Hallett & Perrin, P.C.
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January 23, 2017

Protecting Your Rights in a Commercial Real Estate Transaction

Commercial real estate transactions are inherently complex: lenders, property owners and tenants all draw value from the same property. One document binds their interests together, and must be familiar to anyone involved in a commercial real estate transaction: the Subordination, Non-Disturbance and Attornment Agreement (SNDA). Below are several of the key attributes one should understand and look for in a proposed SNDA.

Subordination

The subordination provision of an SNDA essentially provides that the lender’s rights against Landlord under the loan will be superior to any rights Tenant may have against Landlord under the lease. Rather basic language would look something like this:

“The Lease is and shall be subject and subordinate to the provisions and lien of the Security Instrument and to all renewals, modifications, consolidations, replacements and extensions thereof, to the full extent of the principal amount and other sums secured thereby and interest thereon.”

Standing alone, the subordination aspect would permit a lender to foreclose a lien and wipe out the subordinate leases in the process. However, a good SNDA will go much further to protect Tenant’s rights.

Attornment

The attornment provision of an SNDA provides that Tenant agrees, in advance, to continue performing under the lease if the Landlord loses the property pursuant to a default under the loan. There are essentially three ways a new landlord would be introduced: (1) foreclosure, whereby the lender takes the property, (2) foreclosure, whereby a third-party out-bids the lender for the property, and (3) transfer by deed in lieu of foreclosure, typically resulting in the lender taking over as landlord. Usually, the attornment provision will apply to all three situations. Rather basic attornment language would be:

“Tenant agrees that, Tenant will attorn to and recognize: (A) Lender, whether as mortgagee in possession or otherwise; or (B) any purchaser at a foreclosure sale under the Security Instrument, or any transferee who acquires possession of or title to the Property, or any successors and assigns of such purchasers and/or transferees, as its landlord for the unexpired balance (and any extensions, if exercised) of the term of the Lease upon the terms and conditions set forth therein.”

Non-Disturbance

Why would Tenant agree to sign a document where they are second in line for rights against Landlord and have to deal with whatever new landlord might result from a foreclosure? Because the Tenant receives the promise of non-disturbance.

The non-disturbance provision of an SNDA provides that, regardless of a change in landlord under the terms of the loan documents, Tenant’s operations under the lease will not be affected. This peace of mind is the primary motivation Tenant has to enter into an SNDA (and because most landlords make it a condition to the lease). Rather basic non-disturbance language would be:

“So long as Tenant complies with Tenant’s obligations under the SNDA and is not in default under the Lease, Lender will not disturb Tenant’s use, possession and enjoyment of the leased premises nor will Tenant’s rights under the Lease be impaired in any foreclosure action, sale under a power of sale, transfer in lieu of the foregoing, or the exercise of any other remedy pursuant to the Security Instrument.”

Keep in mind that the sample language provided herein is the most basic form of subordination, attornment and non-disturbance language. Most SNDAs will surely go into much more detail and include additional representations, warranties and covenants between Lender and Tenant (and possibly Landlord). This document will govern a significant transition during the lease process, and must be carefully considered by all parties and their counsel.