‘R’ Is for Recognition Agreement
Last month we talked about the SNDA (subordination, nondisturbance and attornment) agreement, a device by which a tenant can protect its leasehold interests from termination by a defaulting landlord’s foreclosing lender. Today we look at a sister agreement, this one in the context of the landlord-tenant-subtenant relationship.
The recognition agreement, sometimes called “sublease nondisturbance agreement,” is defined as an agreement between the landlord and the subtenant. Should the sublandlord (the tenant under the lease) default, the landlord will not disturb the subtenant’s right to remain in possession under its sublease. The subtenant then recognizes the landlord and becomes a direct tenant of the landlord. The sublease creates two distinct legal relationships between the sublandlord and the subtenant (one in real property law and one in contract law) and if the lease is terminated for any reason, the sublease is automatically terminated.
So the subtenant, having no direct relationship with the landlord, must depend on the tenant-sublandlord to stay in compliance with all the lease terms lest it be evicted, too.
To summarize: Obtaining this agreement is of special importance to multifloor office and retail tenants, especially where the tenant-sublandlord is in a precarious financial state—often the background story as to why the tenant is looking to shed space in the first place. Likely the recognition agreement is unavailable to smaller tenants.
When is a good time to try to get the landlord on board with the recognition agreement? The earlier the better. How about in the “letter of intent” stage? This all gets translated into the lease, which would provide that if the tenant delivers a qualifying sublease—one with a subtenant that meets certain pre-agreed to criteria (financial, use, amount of space, length of term and the like)—the landlord will deliver a recognition agreement in favor of that subtenant. While the landlord will naturally be reticent about giving rights to some as-yet identified party, it boils down to a tenant with leverage subleasing to a very credit-worthy company.
The other scenario is that the recognition agreement is requested during the lease term in connection with a defined transaction. The subtenant and the terms of the sublease are then known to the landlord, making the request far more palatable.
Of course there are some warts and wrinkles to acknowledge. First, below-market sublease rent—often the most attractive part of the deal for the subtenant—goes out the window as the landlord will insist that rent levels be brought to the number set forth in the lease—or perhaps an even higher number if the market has outstripped the rent reserved; the subtenant, which is often not known to the landlord or the tenant when the lease is executed, would have to meet certain financial criteria, perhaps a high credit rating from Standard & Poor’s); the subtenant will also be forced to give up any tenant improvement allowance and sub-rent abatement and other atypical concessions granted by the now defunct tenant-sublandlord. Sometimes an additional security deposit must be paid. Of course, the subtenant must not be in default. Counsel should also negotiate a provision that the subtenant will not be joined as a party in any eviction proceeding, except where it is a necessary party.
Practice pointer: If the sublease covers the entire premises, the landlord’s analysis of whether or not to give a recognition agreement boils down to the following question—if the premises were vacant, would I have entered into a direct lease with his subtenant?
Jeffrey A. 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.