When a tenant invests significant capital, time and resources in a leased location encumbered by a mortgage or other loan secured by the premises, a Subordination, Non-Disturbance, and Attornment Agreement (SNDA) is an important document to help protect its investment. The multiparty dynamic of these agreements requires careful navigation because a poorly negotiated SNDA can undermine hard-won rights negotiated in the lease at the very moment a tenant can least afford to lose them.
Below is a practical overview of the components of the SNDA and key considerations tenants should keep in mind when negotiating them.
What an SNDA Does
The SNDA is a triparty agreement governing the relationship among tenant, landlord and the landlord’s lender. Each component carries distinct implications for tenants:
- Subordination. The tenant agrees that its leasehold interest is subordinate to the lender’s mortgage so that the lender’s lien takes priority over the lease and any recorded notice of lease. Without an SNDA, the interests of a tenant through a recorded notice of lease may take priority over the interests of a lender through a recorded mortgage, which is why lenders typically insist on subordination.
- Non-Disturbance. This is the most critical element of the SNDA from a tenant’s perspective. If the lender forecloses or otherwise steps into the landlord’s shoes as is typically permitted in a mortgage or other lending agreement, the tenant wants a lender to promise not to disturb the tenant’s possession and rights under the lease. This is the protection tenants receive in exchange for subordination and serves as tenant’s main protection of its investment in the leased premises.
- Attornment. The tenant agrees that if the lender or a third party to whom the lender may eventually sell the premises to succeeds to the landlord’s interest, the tenant will recognize that party as its new landlord and continue performing its obligations under the lease, effectively consenting in advance to accept a successor landlord with whom it has no prior relationship.
Lenders typically drive the request for an SNDA in connection with a financing or refinancing, while a tenant is primarily interested in securing non-disturbance protection that subordination would otherwise jeopardize. With no preexisting relationship between the tenant and lender, the dynamic can become complex. Both parties rely on the landlord to act as intermediary because the landlord has an interest in securing both the loan and lease and is in privity with both the lender and tenant.
Tenant Protections and Negotiations
Timing Is Everything and Establishing Leverage During Lease Negotiation
Multiparty agreements are inherently slow, and SNDA negotiations can create delays in financings, sales and lease commencements. However, tenants can use this dynamic to their advantage. By understanding and establishing leverage at the lease negotiation stage and recognizing the critical timing pressures surrounding SNDA execution and recordation, tenants can position themselves to secure more favorable terms:
- Condition to Execution. The most effective time for a tenant to negotiate an SNDA is in the lease itself, not after a lender presents its own form at the end of the negotiation or mid-lease term. For existing lenders, tenants with leverage should provide their preferred form of SNDA and require the landlord to cooperate and coordinate to have it signed by its lender. Larger bank lenders may require that tenants start with the bank’s form, which is typically acceptable as long as a tenant has an opportunity to review and negotiate, either directly with the lender or through the landlord. Ideally, tenants would require execution of an SNDA as a condition to execution of the lease itself, but in many instances, milestones such as delivery of the premises or commencement of rent may be used as deadlines for finalization of SNDAs. Tying SNDAs with existing lenders to critical stages of lease execution incentivizes the landlord to keep pressure on the lender to move the negotiation and execution of an SNDA along. Where tenants have leverage, they should attach their preferred SNDA form to the lease and require any future lenders to start from that form. Although not every tenant will have the leverage to push for their own preferred forms, placing the obligation on the landlord to facilitate and obtain both an SNDA from any existing lender and any future lenders encumbering the leased premises is a critical component that should be agreed upon early in the letter of intent or during lease negotiation.
- Condition to Future Financing. As referenced above, tenants should take steps to look beyond the current lender(s) of a leased premises. By including an affirmative obligation of landlord in the lease to obtain a tenant-approved SNDA as a condition to any future financing, and by prohibiting automatic attornment to unknown future lenders, tenants can ensure that the protections they negotiated at the outset are preserved throughout the entire lease term.
- Execution and Recordation. An SNDA is effective among the parties upon execution, but execution alone is often not enough. Where a notice of lease has been recorded, the SNDA itself should be recorded so that the protections of the SNDA run with the land and bind successors and assigns. Tenants should negotiate for the right to record the SNDA and, if possible, require the landlord or lender to do so promptly after execution.
Common Negotiation Points and How to Navigate Them
Because of the different interests that each party has in the property, SNDA provisions requested by a lender may conflict with a tenant’s carefully negotiated lease terms. Tenants should insist that the lease terms control or, at minimum, that the tenant’s substantive rights under the lease be preserved. A lender’s loan default should not be permitted to unwind lease terms a tenant negotiated in good faith, and the time to secure that protection is in the SNDA.
- Assuming Liability of Landlord. Lenders will often refuse to assume liability for the landlord’s acts or defaults, unwilling to be responsible for breaches or monetary obligations that accrued before a lender stepped into the shoes of the landlord. Unfunded tenant improvement allowances, incomplete landlord work and unrealized free rent are among the most significant economic risks a tenant faces in a foreclosure, as these landlord obligations can suddenly vanish if the landlord is displaced by the lender. To guard against this, tenants should negotiate self-help and offset rights in the SNDA, such as the right to perform outstanding work themselves and recover costs through rent abatement. As a practical matter, curing defaults is generally in the lender’s own interest because tenant retention preserves the asset value while lease instability could undermine marketability, regardless of whether the lender intends to hold or sell the property containing the leased premises. Framing reasonable cure obligations as protections aligned with the lender’s goals can be an effective negotiation position.
- Lender Consent Rights. Lenders often incorporate consent and approval provisions into the SNDA, including requirements that tenants obtain lender approval before executing lease amendments. This is not unreasonable because lenders have a legitimate interest in changes that reduce rent or materially alter the premises. Nevertheless, tenants should negotiate to narrow the scope of these consent rights, such as exempting lease modifications that do not diminish the lender’s collateral. Where lender consent is required, the tenant should advocate for a defined response period within which the lender must act together with a “deemed-approval” mechanism in the event the lender fails to respond within the given time frame. Limiting the scope of lender consent rights to narrowly meet the landlord interest reduces administrative burdens on both parties, and a deemed approval period provides certainty and helps minimize delays in deals.
- Lender Cure Rights. Lenders typically want the right to cure a landlord default before the tenant can terminate a lease in order for a lender to have the right to try to preserve the lease and its accompanying income stream. That is not unreasonable in concept, but it could extend the cure period that the tenant and landlord negotiated in the lease. Tenants should negotiate to cap the additional cure period to protect their business operations or other use of the property. Further, the tenant’s other remedies, including offset and self-help, should be expressly preserved during any lender cure period so the tenant is not left without recourse while the additional cure period runs.
- Casualty Insurance Proceeds. After a casualty, lenders typically want to apply insurance proceeds to the loan balance, while tenants want those proceeds directed toward rebuilding the premises. Tenants should negotiate for an express rebuild obligation with proceeds applied toward restoration. Tenants are well positioned here because they selected the premises and likely invested significant capital in improvements, and applying proceeds to the loan effectively eliminates the tenant’s bargained-for space without compensation. Rebuilding also serves the lender’s interest by preserving the asset securing the loan.
Conclusion: Risk Assessment in Practice
It may be easy to view the SNDA as a backend administrative document once the heavy lifting of the lease negotiation is finished, but tenants who underestimate its significance may do so at their own peril. A tenant who does not carefully negotiate the SNDA may find, at the worst possible moment, that the protections it thought it had under the lease do not survive a foreclosure.
Ultimately, every SNDA negotiation comes down to an assessment of risk, and there are many factors that contribute to the leverage a tenant might have to negotiate against a lending institution. A well-negotiated SNDA preserves the benefit of the tenant’s bargain, but a poorly negotiated one can quietly surrender it.