SNDAs and estoppels, two mainstay documents of lease administration that are all-too-frequently overlooked.

A Quick Lesson in Two Vital Legal Documents

 

May 01, 2003

There's an old saying that no job is tougher than the one you take for granted. That could certainly be said about SNDAs and estoppels, two mainstay documents of lease administration that are all-too-frequently overlooked.

 

A subordination, non-disturbance and attornment - SNDA - agreement is actually three agreements in one. The “subordination” portion permits a lender-mortgagee of the property whose lien is junior or subordinated to the tenant's (usually because the lease was recorded before recording the lien of the mortgage), to become superior to the lien of the lease.

 

Once the lender's lien is superior (in the event of a foreclosure) the lender may eliminate all junior liens. Most lenders insist that their loans be a “first lien” and most landlords appreciate that their property will be more valuable and more attractive to lenders if all of their leases are subordinate to subsequent mortgages. So, landlords frequently include a provision that makes all leases subordinate.

 

However, lenders also need another agreement along with subordination, to ensure that tenants can't walk away from their leases in the event of a foreclosure. This agreement is called an “attornment,” which is especially necessary in the states that extinguish a lease once the property has been foreclosed (although this is not the rule in the majority of states). The attornment agreement creates a contractual bond between tenant third-party mortgagee, pursuant to which the tenant agrees it will recognize the mortgagee as landlord.

 

It is important to note that in the majority of states where a foreclosure does not automatically extinguish the lease, the lender can still extinguish the lease at its option. If for example, the lease is at a below-market rent in a rising market. These states are referred to as “pick-and-choose” jurisdictions. Thus, whether in a state that automatically extinguishes the lease or in a pick-and-choose state, the tenant needs an agreement so that it is not left at the whim of the lender and the real estate market.

 

The agreement that protects the tenant is called a “non-disturbance.” A non-disturbance agreement permits the lease to stay in force so long as the tenant is not in default. Tenants looking toward a long-term lease with expensive improvements are advised to add a non-disturbance clause to any subordination agreement. This may need to be negotiated into a landlord's form agreement, as many of these leases do not contain non-disturbance provisions.

 

What should a tenant look for in an SNDA? First, it is important to remember that only the strongest tenants have much room to negotiate important provisions. Therefore, a tenant should try to negotiate only the most important issues first. For most tenants, this is unquestionably the non-disturbance agreement.

 

At a minimum, the tenant should insure that any lender/mortgagee agree to assume all of the obligations of the landlord. The easiest way to insert this into a lease is as a preface to subordination, i.e. “so long as the lienholder agrees to assume all of the duties and obligations of the landlord…”

 

A strong tenant should be more specific, especially if signing a lease for a space that is under construction or requires substantial repairs or renovation. In that case, it should include a provision requiring the mortgagee to complete any unfinished construction begun by the landlord as a pre-condition to collecting rent. (Many subordination agreements excuse lenders from this obligation, and tenants should watch for this language in their lease forms.) This provision might also include a similar covenant for casualty and condemnation repairs.

 

A tenant should also be assured there are no existing through a title search. The tenant could also ask the landlord to make a representation concerning preexisting liens. A tenant should insist that any preexisting lienors agree to the non-disturbance.

 

These rules apply where there is a ground lease or in cases of a sublet. A tenant should insist on a non-disturbance agreement from the ground lessor as well as from the master landlord and any of its lienors.

 

Beyond the non-disturbance agreement, tenants that risk losing substantial investments, especially those in free-standing locations and small centers, should insist that the SNDA be a separate document from the lease (in case there is any claim that the SNDA was extinguished as part of the lease in a foreclosure). Tenants should also insist upon the right to record the SNDA or a memorandum.

 

A more common document for a lease administrator is the estoppel. Usually, the estoppel is sent by the landlord whenever it is selling or refinancing property. Sometimes, the estoppel will be sent by the tenant when assigning, subletting or selling its business. In either case, the effect of the estoppel is to bind the executing party to certain statements of fact. These facts might include the existence of a binding lease and the documents that constitute the lease, the status of rent payments and security deposits and any lease defaults.

 

Breach of contract

From the tenant's point of view, there are only a few issues to keep in mind. First, when negotiating the lease, do not permit the landlord to execute the estoppel for the tenant if it is not returned within the time period allotted — which should be at least 15, and preferably 30 days. Rather, the obligation to return the estoppel is a condition of the lease; a tenant's failure to comply is a breach. Second, don't permit the estoppel to be used “offensively.”

 

The purpose of the estoppel is to benefit third parties not privy to the landlord-tenant relationship. Courts have held that a landlord can't use the estoppel against the tenant, for example, to claim that the tenant “agreed” that there haven't been overcharges of operating costs. Still some care should be taken to preserve the tenant's rights and remedies.

 

If a tenant is undertaking an audit of rent or other charges, the estoppel should be amended to the effect that “this statement is subject to any claims for overcharges that may be discovered in audit by Tenant.” Even if no audit is under way, or even planned, a tenant may still protect itself by inserting a phrase, such as, “this statement does not cover facts or conditions not within the Tenant's actual knowledge at the time of execution.” If the tenant already has knowledge of overcharges or other breaches of the lease, it is certainly prudent to include them in the estoppel.

 

The bottom line is: SNDAs and estoppels serve the landlord and its lenders. While it is reasonable for your landlord to insist on them, a tenant must protect itself accordingly.

 

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Estoppels and SDNAs Clause Uses in Mezzanine Loan Agreement

Home Mezzanine Loan Agreement Estoppels and Sdnas

 

Estoppels and SDNAs

THIS JUNIOR B MEZZANINE LOAN AGREEMENT, dated as of July 31, 2003 (as amended, restated, replaced, supplemented or otherwise modified from time to time, this Agreement), by and among DB REALTY MEZZANINE PARALLEL FUND II, LLC, a Delaware limited liability company, having an address at 1251 Avenue of the Americas, 9th Floor, New York, New York 10020 (Lender), PHILADELPHIA PLAZA-PHASE II, LP, a Pennsylvania limited partnership, having an address c/o Thomas Properties Group LLC, 515 South Flower, Suite 600, Los Angeles, California 90071 (Borrower) and TCS SPE 3, L.P., a Delaware limited partnership, having an address c/o Thomas Properties Group LLC, 515 South Flower, Suite 600, Los Angeles, California 90071 (Junior B Mezzanine Guarantor).

 

Estoppels and SDNAs. Estoppel Certificates and Subordination, Non-Disturbance and Attornment Agreements, in a form and substance reasonably satisfactory to the Lender, shall be obtained from all Tenants and subtenants listed on Schedule 9.1 attached hereto. X. DEFAULTS Section 10.1 Event of Default. (a) Each of the following events, after the applicable notice and expiration of applicable cure periods set forth in this subsection (a), if any, shall constitute an event of default hereunder (an Event of Default):

Estoppels and SDNAs

THIS JUNIOR A MEZZANINE LOAN AGREEMENT, dated as of July 31, 2003 (as amended, restated, replaced, supplemented or otherwise modified from time to time, this Agreement), by and among DB REALTY MEZZANINE PARALLEL FUND II, LLC, a Delaware limited liability company, having an address at 1251 Avenue of the Americas, 9th Floor, New York, New York 10020 (Lender), PHILADELPHIA PLAZA-PHASE II, LP, a Pennsylvania limited partnership, having an address c/o Thomas Properties Group LLC, 515 South Flower, Suite 600, Los Angeles, California 90071 (Borrower) and TCS SPE 2, L.P., a Delaware limited partnership, having an address c/o Thomas Properties Group LLC, 515 South Flower, Suite 600, Los Angeles, California 90071 (Junior A Mezzanine Guarantor).

 

Estoppels and SDNAs. Estoppel Certificates and Subordination, Non-Disturbance and Attornment Agreements, in a form and substance reasonably satisfactory to the Lender, shall be obtained from all Tenants and subtenants listed on Schedule 9.1

 

 

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Landlord waivers & SDNAs – everybody’s favorite documentation task

 

Fredrikson & Byron PA logo

USA December 15 2011

When the economy is thriving, it is a rare occurrence for a borrower to default on its loans so profoundly that its secured lender needs to repossess its assets. It is even rarer for a commercial landlord to suffer such a profound loss of cash flow that it cannot service its mortgage debt and ultimately loses the property to its mortgagee. Consequently, few in the industry were well practiced in either scenario in 2008. After the past couple of years, however, we are all too familiar with these situations, though, in some cases, we wish we had better documentation to make the repossession process proceed more smoothly.

 

Landlord Waivers

 

If a borrower/tenant defaults and its lender, as a secured party, opts to repossess inventory or equipment, it is important for the lender to have a clear agreement in place with the borrower’s landlord that explains the following:

 

The landlord does not have any claim on the borrower’s assets (or any claim it does have is subordinate to the lender).

The lender has the right to enter the property as necessary to repossess the borrower’s assets.

The lender is responsible only for rent extending through the reasonable time during which it is executing its repossession rights or arranging for a sale, plus any damage it causes during that time.

Without these provisions, it is likely the lender will end up fighting about these issues with the landlord, which slows down the repossession process and makes it more expensive. Contracting for the above provisions up front sounds simple enough, so why is it that lenders do not always do so? Answer: Landlords do not like to agree to these provisions because they are a pure giveaway of rights without receiving any value.

 

Further, obtaining these agreements from the landlord can be costly for the borrower/tenant. Landlords with strong leverage can charge legal fees to the borrower/tenant for the cost of having the landlord’s counsel review the proposed agreement. These landlords may also charge a processing fee or extract some other costly concession in exchange for the landlord’s consent.

 

And because landlords dislike these agreements, negotiations can take a lot of time. In cases where these agreements are heavily negotiated, they often result in an awkward three-way conversation among lender counsel, tenant counsel and landlord counsel—each trying to avoid responsibility for moving it along. Whoever has the most leverage (usually the lender) generally imposes its will. The borrower/tenant almost always ends up getting caught in the middle.

 

Subordination, Non-Disturbance and Attornment Agreements

 

One major concern for a tenant (and, potentially, lenders who have secured interests in the tenant’s property) is that if the tenant’s landlord defaults on its mortgage loan to its mortgagee, the tenant could lose its lease rights and be evicted (if the lease is on tenant-attractive terms) or see its rent expense greatly increased. An aggressive mortgagee also could try to obtain property belonging to the tenant (which also may be security for the tenant’s loans with its lender) if there is any ambiguity about whether the property belongs to the tenant or is a fixture belonging to the property owner.

 

It is important in this case to have an agreement in place among the tenant, its landlord, and the landlord’s mortgagee to protect the tenant and, in many cases, the tenant’s lender. This agreement is typically referred to as a Subordination, Non-disturbance and Attornment Agreement, or “SNDA.” First, the SNDA states that even if the landlord defaults and the mortgagee forecloses, the mortgagee will respect the tenant’s lease on its terms (Non-Disturbance).

 

In return, the mortgagee reasonably asks for the tenant’s acknowledgment that, subject to Non-Disturbance, its lease rights are subordinate to the landlord’s mortgage (Subordination). The mortgagee will also ask the tenant to acknowledge that it does not own any of the fixtures to the mortgaged property. To the extent there is ambiguity regarding whether any of the tenant’s property is a fixture, the tenant will want to ensure this is clarified in the agreement. Finally, the mortgagee will ask the tenant to acknowledge that it will pay rent to the mortgagee after any foreclosure (Attornment).

 

Again, obtaining such an agreement makes sense, so why do we not see more of them? Answer: They, too, are painful to negotiate. However, since an SNDA may be sought by either the tenant (seeking Non-Disturbance) or the mortgagee (seeking Subordination and Attornment), there often is more common ground to work from than there is with landlord waivers.

 

Takeaway

 

Landlord waivers are helpful tools for loans for which equipment or inventory are material collateral. Subordination, Non-Disturbance and Attornment Agreements (SNDAs) are helpful tools when the tenant/borrower has important lease rights or the landlord/mortgagor has existing leases in place. Consider seeking these agreements, but know that it will be a bit of a struggle.

 

 

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