suck wind”? Generally not. A property’s leases are the real collateral for a loan, not the bricks and mortar. If it takes an SNDA for a tenant to place its John Hancock on a lease, almost all lenders will grant one. There are some other reasons, and if one looks hard at this and future blog entries, they can be found.
So, that having been said, we are left with the “A” part of an SNDA. “A” stands for “apple” and also for “attornment,” a poorly understood concept, even by experienced attorneys. Here’s our way of explaining attornment. It’s simple – when a tenant attorns to its landlord’s transferee, the tenant agrees to be the transferee’s tenant. The trick is that without an agreement to the contrary, under common law, an attornment creates only a month-to-month tenancy. So, the “A” part of an SNDA corrects that little “issue,” and that “works” for both the tenant and the foreclosing lender.
To continue – a mortgage foreclosure “cuts off” or “cuts out” any property interest that is inferior to the mortgage. That includes most later liens. Unless there is a non-disturbance agreement in place, later leases as well as earlier ones that recite that they are subordinated to future mortgages are “cut-off,” i.e., effectively terminated. Now, in many jurisdictions, foreclosing lenders are required to name tenants with subordinate leases and this requirement can really hurt the lender because, just as a lender can toss out a tenant without “non-disturbance” rights, a tenant whose lease is foreclosed can just walk. And, when such a tenant “walks,” so does the rental income. Along with the rental income goes some part of the property’s value. So, lenders want all but really, really below market rent tenants to stay; that is, they want tenants to “attorn” to them. For that reason, to preserve mortgagability, a landlord will certainly want its leases to say that the tenant agrees to attorn to successor landlords and, at the option of mortgagees, to those mortgagees. Without such a provision in a lease, it may be difficult to get a mortgage. With or without such a provision in the lease, most lenders want to have a direct agreement with tenants (yes, they want privity) wherein the tenants agree to stick around after a foreclosure (i.e., to attorn to the lender). That’s one reason why lenders are willing to give an SNDA to a tenant and even negotiate over the terms of that SNDA.
For now, with thanks to Porky Pig, “th-th-th-that’s all folks.” Next week or soon thereafter, followers of this Ruminations blog will be treated by (or punished with) [choose one of the above] a somewhat “nuts and bolts” treatment of SNDA issues. It will be based, in part, on readers’ comments to this posting. So, please add your comments at www.retailrealestatelaw.com.