In the universe of agreements that can protect a tenant’s fundamental right to life, liberty and undisturbed tenancy—at least until the end of the agreed upon term—one of the most important is the SNDA: Subordination, Non-Disturbance and Attornment Agreement.
In our scenario, the building has been mortgaged. The SNDA is defined as an agreement between lender and tenant to the effect that tenant will subordinate its lease to the lien of the mortgagee-lender provided that the lender agrees that in the event of landlord’s (mortgagor’s/borrower’s) default it will not disturb the tenant’s right to remain in possession under its lease.
Plus, if there is a foreclosure, the tenant will attorn to (recognize) the lender or new owner as its landlord. (The equivalent protection for a subtenant, vis a vis a defaulting sublandlord, is found in a document called a Recognition Agreement. That’s next month’s column.)
Here, we highlight the general rule that in connection with a foreclosure the lender has the right to cancel leases. Thus, obtaining this agreement is of special importance to major office and retail tenants, especially where the landlord is in a precarious financial state. Lenders are loath to cut off their options and so won’t freely hand out SNDAs. This means that as a general rule the SNDA is unavailable to small, clout-challenged tenants.
How great is the risk that the new landlord would want to terminate existing leases? A smaller tenant in a major Midtown office building does not have much to worry about, but there are instances in which it is a real risk. For example, a major lease with a rent significantly below market might be a target to terminate. The landlord’s strategy would be to use the termination right as a club to renegotiate the rent.
Good news: You have a term sheet that calls for an SNDA for your client. There will be a formal agreement that notwithstanding the foreclosure, tenant’s rights to its premises will be preserved (“nondisturbed”) except on specified—sometimes onerous—conditions.
The initial form for an SNDA will be generated by the lender or potential lender. The tenant and its counsel may be surprised to find that there are many tradeoffs required to get the SNDA protection. The form provided by the lender attempts to shift as much of the underwriting risk as possible related to a landlord-borrower default from the lender to the tenant. The tenant’s counsel must address collateral issues including return of security deposits, landlord’s work, free rent concessions; all must be protected.
To highlight areas that must be addressed: the lender requires that the tenant not be in default. Pro-tenant language would include a lender’s agreement that the tenant will not be joined as a party in any foreclosure action, except where the tenant is a necessary party. This will save the tenant unnecessary attorney’s fees incurred in participating in any foreclosure action that ultimately will not affect its tenancy.
Now here’s where the matter starts to get a bit hairy and a good place for tenant lawyers to earn their fees: Invariably the modern SNDA will also include significant limitations on the obligations of the lender (or any purchaser at a foreclosure sale), in the event such party comes into possession of property. Some examples (with pro-tenant advice in parentheses):
* Lender not liable for any act or omission of the prior (now foreclosed on) landlord. (Delete this—the tenant does not want to be in a position where the landlord fails to perform under the lease then following the foreclosure, tenant has no recourse against the new landlord. The tenant is left with its claim against the now-likely judgment-proof-foreclosed-out landlord.)
* Lender not subject to any offsets or defenses that tenant might have (also delete, same reasoning); lender not bound as to any prepaid (beyond current month) rent (fair).
* Lender not bound by any amendment or modification of the lease made without lender’s consent (fair, but I’d suggest limiting to amendments that materially impact the landlord’s rights or remedies under the lease; also provide said consent not to be “unreasonably withheld, delayed or conditioned.”)
* Lender only has obligations as to tenant’s security deposit to the extent actually remitted by the prior landlord (delete—lender will get benefit of future rents, tenant shouldn’t forfeit a security deposit without cause).
* Lender not required to pay TI (Tenant Improvement) allowance nor perform landlord’s work (three pro-tenant approaches: delete, or pre-foreclosure scenario, landlord posts a bond or escrow equal to its obligations, or gives tenant a right of offset against rent coming due.)
As a final practice pointer: Most mortgages provide that lender has first dibs on casualty insurance proceeds—the right to apply same to pay down the loan, thus not, as the lease provides, available for reconstruction of the premises. Try to include in the SNDA a provision that the lease language will prevail.
SNDAs: Yes, it’s complicated but worth the effort if available to tenant.
Jeff Margolis is founding principal of The Margolis Law Firm in New York City, where he specializes in “dirt” law—buying, selling and leasing. Jeff’s website is newyorkleaselaw.com