What Is an SNDA, and Why Does It Matter?

March 9, 2020 by Kyle Niewoehner, Esq.

Lenders operating in the commercial real estate space will frequently require, or consider requiring, an additional document referred to as an “SNDA,” an acronym that stands for “Subordination, Non-Disturbance, and Attornment Agreement”.

An SNDA delineates the relationship and allocation of rights among the lender, the borrower/landlord, and a tenant of the property which is securing the loan. The SNDA is an important means of protection for the lender if it ultimately needs to foreclose and take control of the property. It is also quite common for tenants to negotiate the terms of the SNDA with the lender, as there tend to be competing interests between the lender and tenant when it comes to the terms of the SNDA. This article explains the purpose of the three primary clauses of the SNDA and discusses the negotiation process.

Subordination

The subordination clause of an SNDA subordinates the tenant’s leasehold interest in the property to the lender’s security instrument. This subordination ensures that the provisions of the lender’s security instrument take priority over the lease. Landlords of commercial property often mandate that subordination clauses be included in their lease agreements in order to reserve the right to utilize the building as collateral for a loan, giving lenders the upper hand when it comes to this aspect of the SNDA. Once a security instrument is recorded it will automatically have priority over any subsequent lease.

Non-Disturbance

After subordinating their leasehold to the lender’s interest, tenants typically fight for an extensive non-disturbance clause. The non-disturbance clause affords a tenant the right to occupy the property and retain its rights under the lease in the event of a sale or foreclosure. Obtaining a non-disturbance clause offers some peace of mind to tenants that their leasehold rights will be safeguarded in the event that the landlord fails to fulfill its obligation to make timely payments to the lending institution. This is particularly significant for business tenants who rely on a fixed, stable location in order to minimize expenditures and preserve their customer base.

Attornment

Attornment means that the tenant will officially recognize (“attorn”) a new property owner as its landlord. The attornment clause creates an obligation for the tenant to accept a purchaser of the leased property as its landlord regardless of whether the property was acquired via the foreclosure process. The practical effect of the attornment clause is that in instances of ownership transferal the former owner is replaced by the purchaser as landlord and the purchaser assumes the previous landlord’s rights and obligations pertaining to the lease. The attornment clause therefore mandates that tenants maintain rental payments regardless of the landlord’s identity. Without the attornment clause, a tenant could potentially terminate a lease if the landlord experiences a foreclosure. It is thus a vital protection for a lender who may otherwise worry that foreclosing on the collateral property would destroy much of its value if the foreclosure releases all the tenants from their lease obligations.

A Word on Negotiation

While the three primary clauses form the core of any SNDA, there will usually be a plethora of other provisions which delineate the rights and obligations of the parties in the event of a foreclosure. These additional provisions are usually the focus of negotiations. Tenants will want to carry over any rights they may have against the original landlord, whereas the lender will want to exempt itself as much as possible from any liability arising from the actions of the original landlord.

Timing can be a critical factor when it comes to negotiating the specific terms of an SNDA.

If the negotiation is initiated either prior to the lease execution or after the loan closing (or both), the tenant is afforded the most potential leverage. Prior to execution of the lease, the landlord doesn’t want to lose a potential tenant and may exert pressure on their lending institution to execute the SNDA under terms favorable to the tenant. After a loan closes, the landlord will not be as motivated to pressure a tenant into signing the SNDA and the lender will be eager to protect its now-vulnerable interest by locking up the subordination and attornment protections as quickly as possible, which may result in the lender making more concessions than it would prefer. However, the lender usually wants to close the loan quickly and because of that lenders often end up negotiating SNDAs post-closing. If a lender plans to negotiate an SNDA post-closing, it is important to include language in the loan documents which requires the borrower/landlord to cooperate in procuring the SNDA.

On the other hand, if the SNDA terms are negotiated after execution of the lease and prior to the loan closing, the lender typically has the upper hand. If the landlord was savvy, the original lease included language requiring the tenant to sign an SNDA. Additionally, the borrower/landlord will be eager to close the loan and will have maximum motivation to ensure cooperation from its tenant.

SNDA negotiations involve skillfully balancing the valid interests of all parties involved in the transaction. Deciding when and in what manner an SNDA is implemented is a complex and fact-intensive analysis that is best handled by an experienced commercial real estate attorney that can assist clients in achieving their goals.

If you need help preparing or negotiating an SNDA or have questions about whether you should be obtaining SNDAs for your loans, reach out to Geraci Law Firm for a consultation today.

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