No introduction needed. If you know what SNDA stands for, then you are ready for the rest of this posting. If you’re a little shaky on what the acronym stands for, look at the December 25 Ruminations posting.
For all but the biggest tenants, and even then for most of them, the SNDA negotiation process begins with a lender’s form. And, it seems like a fair number of lenders think the “A” in “SNDA” stands for “Amendment,” i.e., an amendment of the lease. That’s pretty frustrating to a tenant and even to a landlord because, after a lease has been fully negotiated, often after it has been signed, along comes a somewhat remotely related party who is seeking to make unilateral changes through the backdoor of an SNDA. My advice is to tell them to fly a kite. In my experience, this almost always works. Here, a tenant actually has bargaining power: if the lease hasn’t yet been signed, few lenders want to kill a market rate deal; if the lender became such after the lease was signed, it needs to get the loan done and over with. So, that leaves only one scenario – where the mortgage (or deed of trust) is already in place, and the tenant doesn’t get started on negotiating the SNDA until after its lease has been executed. My strong advice to tenants is don’t let yourself get into that position.
Some lender’s forms also crave to be an estoppel document as well. This isn’t a terrible thing. After all, the lease is going to have a provision that requires the tenant to give estoppel certificates. The problem is that the parties to an SNDA usually don’t pay the same level of attention to the “estoppel” part of the SNDA as they would if it were a separate document. Savvy tenants split the SNDA into two parts: what an SNDA should contain; and a separate estoppel document. If that “isn’t going to happen,” then my advice is to give each part its separate dignity during the review and negotiation process.
Now, to the real parts of an SNDA – the items to fight over.
One of a lender’s objectives is to minimize, if not eliminate, any risks – essentially to shift all risk to the tenant. This approach is based on the lender’s theory that the tenant chose its own landlord and should have to suffer the consequences of its landlord’s credit collapse. That’s a great, but very flawed theory. The fact is that the lender chose its borrower, the landlord, based on credit criteria whereas the tenant mostly wanted someone with available space in the right location and who could manage a property.
The first place many lenders go in their quest to reduce their own risk is the lease itself. An SNDA is an agreement between a tenant and its landlord’s lender, establishing certain priorities between them even if those priorities don’t exist under law. What does that mean? It means that even if a mortgage comes into existence after a lease has been exercised or even if a prior mortgage has been modified afterwards, the SNDA will make a tenant agree that certain aspects of the lease will be “trumped” by certain provisions of the mortgage. “Trumped” can mean “subject to,” just as if the mortgage had been in place before the lease was executed. “Certain provisions” means the following. Most SNDA forms are lender-generated and flatly state that the lease will be “subject to all of the provisions of the mortgage. Many tenants insist on revising that to say that their lease will be “subject to THE LIEN OF THE mortgage.” Though one might argue this is only a distinction without a difference, such a change makes good sense from a tenant’s point of view. It can’t mean fewer rights for the tenant.
Almost always, a lender’s form of SNDA seeks to condition the tenant’s “non-disturbance” rights on the tenant not being in default. This commentator’s view on that subject is amply set out in the Ruminations postings of August 25 and 26, 2011. [Click Here or Here to see them.] Tenants should insist that the lender can only terminate the lease in the manner set forth in the lease itself. For example, if the tenant is in default, the landlord must take affirmative steps to terminate the lease. Nothing in an SNDA should change this fact just because the lender has taken over as the landlord. To provide otherwise would be a significant change to an important lease provision, one that was usually the product of serious negotiation.
The most obvious risk-avoidance provisions in a lender’s form of SNDA are those that follow the ubiquitous: “Tenant agrees that Successor Landlord (e.g., Lender) will not be liable for, subject to or bound by any of the following:” And, here we go with “the following.”
“Lender won’t be liable to claims, offsets or defenses which Tenant might have against Landlord” – why not? Why should the lender be in a better position than someone who buys the property? The lender is getting two bites at the apple in the first place – it got monthly loan payments, and, as a back-up, realized on the property as collateral. Here are a couple of examples. Let’s say the landlord had a claim against its tenant and the tenant had a defense. Should a lender (or the buyer at a foreclosure sale), when taking over the lease, still have the claim, but now be free of the tenant’s legitimate defense. I’d like to hear cogent arguments in the lender’s favor. As to offsets, the most emotional issue, here is what I think is objectively correct. If the offset is personal as between a tenant and its landlord, such as a separate loan, the lender has a point. But, if a tenant rightfully fixed something a landlord should have fixed, such as the roof, why shouldn’t the next landlord, even the lender, stand in the shoes of its predecessor? After all, if the tenant had left the “thing” unfixed, the landlord’s successor would have to make the repair and bear the cost anyway. In fact, had the tenant not stepped in, the problem might have grown even worse and more expensive. Further, such an expenditure preserved the collateral. A tenant pays rent in return for exclusive possession of its leased premises AND for certain contractual benefits. When a successor landlord steps in, it wants and gets all of the benefits of that lease. In return, the tenant deserves all of the bargained-for benefits. For landlord obligations, the test should be: “would the successor landlord be responsible for paying the cost to remedy the obligation if the item had not previously been taken care of by the tenant?” If yes, it should be a valid offset item.
“Lender won’t be liable for the acts or omissions of Landlord” – why not? It’s one thing not to be liable for acts and omissions unrelated to the lease, but as to the “core” of the relationship, the lease itself, the lender (or the purchaser at a foreclosure sale) has to “make good” on the promise. In this writer’s view, while it is fair to avoid “punishing” the lender for its borrower’s acts, what this provision should say is: “Lender shall not be liable for damages for any act or omission of any prior lessor or landlord that may have occurred prior to the date [Lender or Successor Landlord] obtains possession of the leased premises, but [Lender or Successor Landlord], in accordance with the Lease’s provisions, shall cure any breach or default by such prior lessor or landlord to the extent the breach or default exists or continues beyond that date.”
“Lender won’t be liable for rent or additional rent which Tenant might have paid for more than the current month” – surprise, this is fundamentally fair provided it is clear that this limitation doesn’t apply to items specifically required by the lease to be paid more than one month in advance.
“Lender won’t be liable for any security deposit or other prepaid charge paid to Landlord” – again, surprise! This is fundamentally fine unless the lender has received the security deposit or if the security deposit is part of the lender’s collateral. Then, there is a pragmatic element to this point of view. Tenants who have the bargaining power to negotiate this limitation, probably didn’t post a security deposit; those who did, probably don’t have the bargaining power or energy to argue about this SNDA provision.
“Lender won’t be liable for construction or completion of any improvements for Tenant’s use and occupancy” – back to “why not?” Isn’t the lender getting the full rent? Isn’t the cost of the improvements being recovered as part of the rent? Why would the lender, or any successor landlord, think it should get something for nothing?
“Lender won’t be liable for warranties of any nature whatsoever, including any warranties respecting use, compliance with zoning, hazardous wastes or environmental laws, Landlord’s title, Landlord’s authority, habitability, fitness for purpose or possession” – and, neither will tenant be liable for anything the landlord was relying on. That’s not a very helpful or polite response, being more like a retort, but if it results in a lender responding in any substantive fashion, the lender would see that its reaction is no different than what the tenant’s reaction should be to this risk-averting provision commonly found in a lender-form SNDA.
“Lender won’t be liable for amendments or modifications of the Lease made without its written consent” – does the lender desire to get involved with every change in the lease’s operational obligations no matter how insignificant? A lender should only have a right to consent in the event an item materially reduces the tenant’s obligations or materially increases the landlord’s obligations. So what if the landlord agreed, post-lease execution, that the tenant could hold sidewalk sales?
Well, this lone Ruminator has bitten off more than could be chewed in one sitting. That means instead of this being the second of a two part rant, it looks like it will be the second of a three-parter, with the last installment next week or the week thereafter.