An Overview of SNDA Agreements
An SNDA, short for subordination, non-disturbance and attornment agreement, is a simple real estate transaction document that is generally utilized in the context of one party’s sale of property to another party with an underlying financing arrangement. In the context of the sale, this buyer has financed and provided a security interest in its property to a lender (or a group of lenders). In so doing, the buyer has pledged the property as collateral for the loan. When a borrower obtains mortgage financing, the lender will want the borrower’s leases to be subordinated to its lien and have the tenants agree that the leases will not interfere with lender’s rights.
Essentially , subordination means that the tenant or leaseholder agrees that the lease will not be a higher priority than debt owed to a lender. The second element is generally only required where the purchaser’s loan is secured by the property and the purchaser has already assumed the seller’s loan. If the sale is of all or substantially all of the property, the lender may also require the purchaser to assume the loan. A non-disturbance provision ensures that although the lease has been subordinated, a tenant will be protected in the event the property is sold to a new owner or lender forecloses on the property. It can protect a tenant from being "kicked out" if a lender were to foreclose on the seller and take possession of the property. The tenant might otherwise be kicked out of the venue by virtue of acquiror asserting a constructive eviction. The third part is the attornment, which is an agreement to recognize the new purchaser or lender as the landlord or creditor going forward.
The Essential Terms of an SNDA Agreement
SNDA (subordination, non-disturbance and attornment): Key components
As the name suggests, an SNDA agreement is made up of three key components – subordination, non-disturbance, and attornment.
Subordination
The subordination component of an SNDA establishes "the priority between a lessee’s interest under a lease and the lien of a mortgage". The lessor and the lessee agree to subordinate all of their interests in the real property to that of the lender. As a practical matter, the requirement for subordination is a lender risk control measure and ensures that the current or future mortgagee can be sure its mortgage will receive priority over the leasehold interest. If a mortgage has been registered or executed against registered land, the mortgage is considered an encumbrance on title regardless of whether or not a lessee has agreed to subject his or her leasehold interest to the lender’s mortgage. However, if a lease is subject to a mortgage that is registered or executed against unregistered land, a lease that is not subordinate is preferred to a lease that is subordinate.
Until recently, the subordination requirement was voluntarily accepted by lessors who wanted to obtain a NENDRS rating to aid in marketing their commercial properties in Alberta. In fact, many property owners "voluntarily" subordinate their leases to the mortgages (and other encumbrances) their lenders place on the property because lenders have made it clear that failure to subordinate would be dealt with severely. To give effect to a qualified rating, property owners had to submit their property to the NEDRS on a subordination basis. Unfortunately, some lenders leave it to the creativity of the lessors to indemnify the lender who suffers a loss on the property and sue them for damages. This approach completely shifts the economics of risk assessment onto the lessors and results in higher rental rates across the board. Other lenders simply see the legal status quo as an administrative burden and require property owners to submit on a subordination basis, to be re-registered, and charged for the additional work. The new changes will now make this voluntary decision for lessors mandatory.
The mere fact that a lease is subordinate to a mortgage does not affect the day-to-day obligations of the parties under the lease.
Non-Disturbance
Non-disturbance agreements are "sometimes collectively referred to as ‘nondisturbance agreements’ or ‘NDS agreements’". By entering into a non-disturbance agreement, the lessor and the lessee agree that "the lessor will not disturb the leasehold, or interfere with the lessee’s quiet enjoyment, so long as the lessee performs all its obligations under the agreement". Once lessee obligations are performed, lenders have agreed to accept the lessor’s obligations in the event of a produce, accident, loss, or failure to comply with an obligation. Most commonly, the non-disturbance provision of an SNDA is drafted in favour of the lessee and basic requirements include obligations for the lessee to (i) keep and observe all covenants, agreements, stipulations, and conditions and (ii) to pay the rent and other charges relating to real property taxes, utilities, insurance, assessments, and applicable duties and fees.
The legal implications of a non-disturbance agreement mean that even if a property has been fully registered as freehold and is encumbered by a mortgage of which the lessee has not agreed to subordinate to, the lessee is considered to be in agreement with the agreed upon provisions.
Attornment
The concept of attornment reflects the notion that if the latchkey is given to a lender during a mortgage in default, the existing tenants or lessees will voluntarily recognize the lender as the new landlord. In the absence of an attornment, a tenant or lessee is entitled to retain possession of the premises until forced out by a judgment of possession or interference by the landlord. If a tenant or lessee refuses to attorn, the lender cannot take possession.
The legal implications of attornment mean that if a tenancy is attorned, but the payments and conditions are not complied with, the lender is entitled to a rectification order from the court in addition to debt payment.
In the absence of a statutory regime in Alberta that allows for SNDA agreements, these agreements remain subject to common law interpretations. The Judicial approach to SNDA agreements has been, and continues to be, quite favourable in the granting of remedies to the lessees. With the recent legislative changes, lenders have removed the risk that former judicial discretionary power could lead to losses for Alberta lenders in favour of SNDA agreements that are tinted with the common law.
How Lenders and Tenants Play a Role
Various interests in the property are at stake when it comes time to draft an SNDA agreement. Lenders and tenants are generally the two remaining parties with interests remaining in the property and concerns about the risk of losing their respective interests due to the foreclosure of the mortgage. Each party will want to protect its own interest in the event of such a foreclosure, which requires that the SNDA agreement address any changes in the rights of each of the parties resulting from the implementation of the agreement. In addition, each party will want to retain the ability to take action to preserve its interest if the other party fails to take action to preserve its own rights in the property.
A tenant’s primary concern regarding a potential foreclosure resulting from a default under the mortgage loan is that its lease is enforceable after foreclosure. This is addressed by requiring that the lease be subordinate to the mortgage. However, as a means for preserving its interest in the property, the SNDA may also require the mortgage lender to enter into a written agreement with the tenant before evicting the tenant upon the lender’s foreclosure of the property. "Non-disturbance" provisions are generally subject to negotiation between the lenders and tenants so the horse-trading is meant to prop up the agreed-upon terms of the SNDA.
Benefits of SNDA Agreements for Property Owners
Benefits of SNDA Agreements for the Owner Of The Property
SNDA agreements can also benefit the owner of the property in that they protect property investments by providing another source of stability in an otherwise uncertain rental environment. Understanding that rents may not be paid, and that tenants may default, is important to landlords. However, risks can be mitigated by entering into an SNDA agreement with the tenant. Such an agreement provides certainty to the tenant about its ability to occupy the property, despite any sale, mortgage, foreclosure, or other disposition of the property by the property owner.
Typical Misunderstandings and Truths
Despite the standardization of forms, SNDA agreements can also pose some challenges. For example, coordinating the timing of their execution can be difficult. Lenders may want an insurance of priority at loan closing and landlords may want the tenant to sign the MNDA before it releases its landlord estoppel certificate, not wanting to bind itself until it knows the exact terms of the lease. The landlord may want some time to execute the SNDA agreement, but the tenant may refuse to surrender its rights and leasehold mortgagees will not agree to delay their document.
Some issues involve dissimilarities in state laws and practice. Some states impose a duty on the tenant to subordinate its mortgage-holding rights and to execute a non-disturbance agreement regardless of whether the lease expressly requires such acts. Other states have held that a tenant has no duty to consent to an SNDA to which it has not consented. Some states require that SNDAs be executed concurrently with or shortly after the lease so as to avoid disputes over subsequent leases over space within a project. Constructive notice statutes in some states, such as Illinois, deem parties charged with the notice of the landlord’s rights and restrictions contained in recorded documents to be on constructive notice of the contents of SNDA agreements by which their lease subordinates .
A related issue is the scope and extent of the tenant’s subordination, non-disturbance and attornment agreements. Tenants sometimes seek to limit the agreement to a particular beneficiary of a deed of trust or mortgage, but lenders are often reluctant to do this as this is no protection for the landlord if the lender assigns the mortgage or deed of trust it will then hold without first obtaining the tenant’s consent or agreement.
Both tenants and lenders are often concerned about the force and effect of the SNDA agreement on third parties. For example, a tenant may object to giving lenders an agreement that could prevent it from enforcing its right to cure mortgage defaults. A lender may object to executing an SNDA agreement that prevents it from charging certain fees considered customary in its industry, such as periodic confirmation of the tenant’s minimum net worth or requiring additional guaranties from the entity owning the property or any entities affiliated with the owner. Both parties may want to clarify in the SNDA an allocation of responsibility for any real estate or other taxes owing on the real property. Tenants may want to limit the lender’s right to transfer SNDA in the event of foreclosure or limit the lender’s ability to sign documents relating to financing leases. Landlords may want the ability to request financial statements and updates over the life of the agreement.
Elements of an Effective SNDA Agreement
A typical SNDA agreement will first acknowledge the mainstay lease agreement and the existing fee mortgage. A typical provision will state: "This SNDA is effective on and from the date stated above and amends and supplements that certain lease agreement, dated July 24, 2019, between Landlord and Tenant (the "Lease"), and the mortgage and security agreement ("Mortgage") dated November 1, 2019 between Landlord and Lender (the "Mortgage"). Landlord and Tenant are respectively the lessor and lessee under the Lease, and Lender is the holder of the Mortgage." It is important for an SNDA to have a defined effective date, i.e. this SNDA is effective as of … . Having a defined effective date allows both parties to have certainty over the timing of when compliance with the Mortgage and SNDA is required. The SNDA may then recite that the tenant agrees that any lease or sublease now or hereafter made of all or a portion of the Premises, is and shall be subordinate to the senior Mortgage and to all of the terms and provisions of the Mortgage. The SNDA may also prohibit the tenant from holding over or failing to timely pay rent. For example, a typical provision might state that "The Lease is hereby amended to prohibit a sub-tenant, assignee or transferee from failing to pay rent or late fees within five (5) days of the due date set forth in this SNDA without the prior written consent of Lender." Not every lease can be subordinated under New York banking regulations governing SNDA agreements. Regulators require SNDA agreements to be recorded in the county clerk’s office. It is a rare SNDA that will meet all requirements needed to be recorded. Tenants need to keep in mind that the landlord’s fee mortgagees require that any SNDA to a fee mortgage be recorded before any such SNDA can be effective. If the tenant does not sign the SNDA, the landlord may be required to obtain a "blanket subordination of leases" from a fee mortgagee, which subordination instrument would be unilaterally executed by the fee mortgagee and without tenant approval.
Legal Basics Surrounding SNDA Agreements
In addition, the granting clauses of an SNDA agreement vary by jurisdiction. For example, "good and sufficient consideration" may suffice in Wisconsin, while another state requires "adequate and fair consideration." Furthermore, judicial decisions addressing conflicts between provisions of an SNDA and the terms of the underlying mortgage have held that an SNDA may be unenforceable against the successor lender. Even when an SNDA is found to be enforceable, it is possible that a lender will be able to assert its rights to cure defaults and terminate the lease in certain jurisdictions, notwithstanding the terms of any SNDA.
Timing issues also present challenges. Since the lender may not have acquired title to the property when the tenant is asked to enter into an SNDA, there is nothing for the tenant to forbear or subordinate its interests to . Furthermore, the lender may not be inclined to enter into an SNDA until after it has acquired the property through foreclosure.
The term, "non-disturbance," itself, is deceptively simple. It really refers to the protection of rights that a borrower has that are superior over a lender’s rights. Even where an overriding lease is not subordinated, the overriding lease may still be terminated because the terms and conditions of the specific overriding lease are incompatible with the lender. On the other hand, if the overriding lease is subordinated to the lender’s lien (as would be the case in a SNDA), the overriding lease will, upon foreclosure, be destroyed by the doctrine of merger.
Although attempting to resolve these issues can be time-consuming and costly, still, it is important to work with counsel to structure the transaction so that the risks have been addressed.