Estoppels and SNDAs—Understanding and Negotiating the Landlord’s Lender’s Lease Documents
By G. Andrew Gardner, Hannah Dowd McPhelin, and Joseph M. Saponaro
G. Andrew Gardner is senior counsel at Walter Haverfield LLP in Cleveland, Ohio, and co-chair of the Section’s Leasing Group.Hannah Dowd McPhelin is a partner at Troutman Pepper in Harrisburg, Pennsylvania, vice chair of the Section’s Leasing Group, and chair of the Emerging Issues and Specialty Leases Committee. Joseph M. Saponaro is a partner and chair of the real estate group at Meyers, Roman, Friedberg & Lewis in Cleveland, Ohio, and chair of the Section’s Retail Leasing Committee.
Lawyers who represent lenders, commercial landlords, or commercial tenants need to understand the leasing documents required by lenders to landlords. This article provides an overview of such documents, which usually include tenant estoppel certificates and subordination, nondisturbance and attornment agreements, with sample document forms.
A Brief Overview of a Lease Transaction
Simply stated, a lease is the grant by one party (Landlord) to another party (Tenant) of a possessory interest in an estate in land (whether vacant land, an entire house or building, or a portion of a building). In the majority of commercial leases, the Landlord has obtained a loan from a bank or other lender (Lender or Mortgagee) who will be taking a security interest in the property owned by the Landlord, as well as an assignment of the Landlord’s interest in the leases of the property and the rental income derived from the leases and the property as collateral to secure the Landlord’s payment of the loan. The Tenant’s rent payments are part of the income stream the Landlord will use to repay the loan to the Lender.
The Lender made the loan to the Landlord to facilitate the Landlord’s acquisition, development, or redevelopment of property. As part of the terms and conditions of the Lender’s security documents with the Landlord—typically a loan agreement, mortgage, or deed of trust (mortgage), and assignment of rents and leases—there will be certain restrictions and requirements regarding leasing of the property. These requirements can include requirements that the Lender approve any leases of the property by the Landlord. In the case of large commercial or industrial properties, the Landlord’s approval may include approval of the Tenant, including the Tenant’s creditworthiness, and the terms and conditions of the lease. In the case of multifamily leases or leases of smaller spaces in a large facility, the requirement may only be that the Landlord use a form that has been pre-approved by the Lender (allowing minimal changes as may be negotiated by the parties) and that the lease be on market terms (set forth in the loan documents or calculated by the terms of the loan documents). Additionally, the loan documents may restrict the right of the Landlord to amend, modify, terminate, or extend the term of leases without the Lender’s consent.
In most loan documents for commercial properties, there will also be a requirement that all leases of the property be subordinated to the Lender’s liens created by the Security Documents. Why does this requirement exist? A lease creates a possessory lien in favor of the Tenant (the priority of the lien will depend upon the lease terms and date that the Tenant obtained possession of the leased premises). The lien of the Lender’s Mortgage will establish a Lender’s lien on the property and provide the Lender with priority upon filing. Lenders require that the Tenant’s possessory lien be subordinated so that in the event
that the Lender ever forecloses on the property, the Lender’s superior lien can be used to terminate any subordinate liens (including the Tenants’ rights to possession under their leases). Lenders typically require that the Landlord’s lease form expressly state that the Tenant’s lien is automatically subordinated to the lien created by the Mortgage held by any first mortgagee.
A typical Mortgage provision may provide as follows:
Mortgagor shall comply with and observe Mortgagor’s obligations as landlord under all leases of the Property or any part thereof. Mortgagor, at Lender’s request, shall furnish Lender with executed copies of all leases hereafter made of all or any part of the Property. Unless otherwise directed by Lender, all leases of the Property shall specifically provide that such leases are subordinate to this Mortgage; that the tenant under any lease attorns to Lender, such attornment to be effective upon Lender’s acquisition of title to the Property; that the tenant agrees to execute such further evidences of attornment as Lender may from time to time request; and that the attornment of the tenant shall not be terminated by foreclosure.
Lenders may also include reservation of the right to not subordinate a Tenant’s lien to Lender’s lien.
Subordinated liens may be terminated upon a foreclosure of the Property by the Lender (allowing Lender to deliver vacant possession). Depending upon the property and creditworthiness of the Tenants, the Lender may want the leases to continue in the event that the Lender is forced to exercise its remedies under its loan documents (including foreclosing upon the property or taking a deed in lieu of foreclosure to take the Landlord’s ownership interest in the property). As noted in the sample provision above, most commercial lenders also require that all leases contain a covenant that the Tenant agree to attorn to (or recognize and accept) the Lender as a successor landlord if the Lender forecloses upon Lender’s mortgage interest in the property. When a Landlord is obtaining a new loan, either to acquire or refinance a property, in some cases Lenders may require subordination agreements only from Tenants who have placed their leasehold interest of record (by recording a memorandum of lease), and in other cases Lenders may require subordination agreements from the major Tenants of the property (which can be defined in many ways, but often by the major Tenant’s square footage).
In addition to the subordination and attornment requirements, the Lender will typically include a requirement that the Landlord periodically obtain confirmation from its Tenants of certain matters related to the Lease. In particular, these items are the key financial terms of the Lease that the Lender used to underwrite its loan to the Landlord. This confirmation typically is made by requesting that the Tenants execute certificates in favor of the Lender, with the understanding that the Lender is entitled to rely upon all statements made in the certificate and that each Tenant will be estopped from asserting different facts in the future after confirming them in an estoppel certificate to the Lender. The confirmations most often included in estoppel certificates are those that are critical to the underwriting of the Lender’s loan to Landlord: (i) the length of the lease term, (ii) the amount of Tenant’s monthly rent payment, (iii) confirmation that payment of rent has commenced, (iv) confirmation of any termination rights, and (v) confirmation that neither the Landlord nor the Tenant is in default under the lease. Depending upon the circumstances, in some cases, Lenders will require estoppel certificates only from certain major Tenants, and in other cases, Lenders may require estoppel certificates from the major Tenants and a certain percentage of remaining Tenants, based on the number of tenants or rentable square footage.
In addition to the subordination provisions and estoppel certificate, the Lender typically will require that the Landlord reject payments under the lease more than one month in advance. This is necessary to protect the Lender’s income stream in the event of foreclosure.
As noted above, the Lender’s Mortgage will have certain requirements with respect to the Landlord’s lease. A typical lease provision for subordination and attornment provides:
Landlord and Tenant covenant and agree that this Lease and any and all renewals, modifications, extensions, amendments, and restatements hereof are subject and subordinate to any security instrument, including, without limitation, any mortgage or deed of trust (Security Instrument), which may now or hereafter be placed upon or affect the Real Property and the Project in which the Leased Premises is located, provided that the holder(s) of such Security Instrument shall agree in writing not to disturb Tenant’s possession of the Premises or Tenant’s rights under this Lease so long as Tenant is not in default hereunder (subject to any applicable notice or cure periods granted to Tenant). In the event that a Successor Landlord, as defined below, receives title to the Real Property, (i) such Successor Landlord shall be bound to Tenant under all of the terms and conditions of this Lease, (ii) Tenant shall recognize and attorn to Successor Landlord as Tenant’s landlord under this Lease, and (iii) this Lease shall continue in full force and effect, in accordance with its terms, as a direct lease between Successor Landlord and Tenant. This clause shall be self-operative, and no further instrument or subordination shall be necessary. For purposes of this Lease, the term “Successor Landlord” shall mean any party that becomes owner of the Real Property, whether pursuant to (i) a foreclosure under the Security Instrument or any mortgage or deed of trust, (ii) any other exercise or the rights and remedies of the holder of the Security Interest, or (iii) delivery by Landlord to the holder of a security interest of a deed in lieu of foreclosure or any of the foregoing.
A typical lease provision for estoppel certificates provides:
From time to time during the Lease Term, within fifteen (15) days of receipt of Landlord’s written request, Tenant shall acknowledge, execute, and deliver to Landlord, the holder of any Security Instrument, or any other persons whom Landlord may designate in such request, a statement in writing certifying that this Lease is unmodified and in full force and effect (or if there have been modifications hereunder, that the same is in full force and effect as modified and stating the modifications) and, if so, the dates to which the Rent and any other charges have been paid in advance, and such other items requested by Landlord, including, without limitation, the lease commencement date and expiration date, rent amounts, and that no offsets or counterclaims are present. It is intended that any such statement delivered pursuant to this Paragraph may be relied upon by any prospective purchaser or holder of any Security Instrument (including any assignee of the foregoing) encumbering the Premises.
Subordination, Nondisturbance, and Attornment Agreements
A subordination, nondisturbance, and attornment agreement, typically referred to as an SNDA, is an agreement among the Landlord, the Tenant, and the Lender who has (or will have during the loan or lease term) security with respect to the property leased between Landlord and Tenant. As noted above, SNDAs are generally required by a Lender as a condition precedent in closing a commercial loan transaction with the purpose of subordinating the rights of the Tenant under its lease so that Lender has a superior lien in the property. In exchange for the Tenant’s agreement to subordinate, the Tenant requests that the Lender agree not to disturb the Tenant’s leasehold in the event that the Lender has to foreclose its superior lien interest in theproperty (the “nondisturbance” provision of the SNDA).
Diving deeper into an SNDA requires a review of each of its components.
Subordination Provision: This provision covers the subordination of the Tenant’s rights under its leasehold to the lien rights of the Lender created through the Security Documents. In the event of a Landlord’s
default under the terms and conditions of the Security Documents, the Lender is granted the first lien position to protect its interest in the Property. The subordination of the Tenant’s rights under a lease may be created by Security Documents that are recorded either before or after the Tenant’s leasehold interest takes effect. As such, in a case where the Tenant enters into a lease after the Security Documents have been recorded, then the Lender may be able to terminate the Tenant’s rights under the lease at foreclosure. By contrast, if the Tenant enters into a lease before the Security Documents have been recorded, then the Lender may have a difficult time terminating the Tenant’s rights under the lease at foreclosure—many jurisdictions agree that foreclosure against the Landlord does not affect the Tenant’s rights under the lease. We are focusing on leasing subordination in these materials; however, other types of subordination include debt subordination as well as property interest subordination, both taking place in the commercial financing setting.
Nondisturbance Provision: This provision pertains to the agreement between the Lender and the Tenant that the Lender will not terminate the Tenant’s subordinate rights under the lease, including the Tenant’s possessory rights, at foreclosure. Generally, this is with the caveat that the Tenant must not be in default under the terms and conditions of the lease at the time of foreclosure. If the Tenant is not in default under the lease at the time of foreclosure, then the Tenant’s rights under the lease shall be fully recognized. Nondisturbance can also take place in the context of a sublease, whereby the subtenant’s rights under the sublease will not be disturbed if the master lease is terminated by the master landlord because of default by the master tenant (sublandlord). One caveat: If the Tenant is an affiliate of the Landlord, the Lender may not be willing to agree to a nondisturbance provision (resulting in a subordination and attornment agreement).
Attornment Provision: In this provision, the Tenant covenants with the Lender that, in the event of a foreclosure, the Tenant’s rights under the lease will not be terminated and the Tenant agrees to recognize that the Lender, who would not otherwise be in privity with the Tenant, may enforce the lease as though the Lender were the original party to and beneficiary of the lease, and the Tenant and the Lender will be bound thereby.
The Lender derives benefits from a standard SNDA, which include the following: leasehold liens remain subordinate to the Lender liens until such Lender liens are released; the Tenant will attorn to the Lender as the new landlord upon the Lender or any successor or nominee acquiring the property; the Lender is not liable for any of the Landlord’s defaults under the lease, leasing concessions, and common area maintenance reconciliations, unless as expressly set forth in the SNDA; and the Tenant will not exercise certain rights under the lease until the Lender has had an opportunity to cure the Landlord’s defaults.
There are other considerations in negotiating an SNDA: the Landlord and the Tenant under the lease that is the subject of the SNDA subordination maintain each of their respective rights under the lease, however modified by the SNDA. Some typical requested covenants in the SNDA that can function as lease modifications (or restrictions on the Landlord and the Tenant) are as follows:
1. The SNDA may restrict any amendment, restrictions, and terminations under the lease by requiring the Lender’s consent in each such case, and failure to obtain such consent may render any such amendment, restrictions, and terminations null and void or not require the Lender to be bound if the Lender exercises its rights under the SNDA.
2. The SNDA should require that the Tenant pay future rent to the Lender without Landlord approval and without the Tenant being required to make a default determination by the Landlord. Further, the Tenant should receive full credit for such future rent payment.
3. The SNDA should contain language that enables the Lender to step into the shoes of the Landlord in the event of the Tenant’s default under the lease and to exercise all rights and remedies under the lease.
4. The SNDA should require the Tenant to provide notice to the Lender in the case of the Landlord’s default and to allow the Lender to cure such default after the applicable notice and cure period set forth in the lease, thus providing an expanded right for the Lender to protect the Lender’s collateral and income stream.
5. Many SNDAs contain provisions that mimic the language in the estoppel certificate to confirm the Tenant’s representations of the current status of the lease.
A sample form of SDNA appears at the end of this article.
From the Tenant perspective, estoppel certificates are important because they can have significant legal consequences, but they can be easily overlooked. Once a Tenant executes and delivers an estoppel certificate, the Tenant is “estopped” or prohibited from asserting a position to the contrary of any of the statements in the estoppel certificate. Estoppel certificates take various forms, but typically they are a series of statements that provide a snapshot of a lease at the time the estoppel certificate is given by confirming certain facts regarding the lease and the Tenant’s occupancy of the property that a Lender requires.
There are several things Tenants must consider when completing an estoppel certificate. As a threshold matter, the Tenant should be clear who the estoppel certificate will be in favor of—usually it is the Landlord, the Lender, and successors and assigns of both. As a second preliminary matter, the Tenant must carefully consider each statement it is requested to make in the estoppel certificate.
First, the estoppel certificate will identify all of the lease documents by title, names of parties (original parties and any assignees), and date. All lease documents, including amendments, letter agreements, guarantees, waivers, assignment and assumption agreements, and similar transfer agreements, should be identified and included. If the Tenant has assigned the lease or sublet any portion of the premises, it should be disclosed here as well, with the applicable documents described in the estoppel certificate. The Lender often requires that copies of all lease documents be attached to the estoppel certificate and that the estoppel certificate confirm that the attached lease documents are true, complete, and correct copies in all respects.
Second, the estoppel certificate will confirm that the lease term has commenced (or if it has not yet commenced, confirm when it will commence based on the occurrence of certain events), together with the length of the initial lease term and any renewal terms that are available. If the Tenant has an early termination right or similar right that could shorten the term of the lease, this will likely need to be disclosed in the estoppel certificate as well. It will likely also confirm the rent commencement date and that the Tenant is paying rent pursuant to the lease documents if the rent commencement date has occurred. Another statement that some Lenders have included since the shutdowns that resulted from the COVID-19 pandemic include “Tenant has not, as of the date hereof, requested rent relief from the Landlord and does not anticipate asking for rent relief.”
Third, the estoppel certificate will confirm the size and location of the leased premises. It is best here to be as specific as possible in describing the leased premises by using a suite number or any similar designation for the space.
Fourth, the estoppel certificate will state the material economic terms of the lease. It will state the current monthly base rent as well as monthly installments of additional rent, such as common area maintenance charges, operating expenses, and real estate taxes that the Tenant is paying. As noted above, it is important to the Lender that rent not be paid more than one month in advance, and the estoppel certificate will likely have a statement to this effect. The estoppel certificate may also request that the Tenant confirm any increases in base rent amounts that will occur at later points in the lease term. The Lender will also want the estoppel certificate to recite the amount of any security deposit paid, the form of security deposit (cash or letter of credit), and whether, to the Tenant’s knowledge, any portion of the security deposit has been applied by the Landlord.
Fifth, the Lender will require statements in the estoppel certificate as to whether there are any defaults by either the Landlord or the Tenant that are then continuing. These types of statements typically include confirmation from the Tenant that all obligations of the Landlord with respect to concessions (i.e., leasing incentives such as free rent and tenant improvement allowances) have been paid in full and that the Tenant does not have any offsets or deductions against rent available to the Tenant. As the Tenant, it is appropriate to add a knowledge qualifier (i.e., to the Tenant’s knowledge) to the beginning of these statements regarding defaults, offsets, and deductions to protect the Tenant in the event that there is a default, offset, or deduction the Tenant is not aware of; otherwise, the Tenant may be deemed to have waived these matters.
Finally, the Tenant should be careful with respect to additional statements in the estoppel certificate beyond confirmation of the facts above (such as representations regarding any potential environmental issues) or agreements that could provide the recipient of the estoppel certificate with additional rights. For example, the estoppel certificate may include a fairly straightforward statement such as “So long as the obligations are outstanding, Lender or its designee may enter upon the property to visit or inspect the property.” This statement permits the Lender to inspect the property without restriction when, before the estoppel certificate, such rights would have been subject to any terms and conditions in the Tenant’s lease.
As a best practice, once you have reviewed and revised an estoppel certificate to be accurate based on the lease documents, you will need to have your client review and confirm each statement as well to ensure that the Tenant provides an accurate picture of the lease and does not waive any of its rights. Further, make sure that every blank in the estoppel certificate is completed and use “Not Applicable” or a similar designation where needed. If the estoppel certificate will be returned along with an SNDA, the Tenant may want to include a notation on the estoppel certificate that it is not valid unless and until the Tenant receives back a fully executed SNDA.
A sample form of estoppel certificate appears at the end of this article.
Lawyers need to understand the basic requirements of Lenders to Landlords with respect to tenant estoppel certificates and SNDAs and the provisions that need to be included in such documents.
Published in Probate & Property: Volume 35, Number 5, ©2021 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
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SNDAs: What are they and why are they important?
If you’re a tenant of commercial property , it’s possible that your landlord has asked or will ask you to enter into a Subordination, Non-Disturbance and Attornment Agreement , or “SNDA.” It is often a requirement in the lease agreement. The title of the SNDA itself is daunting and hints at the complexity involved in weighing the interests of parties brought together, not by choice, but by their mutual relationship with a landlord. This article provides a primer on SNDAs. In the event you are confronted with one, you will learn why you may want one, and where to go for assistance.
An SNDA is an agreement entered into between a tenant and the lender of the landlord (and, ideally, the landlord) to establish the relationship between the tenant and lender (who would not otherwise have a direct relationship) and provide relative priorities between them. As the title of an SNDA suggests, the agreement has three main components: subordination, non-disturbance, and attornment.
Subordination In the subordination portion of the agreement, the tenant typically agrees to subordinate its interest in the leased premises to the landlord’s lender’s mortgage (or the lien of the mortgage). A lender looking to take a security interest in landlord’s real property as collateral for repayment of a loan to landlord wants to make sure that the security deed takes priority over any other interest in the real property, including the rights of existing tenants under leases affecting such real property.
A security deed recorded prior to the time a lease is entered into automatically has priority over the lease. However, landlords of commercial property should make sure that their lease form contains automatic subordination language and language requiring tenants to execute an SNDA upon request. These provisions give comfort to lenders during the underwriting process and make it easier for the landlord to get the capital it needs.
Non-disturbance In the same way that a lender wants to make sure that its security deed has priority over a lease, tenants want to make sure that, in the event the landlord defaults on a loan and the lender forecloses on the property, they will still be able to operate in the leased premises for the remainder of the lease term under the new landlord (whether it be the lender or a transferee of lender).
This provision is very important for tenants. Without it, a foreclosing lender with a prior security deed or its transferee can refuse to recognize the lease and the tenant’s right of possession thereunder. When negotiating a lease, tenants should inquire whether any lenders have a security interest in the property on which the leased premises is located, and, if so, consider requiring in the terms of the lease that landlord cause its lender to enter into a non-disturbance agreement with respect to the lease.
Whether or not to request a non-disturbance and spend the time and money negotiating one may depend on a few factors, including: whether tenant is paying above or below market rate; whether the land is a redevelopment opportunity; and the likely type of purchaser in the event of foreclosure. These decisions are best made with the advice of a commercial real estate attorney, who can help weigh competing interests involved.
Attornment Like the non-disturbance provision where the lender agrees to recognize the tenant under the lease, the attornment provision ensures the lender (or its transferee) that, in the event of foreclosure, the tenant will attorn to the lender as the new landlord. In other words, the tenant will recognize the new landlord (lender or its transferee) as the landlord under its lease. Without this provision, at common law, a tenant may be able to walk away from a lease in the event a landlord is foreclosed upon.
When to Negotiate an SNDA Timing Matters. Whether you’re the lender or the tenant, it’s good to know at what point negotiating an SNDA provides you the most leverage to obtain terms beneficial to your interests.
Before the Lease – Negotiating an SNDA before a lease is signed typically gives the tenant the greatest possible leverage. At this point, a landlord does not want to kill a market rate deal, and may put pressure on its lender to get the SNDA executed; likewise, whether the lender has already made the loan or not, the lender is typically eager to close the loan or secure a tenant whose rental payments will help landlord attain the necessary debt-service coverage ratio.
After the Lease – The lender has the most leverage in this situation. Often, tenants have already agreed in the lease to sign an SNDA within a stated period of time or to automatically subordinate to a future lender. Also, the lender is secure with the knowledge that tenant has obligated itself to occupy the space and make rental payments.
SNDA Issues Below are a few SNDA provisions to be aware of that should be considered during the negotiation process with the help of counsel:
1. Subordinate to what? – Will the lease be subordinate to the lien of the security deed or the security deed itself? Lender wants the lease subject to all provisions of the security instrument, including any future amendments, which may subject tenant to additional requirements and afford it less rights.
2. Liability of New Landlord after foreclosure – this is one of the areas of an SNDA that is heavily negotiated. On the one hand, a new landlord (whether lender or a transferee of lender after foreclosure) does not want to be liable for all the things a prior landlord did or did not do during the term of the lease, which on its face is a reasonable position. On the other hand, a tenant will want the new landlord to step into the shoes of the old landlord and take care of the responsibilities the old landlord had, also a reasonable position. Below are a few instances where lenders will attempt to disclaim liability:
a. “claims of offsets or defenses which tenant may have against landlord” If tenant and the old landlord have agreed to offset rent because, for example, tenant made repairs to a roof, the new landlord under this provision would receive the benefit of full rental payments without tying itself to any obligation to recognize the agreed upon offset against rent. A possible middle ground here is a provision that makes the new landlord recognize prior offsets for things that would have been the responsibility of the new landlord had the tenant not undertaken the repair.
b. “acts or omissions of Landlord” A new landlord shouldn’t be responsible for the prior negligence of an old landlord, however, if the default continues after the date of foreclosure, the new landlord should assume liability.
c. “rent or additional rent which a tenant might have paid for more than the current month” While an uphill battle for tenants, tenant arguments usually take the following form: the new landlord should recognize prepayments of rent because the lender had the opportunity in the loan documents to prohibit landlord from accepting rent paid in advance.
d. “any security deposit or other prepaid charge paid to landlord” This limitation of liability is probably ok, unless lender has actually received the security deposit.
e. “amendments or modifications of the lease made without lender’s consent” Tenant can again raise the point here that Lender can protect itself in the loan documents by requiring landlord to get the consent of lender to all amendments. Lender may counter that such a consent requirement would be overly burdensome, and, regardless of whether such a provision exists, landlord may seek to amend the lease without lender’s knowledge.
Without a doubt, the negotiation of an SNDA requires the careful balancing of the legitimate, reasonable and conflicting interests of both lenders and tenants. Even whether to spend the time and money necessary to negotiate an SNDA, or even request one in the first place, can itself be a complex decision with multiple factors involved. A commercial real estate attorney with experience negotiating SNDAs can help guide you through the initial questions, and, in the negotiation process, help strike a reasonable balance with the other parties involved without spending an inordinate amount of time.
If you are a tenant, landlord or lender and have questions about recommended lease provisions or about negotiating an SNDA, please feel free to contact me for assistance.
Ruari O’Sullivan takes the proactive approach. In working with business owners, he anticipates their issues and puts structures in place to protect their interests.
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The hidden exposure of tenant estoppels and SNDAs
Walter cupkovic jack parrino matt buesching november 13, 2017.
You have signed a lease as a tenant. The negotiations were long and convoluted, but the lease has been signed and the space has been built-out. You have moved your company into the space, paid the security deposit, and are paying the rent on a regular basis. All is well.
Then, later in the term, you receive some documents from the landlord entitled “Tenant Estoppel” or “Subordination, Non-Disturbance and Attornment Agreement,” also known as an “SNDA.” The lease states that you might be getting documents like these and are required to sign and return them in 10 days or you as the tenant will be in default under the lease.
They are just standard forms. No reason not to just sign and return them, correct? On the contrary, these simple form documents contain all sorts of hidden traps that you, as the tenant, must be aware of, otherwise you may face big problems later down the line. In this article, we will detail what information and events are covered in tenant estoppel and SNDAs, and the specific terms and conditions you should carefully consider when reviewing these documents as a tenant.
What are tenant estoppels and SNDAs?
Conceptually, the tenant estoppel and SNDA are part of a normal lease transaction. The landlord will request that a tenant estoppel and/or SNDA be signed when the landlord is obtaining financing or when the property is being sold. These documents can actually benefit the tenant if they are carefully reviewed and negotiated and the tenant understands that these documents are as much a part of the lease as if contained in the original executed lease.
For example, the tenant estoppel will contain factual information about the lease that requires tenant confirmation. The document may state that there are no landlord defaults under the lease. If you, as tenant, are having issues with the landlord that could be asserted as a landlord default, when the tenant estoppel document is presented to you for signature, that is the time to raise and resolve with the landlord the outstanding lease issues. No landlord wants its prospective lender or buyer to see a tenant estoppel stating that “the landlord has failed after repeated requests to repair the leaking roof that is causing substantial damage to the premises.”
Further, the SNDA is a document that typically states that the lease will be “subordinate” to the mortgage loan and the lender’s interest in the property and that the tenant agrees to “attorn to,” or recognize, the lender or its assignee or transferee, as the new landlord. In the event of a foreclosure event, the document also states that the lender or new landlord agrees not to “disturb” the tenant’s rights under the lease, including the tenant’s right to possess the premises in accordance with the terms of the lease.
Why is this a key consideration for you as a tenant? Without “non-disturbance” language from a lender, if a lease is “subordinate” to the mortgage and the landlord defaults in its loan obligations, in a foreclosure proceeding the lender can terminate the lease and the tenant’s interest in the property. That means if your landlord defaults, it’s you who could be out on the street. Most tenants are not aware of this lender right. Although rarely enforced by lenders, the right exists and may be implemented where the tenant has attractive lease rates and terms or when the lender wants to remove the tenant and change the use of the property to make it more attractive for sale.
Key terms and what to look for
There are a number of traps and hidden exposure for the unwary in these documents. Not all tenant estoppel and SNDA documents are the same, and many contain factual errors if not properly completed by the landlord. Also, the documents state that the lender and/or buyer may rely on the information contained in the documents that are certified by the tenant to be true and correct. The tenant is “estopped” or prevented from enforcing the actual lease terms to the extent they are inconsistent with the Tenant estoppel and SNDA. If the tenant signs documents that contain incorrect information inconsistent with the lease, the lender or buyer can use the tenant’s own incorrect statements as a defense in an enforcement proceeding brought by tenant.
Here are some examples of typical language in these documents that the tenant needs to confirm:
- This may seem straightforward but many times a lease will state that it commences on a date that occurs after an event, such as the completion of a landlord’s work on the property. For that reason, the date needs to be independently confirmed.
- The additional rent is not usually contained in the lease itself since it is subject to change from time to time and requires confirmation.
- Sometimes, rent abatement in a lease, if applicable, does not occur entirely at the beginning of the lease term. For accounting and tax purposes, free rent periods may be staggered throughout the lease. Check for this.
- If rents have been prepaid and not identified, the tenant could find themselves in a “pay twice” position.
- If not, the tenant could lose its rights to these monies.
- If there are defaults by landlord that should have been raised, and were not, the lender or new landlord may not have any liability to remedy the underlying problems.
- If there is a security deposit that is not reflected in the tenant estoppel, the tenant could lose its rights to return of the security deposit.
- If the tenant agrees to this and there are renewal or early termination options, the tenant could lose its rights to assert these options.
- If there is a lease amendment that benefits the tenant and the tenant does not include it in the tenant estoppel or SNDA, that amendment may not be enforceable against the lender or new landlord.
The tenant estoppel and SNDA may also include provisions that bind the tenant in the future after the tenant estoppel and SNDA are signed. For example:
- Similar to the above reference to rent prepayment, the document states that the lender will not recognize any rent prepayment by the tenant in the future. So, if the tenant has prepaid rent, the tenant may have to “pay twice.”
- If the tenant fails to provide notice to the lender of a landlord default, the notice may be invalidated.
- If the tenant fails to provide notice to the lender where notice to landlord is required, the notice may be invalidated. The tenant could lose the right to a renewal option or termination option if proper notice is not given.
- If the tenant enters into a lease amendment including, by way of example, an early termination of the lease or a reduction in rent, it will not be recognized by the lender if the lender has not consented to the amendment.
After the tenant estoppel or SNDA are signed, they should be kept with the lease files so that the tenant may comply with their terms as if they were part of the lease itself.
Remember, there is no such thing as a standard form tenant estoppel and SNDA. They require careful review, confirmation of the information contained therein, negotiation, and future compliance by the tenant.
If you have any questions about tenant estoppels and subordination, non-disturbance and attornment agreements, please contact Wally Cupkovic or Jack Parrino in our Chicago office, or Matt Buesching in our St. Louis.
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Estoppels and SNDAs, explained
Understanding the basics of estoppels and sndas.
Estoppel Certificates and Subordination, Non-Disturbance and Attornment Agreements (SNDAs) are an essential part of owning, operating, acquiring, leasing , and financing a property with one or more tenants. Each document serves a key but distinct function. Whereas SNDAs are entered into with respect to a landlord’s financing, estoppels are pertinent to a myriad of real estate transactions, including, acquisitions, dispositions, and financings.
Estoppels – The Basics
An estoppel certificate or letter is a binding document delivered by the signing party (such as a tenant) to the reliance parties named therein (such as a buyer and a buyer’s lender), which summarizes certain terms of an underlying agreement (such as a lease), thereby preventing the signing party from disputing such terms at a later date (i.e., the signing party is bound by the statements made in the estoppel certificate and estopped from disputing the facts as presented therein). The estoppel certificate serves two primary purposes : (1) to confirm matters that the reliance parties can determine by reading the underlying agreement (i.e., during due diligence, the buyer reviews a lease which states that monthly rent is $5,000/month. The buyer will seek a tenant estoppel certificate in which the tenant confirms that the lease amount stated in the lease is correct); and (2) to disclose to the reliance parties any matters which they could not determine simply by reading the underlying agreement (i.e., a buyer of a building may not be able to determine if the landlord has promised a rent abatement to a tenant orally or informally via e-mail, or if the tenant believes the landlord is in default of its lease, so the buyer will want a tenant to affirmatively state no such conditions exist).
In real estate, an estoppel certificate is most commonly used to verify lease information during a buyer’s due diligence. The “tenant” estoppel certificate requests information from the tenant regarding, among other things, the rental amount (including base rent and any additional rent), lease commencement and expiration date, any defaults by the landlord or the tenant, and any oral agreements with the landlord or amendments to the lease. In this context, tenant estoppel certificates are a significant part of a real estate acquisition because the leases are often the source of income and value of the real estate asset. A tenant estoppel certificate is essential for a buyer to understand what it is buying.
A potential buyer should negotiate (1) a strong form of estoppel certificate that confirms and clarifies many potential points of conflict with a tenant, and (2) a minimum number (often based on a percentage of occupied square footage or net rentable square footage) of tenant estoppel certificates received as a condition precedent to closing. While a seller will typically allow a potential buyer to “ask for the moon” in a tenant estoppel certificate, tenants will often want to limit what information they certify to in a tenant estoppel certificate (as further discussed below). As a result, sellers will often allow buyers to include many items in a tenant estoppel certificate, but the seller will limit which items are necessary for the tenant estoppel certificate to satisfy the condition precedent to closing. These “essential” items are typically limited to (1) confirmation of the lease documents (including any modifications thereto), (2) the lease commencement and expiration date, (3) the rental amount (base rent and additional rent, if any), and (4) whether or not any defaults by landlord or tenant then exist.
The buyer will often negotiate that receipt of tenant estoppel certificates will be a condition precedent to closing. A typical condition precedent would be the receipt of tenant estoppel certificates from (1) all major tenants , and (2) from tenants representing a defined overall percentage of the occupied square footage (or net rentable square footage), in the aggregate. Depending on the buyer’s leverage and the strength of the asset being purchased, the tenant estoppel percentage typically ranges between 65% to 85% of occupied square footage (or net rentable square footage). Below is an example of a tenant estoppel certificate provision that would be included in a purchase agreement:
Seller shall request and use commercially reasonably efforts to obtain from each Tenant of the Property an estoppel certificate for such Tenant in the form attached hereto, or in the form attached to such Tenant’s lease. Seller shall deliver to Buyer the final versions of any and all such estoppel certificates obtained by Seller promptly following receipt. It shall be a condition precedent to Buyer’s obligation to close hereunder that (i) Seller deliver the Required Tenant Estoppels and (ii) no such Required Tenant Estoppel reveals either (a) a material adverse inconsistency or modification that is unacceptable to Buyer, in Buyer’s reasonable discretion or (b) represents terms that are materially inconsistent or in conflict when compared against the terms of such Tenant’s Lease, in each case. “Required Tenant Estoppels” means estoppel certificates in the form required herein from (i) each of the Major Tenants , and (2) Tenants leasing, in the aggregate, not less than seventy percent (70%) of the occupied square footage of the Property.”
In addition to the considerations above, a buyer will want to ensure (1) that any tenant estoppel certificates are not “stale” (usually dated no later than 30-45 days prior to closing), (2) that the buyer includes a broad range of reliance parties, such as its lender, title company, and any of its successors and assigns, so that such parties are permitted to rely on the statements made in the tenant estoppel certificates, and (3) that the seller is obligated to turn over each and every tenant estoppel certificate that it receives, to ensure that it does not intentionally omit any certificate even if it otherwise delivers a sufficient number of certificates to satisfy the negotiated threshold. Failure to include the buyer’s lender can result in issues when the buyer attempts to obtain an acquisition loan, and its lender is not listed as a reliance party. It is best practice to use broad language (such as simply “buyer’s lender” or “buyer’s title company”) rather than the actual lender or title company’s name, so that if such party changes prior to closing, a new tenant estoppel certificate is not needed, and the new lender or title company can rely on the previously executed tenant estoppel certificate.
As discussed above, a seller’s primary concerns are (1) to limit what makes a tenant estoppel “non-conforming” or “defective” (and therefore result in a failure of a condition precedent); (2) to limit the required tenant estoppel threshold; and (3) to make clear that the failure to obtain a tenant estoppel certificate is not a default under the purchase agreement (and merely a “no-fault” failure of a condition precedent that allows the buyer to terminate the purchase agreement). In order to limit the buyer’s ability to terminate for a failure to meet the tenant estoppel certificate threshold, a seller may negotiate (1) the ability to deliver a “seller estoppel certificate” in lieu of a tenant estoppel certificate, where the seller certifies to the statements in the estoppel certificate instead of the tenant; and (2) the ability to extend the closing date for a period of time while the seller continues to seek any missing tenant estoppel certificates from the applicable tenants. However, the delivery of a seller estoppel should not be taken lightly, as it opens up the seller to potential liability if the facts contained therein are disputed by the tenant, as the buyer will seek recourse against the seller and not the tenant in such an instance. Additionally, depending on the asset and the value of the leases, a seller may negotiate for a provision that it will use commercially reasonable efforts to obtain the applicable tenant estoppel certificates, but that the failure to do so will not be a failure of a condition precedent. This type of provision obligates a seller to attempt to obtain the tenant estoppel certificates, but does not allow a buyer to walk away from the deal if the seller fails to obtain such certificates before closing.
A tenant estoppel certificate, when delivered by a tenant, will bind the tenant and supersede any information to the contrary that existed prior to the tenant’s execution and delivery of a tenant estoppel certificate. Consequently, a tenant needs to thoroughly review each statement in the tenant estoppel certificate and attempt to limit the scope and breadth of the statements made. For example, a tenant may want to qualify some statements to “tenant’s knowledge,” and further hedge on the side of over-inclusion. As noted above, most buyer’s will request a wide range of statements for confirmation from a tenant, but a tenant should review its lease to determine what, if any, statements it is required to deliver in a tenant estoppel certificate. Oftentimes, a lease will state that a tenant is only required to certify to the “essential items” listed above. However, some leases may also include broad language, such as requiring a tenant to include “any information reasonably requested by landlord.” It is essential that a tenant review the estoppel requirements in its lease, and make a determination what – if any – statements it is required to make. Misstating information in a tenant estoppel certificate could result in liability to the tenant, and therefore a tenant should always carefully review the statements made in a tenant estoppel certificate before delivering such certificate.
Estoppel Provisions in Leases and Other Agreements
A lease will typically include a provision that requires a tenant to deliver an estoppel certificate within some period of time after demand by a landlord. Some leases will require that the estoppel include certain information, or even attach a form of estoppel that the tenant must deliver. In such a situation, failure to deliver the estoppel certificate when requested would be a default by the tenant under the lease. The following is an example of an estoppel provision in a lease:
Tenant, at any time and from time to time, within ten (10) days after written request from Landlord, shall execute, acknowledge, and deliver to Landlord, addressed to Landlord and any prospective purchaser, ground or underlying lessor, or mortgagee or beneficiary of any part of the Property, an estoppel certificate in form and substance reasonably acceptable by the Landlord.
Similarly, many development agreements, CC&Rs, condominium documents, and other transactional agreements include estoppel provisions that require each party to such agreement to deliver an estoppel certificate upon request.
While tenant estoppel certificates are the most common real estate use of estoppel certificates, there are other instances where an estoppel certificate may be useful. For example, if buying into a condominium, a buyer may want an estoppel certificate from the condominium association confirming the HOA dues and that the condominium owner is not in default under the condominium by laws. Or, if there is a housing association established by CC&Rs in a master planning community, a buyer may request an estoppel certificate from the housing association for a similar purpose. Ultimately, estoppel certificates can be used in any transaction to confirm various matters asincreased security for the reliance parties during due diligence, and understanding how to negotiate estoppel certificates can be a critical component to deal making.
Subordination, Non-Disturbance and Attornment (SNDA) Agreements
When a landlord obtains a loan secured by real property, lenders will often require that the landlord obtains a Subordination, Non-Disturbance, and Attornment (SNDA) Agreement from all or a portion of the tenants occupying the property. The SNDA is primarily an agreement between the landlord’s lender and the tenant that governs the relationship between the two parties in the event that the lender forecloses on the property.
As suggested by its name, an SNDA serves three primary purposes : (1) subordination of the tenant’s lease to the lien created by the lender’s mortgage or deed of trust (such that the lender can terminate the tenant’s lease upon a foreclosure), (2) non-disturbance of the tenant’s rights under its lease in the event that the landlord forecloses on the property (such that the lender agrees not to terminate the tenant’s lease upon a foreclosure) as long as the tenant is not in default under its lease, and (3) attornment by the tenant of the landlord, stating that the tenant will recognize and accept the lender as the landlord if the lender forecloses on the property. Put simply, an SNDA states that, if the landlord defaults on its loan, the lender will step into the landlord’s role under the lease, the tenant will not interfere with the lender exercising its remedies against the landlord, and the lender will not interfere with the tenant’s right to occupy the property.
The parties will often require that SNDAs are recorded against title to the property, although recording is not required for an SNDA to be effective.
Is An SNDA Necessary?
Good question. The answer is: it depends! You have to look at the lease…
If the lease is “silent” on subordination, non-disturbance, and attornment (i.e., the lease does not address these matters), then the lease is “superior” to the lender’s mortgage, and the tenant may not have to attorn to the lender. Therefore, this would be considered beneficial to the tenant, since the lender cannot terminate the tenant’s lease upon a foreclosure. The lender, on the other hand, faces the risk that the tenant terminates its lease without recourse (because the tenant’s lease is superior to the landlord’s interest in the property). In this instance, a lender will often require an SNDA be signed as a condition precedent to closing the loan.
If the lease states that the lease is subordinate to the loan from the landlord’s lender, then the tenant is unprotected if lender forecloses on the property, and faces the risk that the lender may terminate the tenant’s lease upon foreclosure. In this instance, a tenant will definitely want to have an SNDA signed with the lender.
Some leases, however, contain a provision that the lease is subordinate only if the lender delivers a non-disturbance agreement. This essentially protects both the tenant and the lender. On the one hand, such a provision typically requires the tenant to execute and deliver a reasonable subordination and non-disturbance agreement, so the tenant is required to comply with the lender’s request for an SNDA. On the other hand, the tenant is guaranteed non-disturbance as a condition to subordinating its interest, so the tenant has more leverage than if the lease merely stated it was subordinate by its terms. The following is an example of a subordination clause in a lease, where the bracketed language is language would be added to protect the tenant:
This Lease shall be subject and subordinate at all times to: (i) all ground leases or underlying leases that may now exist or hereafter be executed affecting the Property or any portion thereof; (ii) the lien of any mortgage, deed of trust, or other security instrument that may now exist or hereafter be executed in any amount for which the Property or any portion thereof, any ground leases or underlying leases, or Landlord’s interest or estate therein is specified as security; and (iii) all modifications, renewals, supplements, consolidations, and replacements thereof. [ Notwithstanding anything to the contrary contained herein, Landlord will, as a condition to the subordination of this Lease, provide Tenant with an executed subordination, non-disturbance, and attornment agreement with Landlord’s lender, on customary and reasonable terms .]
Lastly, it is important to remember that a lease is an agreement between a tenant and a landlord, whereas the SNDA is made among the tenant, the landlord, and the landlord’s lender. Therefore, since we are discussing scenarios where the landlord is out of the picture because the lender has foreclosed on landlord’s interest in the property, and the only two parties remaining are the tenant and the lender, it is often beneficial to have an SNDA regardless of what is in the lease (though, of course, a tenant does want to negotiate an SNDA that is more restrictive than the lease).
As may be clear from the summary above, the landlord is not too concerned about the contents of the SNDA, since it only comes into play once the landlord has defaulted on its loan and forfeited the property to the lender. However, a lender may require that a certain number of SNDAs are delivered prior to the lender making the loan. Therefore, a landlord’s primary concern is to facilitate the execution and delivery of the SNDAs by the tenants so as to avoid a delay in loan closing.
As discussed above, the lender is providing the non-disturbance covenant in exchange for the subordination and attornment by the tenant. While obtaining the subordination and attornment are essential, there are other considerations for the lender. Since the SNDA will govern the relationship between the lender and the tenant if the lender becomes the owner of the property, the lender may desire to make certain other terms between the parties more favorable to the lender, such as stating that the lender is not: (1) liable for any landlord defaults that existed prior to the lender’s foreclosure, (2) bound by any amendments to the lease that the landlord may have agreed to without lender’s approval, (3) subject to any offsets, defenses, abatements or other similar rights which the tenant may have had prior to the lender’s foreclosure, or (4) bound to any sublease made without lender’s approval.
As discussed above, the tenant is providing the subordination and attornment in exchange for the non-disturbance language. While obtaining the non-disturbance is essential, there are other considerations for the tenant. Since the SNDA will govern the relationship between the lender and the tenant if the lender becomes the owner of the property, the tenant will want to ensure that the lender will honor all terms of its lease. As noted above, the lender will try to curb its requirements in the SNDA, so it is imperative that the tenant attempt to limit what, if any, concessions it provides to the lender. Ultimately, this is a leverage question – if the tenant is a “credit-tenant” or the largest tenant in the building, it may have more leverage and be able to limit the amount of concessions it provides the lender.
Lastly, as noted above, a tenant may need an SNDA to protect its rights. If the lease provides that the lease is subordinate to the landlord’s lender, and such qualification is not conditioned on the lender delivering a non-disturbance agreement, the tenant may be in the unfortunate position of having its lease cancelled by the lender following a foreclosure. Therefore, it is essential that, when negotiating a lease, a tenant push for the requirement that the landlord’s lender deliver a non-disturbance agreement in order for the lease to be subordinate to the lender’s lien. Absent such a provision, a tenant should push for an SNDA from the landlord’s lender.
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Properly Enforcing an Assignment of Rents
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In Florida, lenders typically obtain an “assignment of rents” if the property produces income by collecting rent, such as an apartment complex, rental home, rental space, or office building. An “assignment of rents” allows the lender to collect the rent payments, if the borrower defaults on their loan payments. Although the lender and borrower may agree to the assignment of rents in the loan documents, the procedure for enforcing the assignment of rent is governed by Section 697.07, Florida Statutes .
The Assignment of Rents Should be Recorded
If a lender and borrower agree to the assignment of rents as security for repayment of debt in a mortgage document, the lender will hold a lien on the rent payments. However, to perfect its rents lien against third parties, the lender must record the mortgage in the public records of the county in which the real property is located. Fla. Stat. § 697.07 (2).
How Can a Lender Enforce the Assignment of Rents?
Section 697.07 provides two methods for the lender to enforce the assignment of rent: (i) the actual assignment of rent to the lender, and (ii) the sequestration of rents into the court registry. Wane v. U.S. Bank, Nat’l Ass’n , 128 So. 3d 932, 934 (Fla. 2d DCA 2013) (“Section 697.07 draws a clear line between a motion seeking sequestration of rents into the court registry [under subsection (4)] and a motion seeking an actual assignment of rents to the lender pending foreclosure [under subsection (3)].”).
(i) Actual Assignment of Rent to the Lender
The first method, the actual assignment of rent to the lender, is provided in Section 697.07 (3). If the borrower defaults on the loan, the lender can make a written demand to the borrower to turn over “all rents in possession or control of the [borrower] at the time of the written demand or collected thereafter,” minus any expenses authorized by the lender in writing. Fla. Stat. § 697.07 (3). If the borrower does not turn over rent payments after the lender has made a written demand, the lender may foreclose on the rents lien and collect rent payments, without having to foreclose on the underlying mortgage. Ginsberg v. Lennar Fla. Holdings, Inc. , 645 So. 2d 490, 498 (Fla. 3d DCA 1994) (“[A]n assignment of rent creates a lien on the rents in favor of the mortgagee, and the mortgagee will have the right to foreclose that lien and collect the rents, without the necessity of foreclosing on the underlying mortgage.”).
To receive a court order for the actual assignment of rent, the lender will have to prove that there was a default, and that it made a written demand to the borrower to turn over rent payment. Wane , 128 So. 3d at 934. Additionally, an evidentiary hearing will be required.
(ii) Sequestration of Rent Into the Court Registry
The second method, the sequestration of rent into the court registry, is provided in Section 697.07 (4). This method can only be used if there is a pending mortgage foreclosure lawsuit. Unlike the first method, the lender does not have to prove that there was a default or make a written demand, and an evidentiary hearing is not required.
Either the borrower or lender may make a motion to the court for sequestration of rent into the court registry. Upon such a motion, a court, pending final judgment of foreclosure, may require the borrower to deposit the collected rents into the court, or in such other depository as the court may designate. The court must hear the motion on an expedited basis, and the moving party will only be required to show that there is a pending foreclosure lawsuit, and that there is a provision in the loan documents for the assignment of rent. Wane , 128 So. 3d at 934.
Moreover, a borrower cannot avoid sequestration of rents by raising defenses or counterclaims. Id. ; Fla. Stat. § 697.07 (4). In addition, the borrower will be required to submit records of receipt of rent to the court and lender, typically on a monthly basis throughout the lawsuit. The rents will remain in the court registry until conclusion of the foreclosure action.
To properly enforce the assignment of rents, the first thing lenders should do is record the assignment of rents in the public records of the county in which the real property is located. In the event the borrower defaults on their loan, the lender will have two options to enforce the assignment of rents: the actual assignment of rent to the lender (Section 697.07 (3)), or the sequestration of rents into the court registry (Section 697.07 (4)). If the lender is seeking the actual assignment of rent, the lender must send a written demand to the borrower to turn over the rent payments and provide proof of default. On the other hand, the lender may seek sequestration without proof of default or written demand. Showing the existence of an assignment of rents provision in the loan documents is sufficient to obtain sequestration of rents into the court registry.
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Assignment of Rents – What, Why, and How?
Madelaine ryan, esq., share this post:.
- November 29, 2023
These days, almost all commercial loans include an Assignment of Rents as part of the Deed of Trust or Mortgage. But what is an Assignment of Rents, why is this such an important tool, and how are they enforced?
An Assignment of Rents (“AOR”) is used to grant the lender on a transaction a security interest in existing and future leases, rents, issues, or profits generated by the secured property, including cash proceeds, in the event a borrower defaults on their loan. The lender can use the AOR to step in and directly collect rental payments made by the tenant. For an AOR to be effective, the lender’s interest must be perfected, which has a few fairly simple requirements. The AOR must be in writing, executed by the borrower, and recorded with the county where the property is located. Including an AOR in the recorded Deed of Trust or Mortgage is the easiest and most common way to ensure the AOR meets these requirements should it ever need to be utilized.
When a borrower defaults, lenders can take advantage of AORs as an alternative to foreclosure to recoup their investment. With a shorter timeline and significantly lower costs, it is certainly an attractive option for lenders looking to get defaulted borrowers back on track with payments, without the potential of having to take back a property and attempting to either manage it or sell it in hopes of getting your money back out of the property. AORs can be a quick and easy way for the lender to get profits generated by the property with the goal of bringing the borrower out of default. But lenders should carefully monitor how much is owed versus how much has been collected. If the AOR generates enough funds so that the borrower is no longer in default, the lender must stop collecting rents generated by the property.
Enforcement of an AOR can also incentivize borrowers to work with the lender to formulate a plan, as many borrowers rely on rental income to cover expenses related to the property or their businesses. Borrowers are generally more willing to come to the table and negotiate a mutual, amicable resolution with the lender in order to protect their own investment. A word of warning to lenders though: since rental income is frequently used to pay expenses on the property, such as the property manager, maintenance, taxes, and other expenses, the lender needs to ensure they do not unintentionally hurt the value of the property by letting these important expenses fall behind. This may hurt the lender’s investment as well, as the property value could suffer, liens could be placed on the property, or the property may fall into disrepair if not properly maintained. It is also important for lenders to be aware of the statutes surrounding the payment of these expenses when an AOR is being used, as some state’s statutes require the lender to pay certain property expenses out of the collected rents if requested by the borrower.
In addition to being shorter and cheaper than foreclosure, AORs can be much easier to enforce. In California, the enforcement of an AOR is governed by California Civil Code §2938. This statute specifies enforcement methods lenders can use and restrictions on use of these funds by the lender, among other things. Under CA Civil Code §2938(c), there are 4 ways to enforce an AOR:
- The appointment of a receiver;
- Obtaining possession of the rents, issues, profits;
- Delivery to tenant of a written demand for turnover of rents, issues, and profits in the correct form; or
- Delivery to assignor of a written demand for the rents, issues, or profits.
One or more of these methods can be used to enforce an AOR. First, a receiver can be appointed by the court, and granted specific powers related to the AOR such as managing the property and collecting rents. They can have additional powers though; it just depends on what the court orders. This is not the simplest or easiest option as it requires court involvement, but this is used to enforce an AOR, especially when borrowers or tenants are uncooperative. Next is obtaining possession of the rents, issues, profits, which is exactly as it seems; lenders can simply obtain actual possession of these and apply the funds to the loan under their AOR.
The third and fourth options each require delivery of a written demand to certain parties, directing them to pay rent to the lender instead of to the landlord. Once the demand is made, the tenant pays their rent directly to the lender, who then applies the funds to the defaulted loan. These are both great pre-litigation options, with advantages over the first two enforcement methods since actual possession can be difficult to obtain and courts move slowly with high costs to litigate. The written demands require a specific form to follow called the “Demand To Pay Rent to Party Other Than Landlord”, as found at CA Civil Code §2938(k). There are other notice requirements to be followed here, so it is essential to consult with an experienced attorney if you are considering either of these options. California Civil Code §2938 specifically provides that none of the four enforcement methods violate California’s One Action Rule nor the Anti-Deficiency Rule, so lenders can confidently enforce their AORs using the above methods with peace of mind that they are not violating other California laws.
Whether you are looking to originate a new loan, or you are facing a default by your borrower, understanding what an Assignment of Rents is and how it operates can be extremely beneficial. Enforcing an AOR can be an easier option than foreclosure and can help promote a good relationship with your borrower when handled correctly. If you have any questions about AORs, or need further details on how to enforce them, Geraci is here to help.
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Home » News » In The News » Pay Close Attention to Subordination, Non-Disturbance and Attornment Agreements
Pay Close Attention to Subordination, Non-Disturbance and Attornment Agreements
- Written by John A. Anderson
- Published: October 29, 2020
John A. Anderson
When commercial landlords borrow against their real estate, their mortgage lender will typically require signed Subordination, Non-Disturbance and Attornment Agreements (“SNDAs”) from current and future tenants. Commercial tenants should resist the temptation to treat SNDAs as “mere forms” and instead carefully review and negotiate them to protect their interests.
Three fundamental agreements are (or should be) contained in every SNDA. First, the Tenant agrees to subordinate its leasehold interest to the lender’s mortgage lien. Second, the lender agrees that after foreclosure it will not disturb the tenancy, provided that the tenant performs its obligations under the lease. Third, the tenant agrees that after foreclosure it will attorn to the lender (or its successor) as its new landlord.
Every mortgage lender has their own form of SNDA. These may vary widely in their approach and often contain additional obligations well beyond these three fundamental agreements. Typical issues that arise when negotiating SNDAs are below.
Subordination . Lenders’ form SNDAs often seek to subordinate the tenant’s leasehold interest to all of the terms of the mortgage document and/or other loan documents. A tenant should modify such a provision so that it only subordinates its interest to the “lien of the mortgage.” Additionally, a tenant will want to ensure that the agreement to subordinate is “subject to all of the other terms and conditions” of the SNDA.
Insurance Proceeds . In certain circumstances, particularly for a long-term lease where a tenant is paying the landlord’s casualty insurance premiums, a tenant should negotiate language whereby the lender subordinates its right to receive casualty insurance proceeds to the extent necessary to allow the landlord to comply with its repair obligations under the lease. In other words, a tenant wants to ensure that insurance proceeds paid upon a casualty are used to repair the premises and not used to pay down the mortgage loan.
Cure Periods . SNDAs typically contain language where the lender agrees, upon foreclosure, not to disturb the tenancy for so long as the tenant doesn’t commit a default under the lease. Since leases often contain cure periods that allow tenants time to cure breaches before they ripen into a “lease default,” tenants should negotiate to incorporate such cure periods into the SNDA.
Landlord’s Work; Improvement Allowances . SNDAs often provide that the lender is not liable for landlord defaults under the lease. The tenant should condition this limitation so that it only applies to landlord defaults occurring prior to the time that the lender (or its successor) forecloses and succeeds to the interest of the landlord. In addition, for any lease under which the landlord has yet to complete certain work at the premises or has agreed to pay a tenant improvement allowance at a future date, the tenant should negotiate language providing that the lender (or its successor) assumes such obligations after it has foreclosed and succeeded to the interest of the landlord.
Amendments; Assignments; Prepayment . SNDAs typically contain provisions limiting the prepayment of rent and any other amendment, modification, termination or assignment of the lease without the lender’s consent. First, a tenant will want to carve-out any lease assignment that the lease permits without requiring landlord’s consent. Second, a tenant should try to exclude non-material amendments from requiring lender consent. Finally, a tenant should be aware that if lender consent is required for lease terminations or material amendments (as is typical), that they are bound by that agreement as long as the SNDA remains in effect. For example, if a tenant and landlord agree to a lease termination or material amendment without getting the lender’s consent, the tenant may remain liable under the original lease in the event of a foreclosure. Because of this, tenants should keep careful track of signed SNDAs since they may be critical to interpreting a lease in the future.
Altering Lease Provisions . Some lender SNDAs include provisions that contradict or seek to supersede other tenant rights contained in the lease (e.g., set-off rights, renewal options, rights of purchase, etc.). Tenants should carefully review SNDAs and make sure to remove or modify provisions that contradict rights that they negotiated into the lease.
There is no shortage of documents and forms commercial tenants need to sign, even after their lease has been negotiated. It can seem monotonous at times, but they need to resist the temptation of viewing SNDAs as form documents not deserving much time or attention. Without careful review and negotiation, a simple signature can alter significant provisions of the lease they worked hard to negotiate.
click here to view Pay Close Attention to Subordination, Non-Disturbance and Attornment Agreements as a PDF
Attorney Advertising. Prior results do not guarantee a similar outcome. This publication is provided as a service to clients and friends of Harter Secrest & Emery LLP. It is intended for general information purposes only and should not be considered as legal advice. The contents are neither an exhaustive discussion nor do they purport to cover all developments in the area. The reader should consult with legal counsel to determine how applicable laws relate to specific situations. ©2020 Harter Secrest & Emery LLP
Assignment of Rents: Potential Conflicts and Exceptions
Date Posted: June 14, 2010 By Jeff Levy, HBSc, MBA, CFA, AMP, JD
In the previous instalment, we discussed the difference between lease and rents and left open the manner of their registration. It is a fait accompli that an assignment of rents could be registered in Land Titles. As the right to get rents is a chose in action, it has to be registered under the P.P.S.A. With regard to an assignment of leases, it could and should be registered normally, because the lease is a property interest. It follows therefore that it cannot be registered under the P.P.S.A.
So, the question is whether or not to register an assignment of rents against the land. That is when conflicts with the P.P.S.A. begin. Because an assignment of rents is a chose in action and the right to receive rent is personal property, it can be registered under the P.P.S.A. Theoretically, under the P.P.S.A, an assignment of leases being an assignment of a contract as security for a loan can also be registered. This is contradicted in Section 4(1) of the P.P.S.A., which states that it does not apply to an assignment of an interest in real property, including a lease of real property. Hence, an assignment of leases cannot be registered under the P.P.S.A. and priority would not be affected by such registration if carried out after all. Priority would be affected by land registrations only.
There is an exception in Section 4(1) of the P.P.S.A., namely: “an assignment of a right to payment under a…lease where the assignment does not convey ….the assignor’s interest in the real property.” It refers to an assignment of rents, not quite elegantly stated. If the wording of the exception means that the assignment of rents does assign the assignor’s interest in the lease, then it cannot be registered under the P.P.S.A. The assignor here is the mortgagee. If so, what are the circumstances when an assignment of rents conveys the landlord/borrower’s interest in real property? One argument is that it applies only where the assignment of rents also assigns leases that are hybrid documents. In that event, it is treated as an assignment of leases for the purposes of the P.P.S.A. If, however, it is a bald assignment of rents, then it should be registered under the P.P.S.A. The alternative is that an assignment of rents is always an interest in real property being a covenant in a lease. So, the question is whether the assignment is collateral to a loan or is it an absolute. If it is collateral, it does not assign the assignor’s interest in the lease until it becomes absolute. If it is absolute, or becomes absolute, then the P.P.S.A. does not apply and priority is determined by the Land Titles Act.
It is also necessary to look at Section 36(1) of the P.P.S.A. stating:
“36.-(1) A security interest in a right to payment under a lease, to which this Act applies, is subordinate to the interest of a person who acquires for value the lessor’s interest in the lease or in the real property thereby demised if the interest, or notice thereof, of the person is registered in the proper land registry office before the interest, or notice thereof, of the secured party is registered in the proper land registry office.”
It means that an assignment of rents registered under the P.P.S.A. competes for priority with other personal property security governed by the P.P.S.A. As the first to register has priority, two competing assignments of rents or a GSA and an assignment of rents will be judged for priority purposes by who registered first under the P.P.S.A. Land Titles registrations are not relevant here, but if a person or one of the lenders acquires the real property or takes an assignment of the lease, then the P.P.S.A. does not apply and priority is governed by the land registration system. Hence, a notice of assignment of rents should be registered under both the land registration provisions and under the P.P.S.A. so as to have priority.
The query then becomes, what does “acquire an interest in the real property or the lease” mean. Obviously, sale or foreclosure is the answer. Does taking possession, appointing a receiver, attorning rents, or merely taking the security by way of mortgage security also satisfy? This point is crucial because it means a move from P.P.S.A. priorities to real property priorities with possibilities as follows:
1. Mortgage itself constitutes “acquiring the interest of the borrower in the real property” for the purposes of the P.P.S.A. It is not in real property law but is adequate for Section 36(1) of the P.P.S.A.;
2. Taking possession constitutes “acquiring the interest of the borrower in the real property” for the purposes of the P.P.S.A. Once more, it is contrary to mortgage law but suitable for Section 36(1) of the P.P.S.A. There are serious reservations against it.
3. Lastly, a mortgagee in possession is obliged under law to collect and apply rents. This duty strongly supports Section 36(1) of the P.P.S.A. even though it has its challenges.
Assuming that these arguments are valid, then priority as against rents is determined by the P.P.S.A. Land Titles until sale or foreclosure have no role there. Summing up, therefore, an assignment of leases cannot be registered under the P.P.S.A. and it is necessary to do so under the land registration statutes.
Assignment of rents is to be registered under the P.P.S.A. and the Land Titles. Until the mortgagee forecloses, or sells under power of sale, priorities are governed by the P.P.S.A., such as between two lenders, each of whom has an assignment of rents. After the mortgagee sells or forecloses, or if a purchaser acquires the real property, priority is determined by the time of registration under real property regime. It could be that the P.P.S.A. ceases to apply at an early stage when the mortgage is taken out or when possession is taken. The safe course is to ensure that the assignment of rents has priority under the, P.P.S.A. by obtaining subordination from other P.P.S.A. holders.
Also, rents can be assigned to a lender under the terms of the mortgage, under a debenture, under a GSA, under a general assignment of rents and under a specific assignment of rents. Even if the mortgage is silent about assigning rents, the right to receive rents being an incidence of ownership, will be included in a mortgage. After the lender has taken possession, the lender would be entitled to the rents from the property. It is possible that a succeeding lessee cannot be compelled to pay rent, but will have to give up possession of the secured property if the prior lender takes possession.
Know your legal rights as a tenant or a landlord. For more information about leasing and renting in Toronto, and how you can use Ontario law to your advantage, contact the lawyers at Levy Zavet PC ( Levy Zavet ) in Toronto, Ontario.
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Assignment Of Leases And Rents
Jump to section, what is an assignment of leases and rents.
The assignment of leases and rents, also known as the assignment of leases rents and profits, is a legal document that gives a mortgage lender right to any future profits that may come from leases and rents when a property owner defaults on their loan. This document is usually attached to a mortgage loan agreement.
Assignment of leases and rents allows lenders to a degree of financial protection in case a loan default occurs. This document is an agreement made between a borrower and a lender of mortgage loans. It often details an exact amount the lender will be entitled to if a default happens.
Common Sections in Assignments Of Leases And Rents
Below is a list of common sections included in Assignments Of Leases And Rents. These sections are linked to the below sample agreement for you to explore.
Assignment Of Leases And Rents Sample
Reference : Security Exchange Commission - Edgar Database, EX-10.9 10 d368735dex109.htm ASSIGNMENT OF LEASES AND RENTS , Viewed October 4, 2021, View Source on SEC .
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Best Practices: Review of the Most Commonly Negotiated Points in Landlord Subordination Agreements
- October 2, 2019
- Katherine D. Tohanczyn
Many small businesses that seek financing under the SBA 7(a) Loan Program operate from buildings that are leased from a third-party landlord, which can take the form of stand-alone buildings, shopping centers or commercial office parks. These loans are generally underwritten on a cash-flow basis and the primary (or oftentimes the only) collateral is the tangible, business personal property (e.g., equipment, furniture, and inventory) of the borrower located at the leased property.
Whenever a SBA loan includes the borrower’s tangible personal property as collateral, the SBA requires lenders to obtain a lien subordination agreement prior to closing from landlords and sub-landlords, as applicable, giving the lender, at a minimum, in addition to lien subordination provisions: (i) notice of the borrower’s default under the lease, (ii) an opportunity to cure the default, and (iii) access to the leased premises in order to remove collateral. Further, “[w]hen a substantial portion of the loan proceeds are to be used for leasehold improvements or [ii] a substantial portion of the collateral consists of leasehold improvements, fixtures, machinery, or equipment that is attached to leased real estate,” the SBA also requires lenders to obtain a collateral assignment of the lease.
Ideally, lenders should provide the borrower and landlord with a copy of the lender’s form landlord subordination agreement early on in the closing process to provide adequate time for negotiations prior to closing. Commonly negotiated provisions include (i) notice, (ii) time of lender’s possession, (iii) payment of rent, and (iv) assignment of lease.
Most SBA landlord subordination forms require landlord to provide notice to the lender of the borrower’s default under the lease. This notice is important as borrowers often default under the lease prior to defaulting under the subject SBA loan. While the lender’s loan documents may provide that a lease default constitutes a default under the loan, that does not protect the lender if it does not know of the lease default. As such, the landlord subordination agreement should provide that the landlord may not terminate the lease or remove, sell or otherwise dispose of the borrower’s personal property without first providing the lender notice of the borrower’s default and an opportunity to cure or exercise lender’s rights under the landlord subordination agreement.
Time of Possession
Another frequently negotiated section of any landlord subordination agreement is lender’s right to access and occupy the premises in order to inspect and/or remove collateral. Lenders generally request 60-90 days to enter and remove the collateral but, in some cases, landlords want the property removed in as little as five days. Lenders should carefully consider the minimum amount of time needed based on the location of the property and type of property to be removed.
While a lender is occupying the property, it is usually requested that the lender pay rent to the landlord. However, it is important for lenders to review the language used by the landlord in reference to the amount of rent owed. In some instances, landlords will request that the lender pay rent due and owing under the lease, which appears reasonable on its face. However, a review of the lease may reveal various types and amount of rent. Additionally, lenders should ensure that they are only obligated to pay rent for the time that the lender is actually in possession of the premises. The lender should ensure it is agreeable to what rent is being paid and limit, if necessary.
Collateral Assignment of Lease
A collateral assignment of lease provision allows the lender to collaterally assign the lease over to a new borrower who is willing to assume the loan and business operation of an original borrower. Landlords are generally hesitant to agree to allow the lender to choose a new tenant. A landlord may be agreeable to allowing an assignment with the landlord’s prior written approval, which approval is generally subject to a review of the creditworthiness of the new tenant. Ultimately, the collateral assignment means that the lender is assisting the landlord with finding a new tenant to rent the property, which is to the benefit of both the landlord and the lender, assuming that the new tenant also assumes part or all of the loan.
Although landlord subordination agreements are generally one to two pages documents, these documents can be challenging to finalize and often result in lengthy negotiations. It is important that lenders are familiar with the terms of the landlord subordination agreement and understand both the lender’s internal policies and SBA requirements when negotiating with landlords.
For more information on negotiating landlord waivers, please contact the attorneys at Starfield & Smith, P.C. at 215.542.7070 or email us at [email protected].
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Commercial Tenant’s Lease – Estoppel and Attornment Considerations
A standard provision of commercial lease agreements is an agreement by the Tenant to execute estoppel certificates, and to attorn to a lender.
An estoppel certificate is a statement from the tenant to either a lender or a prospective purchaser that clarifies:
- what property is leased (often includes square footage)
- the length term of the lease
- that the lease has or has not been modified
- whether there are any renewal options
- whether there is any first right to purchase, expand the demised premises
- the dollar amount of the rent
- the dollar amount of the security deposit
- whether there has been any subletting or assignment of the lease
- the percentage of real estate taxes or Common Area Maintenance (“CAM”) charges paid
- Whether there are any outstanding claims by the Tenant against the Landlord or set offs
When a tenant is asked to sign an estoppel certificate, careful attention must be paid to make sure that the recitals are accurate. Remember, if you fail to assert any claims you might have against the landlord, you will not be able to assert those claims against the addressee of the estoppel certificate.
Unless the lease is recorded, if a lender forecloses on commercial property, the lender usually has the option to terminate the lease and seek possession. Whether the lender decides to do this or not depends on the circumstances. If, for example, the foreclosing lender (or the purchaser at a foreclosure auction) decides that it would be better to empty the building to enhance resale or new construction possibilities, the tenants might be instructed to vacate.
Astute tenants, especially tenants occupying all or much of the building, at the time of initial lease negotiations, would want to include a requirement that the current lender execute a “non-disturbance agreement” saying that, if the lender does foreclose, it will not disturb the tenant’s lease, as long as the tenant is in good standing. A tenant would also prefer to record the lease (or a shorter form of the lease called a “Memorandum of Lease”) at the D.C. Recorder of Deed or at the Virginia or Maryland courthouses, so that, if the property is refinanced, the new lender’s mortgage is subordinate to your recorded lease. This would eliminate the successor lender’s ability to terminate the lease.
While a landlord may or may not be willing to secure a non-disturbance agreement from the lender for the benefit of the tenant, landlords usually do not permit recordation of a lease so that future purchases or refinances do not have complications.
A lender’s agreement not to disturb may be conditioned upon certain waivers by the tenant. Leases often require the tenants quickly execute all-encompassing “Subordination, Non-Disturbance, and Attornment Agreements (“SNDA”). The terms of the SNDA may not even be set forth in the lease and the document may compromise tenants significantly. As the name of the document implies, the tenant is agreeing that the mortgage being taken out by the landlord is senior to the lease (and could result in the lease being terminated in the event of a foreclosure, that the lender agrees not to use its right to terminate the lease under certain scenarios, and that the tenant agrees to accept the lender as the new landlord, in the event of a foreclosure.
At the time of lease negotiations, the tenant might try to seek carve-outs from the SNDA provisions in the lease, such as:
- The foreclosing lender is still responsible for the tenant’s security deposit
- The lender’s rights to anything other than collection of rent only spring into effect when there is an actual foreclosure
- The lease continues in full force and effect as long as the tenant was current in its rent when the foreclosure occurred
- Set-offs or claims that the tenant may have against the landlord may be preserved against the lender as long as they are reported to the lender, in writing, within 10 days after the tenant receives notification of a foreclosure or other default from the lender
- Landlord defaults must be cured with the same amount of time as tenant defaults
It is likely that landlords will balk at some of the foregoing requests for inclusion in the lease. It depends entirely upon the relative leverage of the landlord and tenant.
SNDA’s also usually provide that no lease amendment is binding upon the lender unless the lender has signed off on the amendment. Tenants should insist on that sign-off if there are any changes, extensions or other agreements benefiting the tenants. Similarly, tenants should put the lenders on notice of any defaults by the landlord.
TAGGED: Attornment Agreements , commercial foreclosures , commercial lease agreements , commercial leasing , Commercial Tenant’s Lease , estoppel certificate , Non-Disturbance , Subordination