Commercial Leasing: “Subordination, Non-Disturbance and Attornment”

By: Jeanne S. Saffan, Esq.

Commercial properties have not been immune from the stresses of a sluggish economy and we continue to see significant turnover in the ownership of properties due to lender foreclosures. Following foreclosure, the relationship between the commercial lender, commercial tenant and new property owner, may be governed by a subordination, non-disturbance and attornment agreement (“SNDA”), or similar provisions in a lease. The terms of the SNDA will vary in accordance with the commercial tenant’s bargaining power. For instance, a significant anchor store in a mall will have much more bargaining power when entering into a lease, than a single location retail boutique.

Each of the parties to an SNDA has legitimate objectives when entering into the agreement. The landlord typically wants to get the property leased and to satisfy the lender’s requirements when applying for financing. A stable tenant represents a steady stream of revenue and puts the property owner in a more favorable position with the lender.

The commercial lender generally secures its loans with a power of sale mortgage on the real estate. The value of the collateral will be determined largely by the amount of current and future lease revenue, and the ability of the lender to sell the property. The lender wants the assurance of a tenant who, after foreclosure, will continue to lease the property from a subsequent property owner, but to preserve its options, the lender also wants any interest a tenant may have in the property to be subordinated to the lender’s rights in the event of default and foreclosure.

The commercial tenant is primarily concerned with its ability to remain on the property in the event of foreclosure. Many commercial tenants make large investments in the real estate that they occupy, and an eviction by the foreclosing lender, or subsequent property owner, would be costly. The language of the “non-disturbance” provision of the SNDA assures the tenant that it will be able to maintain its business in the same location following foreclosure. When the tenant “attorns” to the lender or purchaser, it confirms that the lease remains in effect with the new landlord.

Non-anchor tenants and most landlords should carefully consider an SNDA agreement or lease provision early in their relationship. Even if lender financing is not an issue at that time, if the landlord applies for a loan later, the lender’s bargaining power will be greater than that of either the landlord or tenant, and its requirements will be considerable. Anchor stores and prominent commercial tenants, on the other hand, possess substantial bargaining power and should use it to negotiate provisions of an SNDA agreement that protect their long-term investment in the property.

If you need help understanding your rights under a commercial lease or SNDA, please contact a member of our firm’s Real Estate, Development and Environmental Practice Group.