Subordination, Non-Disturbance and Attornment Agreements and Commercial Leases: Why Are They Important?
[NOTE: this post originally appeared on The Vanilla Shell on September 6, 2010]
Read through any commercial lease and you’re likely to find a clause that reads something like this:
Tenant agrees that this Lease shall subordinate to any present or future first or junior mortgages and to any and all advances to be made thereunder and to the interest thereon and all renewals, replacements and extensions thereof provided the mortgagees named in said mortgages shall agree to recognize this Lease in the event of foreclosure if Tenant is not in default. In the event of any mortgagee electing to have this Lease be deemed a prior lien to its mortgage, then upon such mortgagee notifying Tenant to that effect, this Lease shall be deemed prior to the lien of said mortgage, whether this Lease is dated prior to or subsequent to the date of said mortgage. This provision shall be self-operative but in the event that any such mortgagee shall require that Tenant execute a document evidencing such subordination, Tenant shall sign an instrument to that effect and in the event Tenant does not do so within ten (10) days following a written request, Landlord shall be deemed to be Tenant’s attorney-in-fact for this purpose.
The above clause is what’s known as the “subordination and non-disturbance” clause of the lease. Oftentimes, as this sample provision indicates, and usually at the time that the landlord pledges the leased property as collateral for a loan, the parties execute a separate agreement – the Subordination, Non-Disturbance and Attornment Agreement (“SNDA”) – that covers these three key concepts:
- Subordination is an agreement to allow another’s interest in real property to have priority over one’s own interest; lenders typically require that tenants subordinate their leasehold interests to the lien of the first mortgage.
- Non-disturbance means an agreement by the lender to recognize the tenant’s rights under the lease after a foreclosure.
- Attornment is the tenant’s acknowledgment of its obligation to a new, substituted landlord after any transfer of the landlord’s interest.
Five years ago when the real estate market was booming, no one paid much attention to SNDA Agreements. With commercial foreclosures on the rise in recent years, however, this simple document has taken on a new importance and it is in the best interest of all parties to the commercial leasing relationship – the tenant, the landlord and the landlord’s mortgage lender – to have such an agreement in place.