The SNDA: A Critical Safeguard in Commercial Real Estate Leasing

In this article, you'll learn:

• The parties involved in Subordination non-Disturbance Provision
• How SNDA's protect tenant's rights to the property for the full lease term
• Why office tenants are refusing to sign any new leases without SNDA’s
• Who you want in your corner when negotiating

Your landlord's occupancy levels are dropping, therefore vacancy rates are going up.

Their property values are dropping. And now, they can't pay their mortgage...

The building slips into the foreclosure process, and in all probability, a court-appointed receiver will be assigned to the property. They have wide-ranging powers inclusive of terminating any contract, renegotiating any contract, and/or renegotiating or terminating existing leases. 

So, now what happens to you as a tenant? You're now caught in the crossfire betwen your landlord, the bank, and the receiver. Keep reading to find out how this affects your tenancy. 

Unfortunately, tenants without this critical protection will find themselves at the mercy of the court-appointed receiver and/or eventually the bank if the building goes into foreclosure. Depending on the jurisdiction of your building, proceedings can drag on for years. This can leave you, the tenant, in limbo, thus stalling any new plans or ability to recruit and retain great talent. 

Because even if they decide to keep all existing leases intact, paying the property taxes, utilities, and the mortgage payments will be their primary responsibilities.

Predictably, if there wasn't enough money to pay the mortgage and all the building expenses, building maintenance and upkeep will suffer. Additionally, you can expect cuts in office cleaning and perhaps even security. The receiver has a difficult job of trying to keep the building afloat with substantially less cash flow. So, something's got to give...

While this could seem like a worst-case scenario, this nightmare is becoming reality for many businesses. It's no secret that the country's real estate market is on shaky ground. Modern tenants face high stakes due to the financial instability of property owners and navigating the foreclosure process has become a very real concern, making it far from unrealistic for subordinate leases to be at risk.

As the landscape continues to shift, the importance of understanding and negotiating key lease provisions like the Subordination, Non-Disturbance, and Attornment Agreement has never been more critical. This agreement serves as a vital safeguard, ensuring that tenants can maintain their lease rights even if their landlord defaults on a loan and a lender assumes the property.

And speaking of doomsday scenarios, there's a whole litany of considerations modern corporate tenants need to take when negotiating office leases. So, download your copy of Surviving the Office Apocalypse today. It is chock full of helpful provisions like the SNDA and provides a roadmap on how to use them.

The Subordination Non-Disturbance and Attornment Agreement

The SNDA is a three-part agreement that addresses the relationship between the tenant, the landlord, and the landlord’s lender.

Three Core Components

It ensures that the rights of the original lease are protected in the event of foreclosure, which is increasingly common as landlords struggle with declining property values and financial instability.

1. Subordination Clause
   

   The subordination provision in the SNDA requires the tenant to acknowledge that their lease is subordinate to the lender's mortgage or security interest in the property. This means that without an SNDA, the lender’s claim to the property takes priority over the tenant's leasehold interest. In essence without an SNDA, the tenant agrees that the lender's rights under the loan documents will take precedence over the tenant's lease. Therefore, as a tenant, you are in an insecure situation that could take months (if not years) to play out. 
   
   

2. Non-Disturbance Agreement

   The non-disturbance portion of the SNDA is a critical safeguard for tenants. It ensures that as long as the tenant complies with the terms of their lease, their right to occupy the property will not be disturbed by the lender. This provision is particularly important in protecting the tenant from eviction or other disruptions that could occur during the foreclosure process.
   
   

3. Attornment Provision

   The attornment agreement is the final piece of the SNDA puzzle. This provision obligates the tenant to recognize and accept the bank as the new landlord. This means that the tenant agrees to continue paying rent and adhering to the lease terms. 
   
   

Note the following sample SNDA for an outline on the provision. Remember you must consult a qualified real estate attorney to fully safeguard your legal rights. 

This sample SNDA and other gems like it are all available for free in Surviving the Office Apocalypse because entering today's market without the right information is like jumping into open water without knowing how to swim. Secure your path with the Surviving the Office Apocalypse guide—loaded with essential tools like this SNDA sample. In this unpredictable market, tenants need every edge. The choice is yours.

The Risks of Not Having an SNDA in A Tenant's Lease

Failing to include an SNDA in your lease agreement exposes tenants to significant risks, particularly in today’s volatile market. Without an SNDA, businesses will find themselves in a precarious position if their landlord defaults on a loan. And just saying, 1 in 3 office landlords are at risk of default now.

In such cases, the receiver has the right to foreclose on the property, potentially voiding the tenant’s lease and disrupting their business operations.

Additionally, despite their best efforts, tenants without an SNDA  have limited negotiating power with the new property owner or lender. In this case, they are vulnerable to unfavorable lease terms or even eviction.

The lack of an SNDA can also complicate the tenant’s ability to recover their security deposit or assert their rights under the lease agreement. Without an SNDA, businesses are unprotected if their landlord can't pay their mortgage. Therefore, it needs to be drafted in the original lease.

Negotiating the SNDA in a Tenant-Favored Market

With supply and demand in favor of the corporate tenant, there is often more leverage to negotiate favorable terms, including the inclusion of an SNDA.

Given the current environment, where a significant percentage of landlords are at risk of default due to declining property values and increasing financial pressures, tenants must insist on the inclusion of an SNDA in their lease agreements. In fact, many are refusing to negotiate without the inclusion of such a clause.

But don't just expect your landlord to offer you the clause on a silver platter. The responsibility is on the tenant to conduct due diligence to know which clauses that work in their best interest are missing from any lease draft.

Considering the complexity of SNDAs, tenants should work closely with a specialized attorney and True Tenant Rep™ to negotiate the terms of the clause, ensuring that their rights are adequately protected.

This dream team can also assist in reviewing the broader lease agreement, identifying any other critical provisions that may impact the tenant’s rights, such as estoppel certificates, security deposit provisions, and the relative priorities of other interests in the property.

Securing their position in the leased property will be the utmost importance.

Key points to negotiate include the scope of the non-disturbance provision, ensuring that the tenant's lease will remain intact even in the case of a foreclosure. Similarly, the attornment provisions should clearly outline the tenant’s obligations to any new landlord that may take ownership of the property.

The Role of the Lender in the SNDA Process

The lender plays a critical role in the SNDA process, as they are the party most likely to benefit from the subordination provision.

However, lenders also have an interest in ensuring that the tenant remains in the property and continues paying rent. As such, lenders may be willing to negotiate the terms of the SNDA to ensure that the tenant remains in place and the property continues to generate income.

Tenants should be aware that lenders may have specific requirements for the SNDA, including provisions that protect the lender’s interests in the event of a landlord default. These requirements may include limitations on the tenant's ability to terminate the lease or provisions that allow the lender to step into the landlord's shoes and enforce the lease terms.

Again, tenants should carefully review these provisions with their True Tenant Rep™ and commercial real estate attorney to ensure that their rights are adequately protected.

The SNDA as a Vital Tenant Safeguard

The SNDA has become an essential safeguard for tenants. By securing a properly negotiated SNDA, businesses can protect their rights in the event of a default or foreclosure, ensuring that their lease remains intact, and their operations continue uninterrupted.

However, negotiating an SNDA requires careful consideration and the expertise of an experienced attorney. Tenants must be proactive in securing favorable terms and understanding the implications of the SNDA, particularly in a market where landlords are increasingly at risk of default. By doing so, tenants can navigate the complexities of the CRE world with confidence, knowing that their lease rights are protected.

Because remember, commercial real estate is facing unprecedented trouble. A lender foreclosing on your leased property is a more pressing concern than ever. So don't let you’re the fate of your tenancy left up for grabs in a foreclosure sale. Learn what other clauses you need to protect your leases in Surviving the Office Apocalypse.