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SNDAs: What are they and why are they important?

Ruari J. O’Sullivan

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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Assignment Of Leases And Rents

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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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Estop, Subordinate and Listen: Understanding the Role of SNDAs and Tenant Estoppel Certificates in Commercial Real Estate Transactions

Williams Mullen

For those of us that practice in the world of commercial real estate financing transactions, the fact pattern is a tale as old as time: the Bank is making a term loan secured by real estate largely based on leases on the property generating sufficient rent for the owner/borrower to service the loan and adequately maintain and operate the real estate, which already is fully occupied and leased to commercial tenants. Perhaps some of the leases are subject to a memorandum of lease that has been recorded in the real estate records of the clerk’s office in the jurisdiction in which the real estate is located. The Bank’s loan will be secured by a standard Deed of Trust and Assignment of Rents.

The Bank is trying to determine whether to require the owner/borrower to obtain a subordination, non-disturbance and attornment agreement (an “SNDA”) from each of the tenants, or whether a tenant estoppel certificate will suffice. In order to analyze that question, we must understand the distinction between an estoppel and an SNDA, as well as what protection the SNDA is going to provide the Bank that is not afforded by the Deed of Trust and Assignment of Rents.  

An estoppel certificate is a representation as of a particular moment in time as to the status of the lease. It does not contain any ongoing obligations and/or covenants by the tenant or the Bank, but rather just certifies as to certain facts and circumstances as of the date of execution. The estoppel certificate may confirm items such as: (1) the named tenant is the current tenant under the lease; (2) the lease is in full force and effect; (3) no default has occurred under the lease; (4) no advance rent has been paid; (5) the tenant has no charge, lien or claim of offset under the lease; and (6) there are no bankruptcy proceedings pending against the tenant. The purpose of the estoppel certificate is limited in scope: first, it gives the Bank comfort that it is not financing a property that is subject to a slew of landlord defaults or problem tenants, and second, it prevents – or estops – the tenant from trying to impose any liability on the Bank for a pre-existing default under the lease that was not disclosed to the Bank prior to loan closing. As estoppel certificates only speak as of the date of they are signed, the Bank should be sure to obtain them at or just prior to closing (generally no more than 30 days in advance). In addition, the Bank should get an estoppel certificate even if it is also getting an SNDA from a tenant (although sometimes the estoppel provisions might be built into the SNDA itself so that the tenant only has to deliver one document for closing).

The critical components of an SNDA are as follows:

  • Subordination of Lease – the “S” in SNDA .  First and foremost, an SNDA subordinates the lease and the rights of the tenant under the lease to the lien and rights of the Bank under the Deed of Trust. The Bank will be senior to those tenants who otherwise would have a senior and superior interest because of a previously recorded memorandum of lease.  This enhances the ability of the Bank to take control of the real estate if problems arise with the loan.
  • Attornment of Tenant to the Bank – the “A” in SNDA .  If the Bank has to foreclose on its Deed of Trust and becomes the owner of the property, the tenant agrees to “attorn” to (i.e., agree to be a tenant of) the new owner as the landlord even though, but for the SNDA, the tenant might not be legally obligated to do so.  This provision also can protect the new owner as landlord from obligations and liabilities the original owner might have incurred that, but for the SNDA, could have become obligations and liabilities of the new owner. For instance, the Bank will want to ensure that it is not liable for any acts or omissions of any prior landlord, subject to any offsets or defenses that the tenant might have had against a prior landlord, liable for the return of any security deposits not actually received by the Bank, or bound by any accelerated rent payments or modifications to the lease terms made without the Bank’s consent. These liability limitations are a common point of negotiation between the tenant and the Bank, as the tenant may seek to expand the conditions under which the Bank would have additional liability to the tenant, and the Bank will of course want to keep those conditions as limited as possible.
  • Non-Disturbance of Tenant – the “ND” in SNDA .  It’s important to recognize that the SNDA is not a unilaterally beneficial document that solely protects the Bank. The tenant gets an important protection as well in exchange for its agreement to subordinate and attorn to the Bank in the form of the nondisturbance provision, which provides that, so long as the tenant does not default in the performance of its obligations under the lease, the Bank will not terminate, disturb or otherwise adversely affect the rights of the tenant under the lease, including the right to possession and enjoyment of the leased premises. In addition to the core “S”, “A” and “ND” provisions, there are several other important protections that might be afforded under an SNDA:
  • The Bank’s Right to Collect Rent .  Although the Deed of Trust and Assignment of Rents give the Bank the right to collect the rent directly from the tenant, the tenant is not a party to those instruments and could take the position the tenant has no obligation to pay rents directly over to the Bank. The SNDA provides a direct, contractual relationship between the tenant and the Bank. When the tenant signs the SNDA and agrees that the Bank has the right to directly collect the rents, the tenant no longer can take a contrary position on that point.
  • Notice of Default/Right to Cure . The Bank will require the tenant to give notice to the Bank of any default by the owner/borrower under the lease and provide that the Bank shall have the right (but not the obligation) to cure that default in order to preserve the lease if the Bank decides it does not want to lose the tenant, such as an anchor tenant. This is a critical provision because it prevents the tenant from terminating the lease without the involvement of the Bank.
  • No Modification of the Lease without the Bank’s Consent .  The SNDA will also provide that the tenant is prohibited from agreeing to modifications of the lease with the owner/borrower without the Bank’s prior written consent. Again, this is a common point of negotiation between the tenant and the Bank, as the Bank will want a broad scope of modifications that would require Bank consent, and the tenant will want to narrow the scope of modifications that for which it needs the Bank’s approval.
  • Agreements Regarding Rent Prepayments . The Bank will want to ensure that the tenant agrees not to prepay rent more than one month in advance, to avoid a situation in which the tenant front-ends a significant amount of the rent payments, which would then jeopardize the ability of the owner/borrower or the real estate itself (after a foreclosure by the Bank) to service the debt and repay the loan. 
  • Insurance and Condemnation Proceeds . The SNDA may provide further clarification regarding the Bank’s and tenant’s respective rights in any proceeds of hazard insurance carried by the owner/borrower on the leased premises or any condemnation proceeds with respect to the leased premises. The best case scenario is that the SNDA will clarify that any rights the tenant has in such proceeds will be subject to the rights of the Bank under the Deed of Trust to take and apply those proceeds against the loan – however, this is a point that can be subject to heavy negotiation from the tenant.
  • Subordination of Rights of First Refusal or other Options . Though the SNDA will of course contain an umbrella subordination of the terms of the lease to the terms of the Deed of Trust, if there is an express right of first refusal, right of first offer, or purchase option in the lease, the SNDA should clearly address that right and clearly subordinate it to the Bank’s lien under the Deed of Trust – the Bank does not want a first refusal right in favor of the tenant to delay its foreclosure process or potentially diminish the marketability of the property.
  • Recordation of the SNDA . If the underlying lease (or a memorandum thereof) is recorded in the land records, then the Bank will absolutely need to record the SNDA as well – this is what gives the Deed of Trust lien priority over the lease, and prevents the lease from being a B-II exception in the Bank’s mortgagee policy of title insurance.

The foregoing provisions and the other provisions of the SNDA not only protect the Bank during its involvement with the real estate as a lien holder or as an owner through foreclosure or deed-in-lieu thereof, but also protects any third party succeeding to ownership of the real estate though the Bank’s foreclosure or subsequent sale of the real estate. In addition to creating a predictable set of rights and remedies between the Bank and the tenant – which is always critical in a default or workout environment – it can also enhance the marketability of the real estate to third parties knowing they will have the benefits of the SNDA. As a general rule of thumb, the Bank should strongly consider getting SNDAs with respect to all major commercial leases for which the rental income factors into the underwriting decision and approval of the loan.

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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. 

assignment of rents vs snda

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. 

Estoppel Certificate 

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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What Is an SNDA and Who Needs One?

One of the closing documents in a real estate financing transaction involving leased property is a subordination, non-disturbance and attornment agreement (SNDA). SNDAs have a number of purposes. They serve to connect the lender with the tenant and they provide other uses as well.

Basic Provisions of an SNDA

Let’s consider each of the terms in the title of the agreement.


Priority among documents is typically established by order of their creation under the rule: first in time is first in right. If one instrument is superior to another, the provisions of the superior instrument will have control over those of the other to the extent of any conflict between them. If a landowner mortgages its property and then enters into a lease for all or part of it, the mortgage is senior to the lease and the lease is subordinate to the mortgage. On the other hand, if the lease is executed before the mortgage, the mortgage is deemed subordinate to the lease.

If a fire damages or destroys all or part of the property or if a condemnation takes all or a part of it, questions regarding application of insurance or condemnation proceeds will be decided based upon the relative priority of the lease and mortgage. If the lease has priority, the lease provisions will control. These may require that the landlord use insurance proceeds to rebuild the premises. In contrast, if the mortgage is superior, the mortgagee will be entitled to take all of the insurance proceeds and use them to reduce the debt if the mortgage so provides.

A lender typically wants to have an SNDA because of its subordination clause if, in the absence of such an agreement, the lease would be prior to the mortgage. In order to ensure that the terms of the mortgage will govern, the lender will insist that its borrower — who is also the landowner and the landlord — and the tenant enter into an SNDA with the lender.

Furthermore, and often of greater consequences to the parties, a general principle is that the termination of a senior instrument will terminate all instruments that are junior to it. Therefore, if a mortgage is senior to a lease, the foreclosure of the mortgage will terminate the lease unless there is an agreement that provides otherwise. However, if the lease is senior to the mortgage, the foreclosure of the mortgage will not affect the lease — other than a new party will become the landlord.


Because the subordination of the lease to the mortgage could have the disastrous consequence to the tenant of terminating the lease if the mortgage is foreclosed, subordination of its lease, by itself, is usually unacceptable to a tenant. The non-disturbance portion of the SNDA addresses this problem. To avoid the lease being put in peril of its existence, in the SNDA, the lender agrees that if it forecloses on the property or if the property is transferred by a deed in lieu of foreclosure, the lease will continue. When there is a non-disturbance clause the tenant remains in possession of the property, and the new owner of the property — whether it be the purchaser at a foreclosure sale or the transferee of a deed in lieu of foreclosure — becomes the successor landlord, but the terms of the lease remain the same.

Typically, the non-disturbance right under an SNDA is premised on the tenant’s not being in default under its lease.

The lender often wants some or all of the leases relating to the property to continue after a foreclosure sale or a transfer in lieu of foreclosure even if there is not a non-disturbance agreement. Section 7-105.6(c) of the Real Property Article of the Maryland Code (RP) enables lenders to choose which subordinate leases they want to continue after the sale by stating in the advertisement for the foreclosure sale which will survive.

The final term in the name of an SNDA is attornment, which is the act by a person agreeing to become the tenant of the holder of the remainder or reversionary estate of real property. (The word “attornment” has the same root as “attorney,” which literally means one who is appointed to act in place of another.) Under the attornment provisions of an SNDA, the current tenant agrees to be bound by all of the terms of the lease to anyone to whom the remainder or reversion is transferred by foreclosure of or other proceedings brought pursuant to the loan documents. These provisions are supplemented by RP §8 101, which provides that transferees of the reversion in leased property are entitled to the same remedies, and are subject to the same obligations contained in the lease, as the original landlord.

Additional Provisions in SNDAs

These three provisions in an SNDA are typically and generally noncontroversial in most instances. Many SNDAs contain other terms that provide certain benefits to lenders. Many of these may be objectionable to tenants.

Estoppel Provisions

SNDAs may include estoppel certificates from the tenants. These may include a statement identifying the original lease, all amendments to it and all collateral agreements regarding it; an acknowledgment that the landlord does not have any remaining construction obligations; an assertion that the tenant is not in default under the lease and has always used the lease in a manner consistent with the terms of the lease; a statement that the landlord is not in default under the lease and that the tenant has no claim against the landlord (or a description of any defaults or claims); and a representation that the tenant has not assigned, sublet or mortgaged its interest in the property. The estoppel provisions may also include other information that the lender may consider relevant, such as whether the tenant has exercised any option or rights under the lender; whether the tenant has any remaining options or rights under the lease; or whether other agreements, such as reciprocal easement agreements, are in effect.

Additional Notice

SNDAs frequently provide that the tenant will give to the lender copies of all notices that the tenant is required to furnish to the landlord, and they sometimes state that the lender will have an additional period of time to cure any defaults by the landlord under the lease. Lenders may include in the SNDA a statement that if the landlord is in default under the lease, the lender will be given as much time as it needs to complete a foreclosure of the property or otherwise to gain possession of the property before the cure period commences. SNDAs may also provide that the lender will not be held accountable for defaults of the landlord that the lender cannot cure, such as the landlord’s bankruptcy.

After the Foreclosure Sale

The lender may also request certain agreements from the tenant with regard to what happens if the lender forecloses or the property is transferred by action in lieu of foreclosure, including requiring that the tenant execute estoppel certificates in the future and that it agree that without the lender’s consent the tenant will not surrender, cancel or terminate its lease, except due to an uncured default by the landlord. The lender may ask the tenant to agree that the lender has no liability to the tenant for any defaults that the original landlord may have committed under the lease. Additionally, the lender may disclaim any liability to the tenant for the return of its security deposit except to the extent that the lender, or other successor of the landlord, has actually received the security deposit. These latter two provisions in particular are likely to be of concern to the tenant.

So Who Needs an SNDA?

The lender that takes a lien on real property subject to an existing lease wants an SNDA so that its loan documents will control, vis-à-vis the lease, and it wants the benefit of the additional provisions described above immediately and if it becomes the owner of the property.

The tenant that signs its lease when a mortgage or deed of trust already encumbers the property, or if its lease contains a subordination provision, wants the assurance that if its landlord (the loan borrower) defaults under the loan the tenant will be able to remain in possession of the property under its lease.

The landlord (the loan borrower) does not care about the terms of an SNDA. The most important provisions of an SNDA will be effective when the borrower has defaulted and has lost its interest in the property. The borrower’s primary interest is that the process in obtaining an SNDA is not costly and will not delay the loan closing.

For more information, contact Edward J. Levin .

Ed Levin 410-576-1900 • [email protected]

A version of this article was published in The Daily Record on January 16, 2014.

January 16, 2014


Levin, Edward J.

Real Estate

Harter Secrest & Emery LLP

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

John A. Anderson


  [email protected]

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.

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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 Leases and Rents (Pro-Lender) | Practical Law

assignment of rents vs snda

Assignment of Leases and Rents (Pro-Lender)

Practical law standard document 9-555-4236  (approx. 30 pages).

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SNDAs – How to Handle from the Tenant’s Perspective

At some point, almost every tenant of a commercial lease is asked to sign a Subordination, Non-Disturbance and Attornment Agreement (an “SNDA”). Generally, the SNDA comes from the landlord’s lender sometime after the tenant’s lease has been signed and the term has commenced. It can be a complex document with onerous provisions for a tenant, and, without adequate counsel early in the process, a tenant may have little room to negotiate or revise an SNDA.

At its core, an SNDA contains three key provisions. First, the tenant agrees that, notwithstanding that the lease may pre-date the lender’s mortgage, the lease is subordinate and junior to the mortgage. Second, the lender agrees that, so long as the tenant performs its obligations under the lease prior to the expiration of applicable cure periods, the lender will not disturb the tenant’s occupancy or terminate the tenant’s lease in the event of foreclosure or other enforcement by the lender.  The third prong is attornment: the tenant’s agreement to accept the lender (or other purchaser at foreclosure or its successor or assign) as the landlord following foreclosure.  This exchange of promises gives the lender a senior right to its collateral and gives the tenant security in its lease.

But SNDAs are usually not limited to simple subordination, non-disturbance and attornment. Lenders will usually seek to limit their obligations to the tenant in the event they foreclose and step into the landlord’s shoes.  Lenders often seek a requirement to obtain lender consent for any lease modification, a lender’s right to notice from tenant of (and the right to cure) landlord defaults, and a tenant covenant to pay rent pursuant to an assignment of rents.  Lenders may also seek to limit the tenant’s rights to extend or terminate the lease.

When negotiating a new lease, tenants should determine whether there is a mortgage in place with priority over the proposed lease and carefully review any lease subordination provisions. Tenants should also consider requiring a reasonable SNDA with an existing lender of record as a condition to signing the lease. Landlord-prepared leases often contain provisions under which a tenant’s lease is made automatically subordinate to any existing or future mortgage or requiring the tenant to subordinate the lease to any future mortgage upon request.  Such automatic subordination provisions can make the tenant’s lease junior to the lender without the protections of a non-disturbance covenant.  Tenants should seek a provision in their leases conditioning such subordination on tenant’s receipt of a commercially reasonable SNDA from the lender.  This preserves some ability for the tenant to negotiate and protect itself against onerous terms.  Tenants should require the recordation of the SNDA to assure that the non-disturbance covenants are binding on the lender’s successors and assigns.

When tenants receive an SNDA form, it may be presented by the lender and landlord as non-negotiable. The terms of the lease will govern how compliant the tenant must be to the landlord’s demands for a specific form of SNDA. Reasonable modifications to protect tenants should be judiciously requested, but they are worth requesting and are frequently granted. Here are some SNDA tips for tenants to remember:

  • Understand whether the SNDA has the potential to permit the lender to cut off or limit important tenant rights in the event of foreclosure. Even if the tenant’s right to the leased property is not disturbed, a lender-friendly SNDA may not preserve options, rights of first refusal, renewal rights, or rights in the event of casualty or condemnation, or it may alter or limit rights to setoff, abatement and the security deposit. A tenant can expect to be required to relinquish the right to pursue the lender for breaches and defaults of the landlord predating the foreclosure. The SNDA should preserve (if possible) important tenant rights under the lease.
  •  Seek to provide in the SNDA that the lease terms will prevail in the event of any conflict between the loan documents and the lease. For example, loan documents may provide that casualty proceeds go to the lender. The tenant may desire to provide in the SNDA that insurance proceeds will be made available for repair of the building, if so required in the lease.
  • Make sure the landlord is a party to the SNDA to approve payment and other covenants of tenant performance to the lender and to seek the landlord’s confirmation that restrictions on the tenant’s rights vis-a-vis the lender do not modify the tenant’s rights against the landlord under the lease.
  • Consider (if the tenant has bargaining power) providing in the SNDA that pre-foreclosure landlord defaults that are ongoing after foreclosure (e.g., building repairs) are the lender’s obligation to correct when it takes possession.
  • Modify any requirement to provide the lender prompt notice of all landlord defaults, to require only concurrent copies of notices of default that the tenant sends to the landlord under the lease.
  • Provide that the lender will not unreasonably withhold consent to routine or non-material lease amendments.
  • SNDAs frequently contain estoppel provisions under which the tenant confirms certain facts about the lease, such as amount of rent, amount of security deposit and no landlord defaults. Estoppel certificates are common when a lender is financing a commercial property; however, the tenant should scrutinize each provision to ensure the tenant can make the statements truthfully as of the date of the document. If the estoppel provisions relate to performance by another party, such as a statement that the landlord has fulfilled all obligations under the lease, the tenant should certify such statements only “to the knowledge of tenant.” Make sure the lease and all amendments, side agreements, and addenda are correctly identified and that all existing breaches or defaults of the landlord are identified accurately.
  • After a tenant signs an SNDA, it should modify and annotate its records to assure that it is reminded to comply with the SNDA when giving notice, amending the lease, etc.
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Beware Amending a Lease Where There Is an Existing SNDA

assignment of rents vs snda

Most commercial real estate leases are located on property encumbered by a deed of trust. The rental stream from these leases is a major factor in the lender’s valuation of the real property as its security and its underwriting of the loan. The rental stream is also the borrower’s source of funds to make its monthly loan payments to the lender.  Before making the loan, the lender will review the existing leases to determine if those leases are acceptable to it and support the loan. The lender will also decide if it wants any of the existing tenants to subordinate their leases to the new loan and if it is willing to provide the tenant with a subordination, non-disturbance and attornment agreement (“SNDA”).

An SNDA is a three-party agreement between the landlord, tenant and landlord’s lender (and any successor to the lender). Generally speaking, a SNDA provides for: (1) the subordination of the tenant’s leasehold rights to the lien of the lender’s deed of trust; (2) the lender’s agreement not to disturb the tenant’s lease rights if the lender forecloses its lien following landlord default under its loan, and (3) the tenant’s agreement to recognize the lender or the successful purchaser at the foreclosure sale as its landlord. The typical SNDA states that the lease is subordinate (or junior) to the deed of trust, but if the deed of trust is foreclosed, the new owner after foreclosure will not disturb the tenant’s possession under its lease so long as the tenant is not in default under the lease and the tenant recognizes the new owner as its landlord – this is known as attornment. Attornment requires a tenant to honor the lender (or new owner upon foreclosure) as the tenant’s new landlord instead of the landlord/borrower.

While laws vary from state to state, the general rule is that foreclosure of a deed of trust terminates any encumbrance on the property that is junior to that deed of trust. Absent an SNDA, the party acquiring the property at the foreclosure sale will be bound by any lease executed before the deed of trust but foreclosure terminates any lease executed after the deed of trust. The purpose of the SNDA is to spell out in advance what will happen to a lease and the rights of the parties in the event of a foreclosure, such that neither the new owner nor the tenant will suffer undesirable consequences.

The lender typically drafts the SNDA and that agreement includes a number of protections in favor of the new owner after a foreclosure. A common provision in an SNDA provides that no amendment to the lease can be made without the lender’s prior written consent and that any amendment made without the lender’s consent will not be enforceable against the lender.  It is sometimes possible to negotiate with the lender that the landlord and tenant may enter into certain “non-material” lease amendments without lender approval. Where this provision does not exist in the SNDA or when the lease amendment does not fall within the definition of “non-material” in the SNDA, it is imperative that the parties make sure that lender consent is obtained.

A common mistake made when amending a lease is forgetting if there is a previously executed SNDA and, if so, whether lender consent is required for any lease amendment. Common examples include (a) a right by the tenant to exercise an option to extend the term of the lease, (b) the right of the tenant to exercise a right of early termination, (c) a right to expand or contract the size of the lease premises, or (d) a right to terminate the lease after the occurrence of certain circumstances. A tenant is well advised to negotiate a provision in the SNDA to provide that lender’s consent is not required for any lease amendment to document the exercise of an existing right in the lease (previously approved by the lender).

When an existing SNDA provision is in place, a landlord and tenant will commonly and mistakenly modify the lease and forget to request the lender’s consent. This could have adverse consequences as the modification may not be effective against the lender, causing significant damage to the tenant benefitting from the modification.

There are numerous examples of the ways in which this oversight may be detrimental to the tenant. For example, in a down market,  a landlord may provide a tenant with some rent relief (whether in the form of free rent, lower rent or some other concession) in exchange for an extension of the lease.  This gives the landlord more stability with respect to its cash flow and provides the tenant with a better chance to weather an economic downturn. If the landlord and tenant do not secure the lender’s consent to this type of amendment, and the parties have already signed an SNDA with the lender in connection with the initial lease signing, if there is a foreclosure, the new landlord may not be obligated to honor the rent concession given to the tenant.  The tenant may find itself paying a higher rent for a shortened lease term.

Some tenants argue that it is unlikely that a successor landlord would want to terminate an existing lease upon foreclosure, but there are instances in which it is a real risk. For example, a lease signed during a downturn in the real estate market might be at a rental rate that is significantly lower than the market rate at the time of a foreclosure. In that instance, a successor landlord who has the right to terminate a lease upon foreclosure may elect to terminate the lease in order to replace it with one that has a higher rental rate, or use that right of termination to leverage a higher rental rate from the existing tenant who signed its lease during the economic downturn. In either case, the tenant will have virtually no leverage and will likely have to agree to the successor landlord’s demands. Thus, it is imperative that the tenant seek to obtain an SNDA from the landlord’s existing lender(s) in order to protect its leasehold interest.

What issues have you encountered in connection with an SNDA provision and related lease amendments?

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