Yes, Virginia, There is an SNDA Clause

If you’re familiar with commercial leasing, you’re probably already familiar with the SNDA (pronounced Ess-ENN DEE-Eh). If not, you’re probably asking “What’s an SNDA and why do I need one?”

SNDA stands for Subordination, Non-disturbance and Attornment Agreement. You need an SNDA if you are a commercial tenant, a commercial landlord, or a lender taking a mortgage against commercial property.

If you’re a tenant, the SNDA protects you from being evicted if your landlord stops paying its mortgage loan. Without an SNDA, a mortgage foreclosure can result in your lease being wiped out.

If you’re a lender, you have equally strong reasons for wanting an SNDA. Depending on when the lease was signed and what the lease says, the mortgage may not give you a complete first lien against the property. Even if the lease provides that the tenant’s rights are subordinate to all present and future mortgages, that subordination is often conditioned on the lender providing the tenant with an acceptable SNDA. And if the lender eventually takes over the property, many SNDA’s provide that the lender is not responsible for certain of the landlord’s past or future obligations.

If you’re a landlord, you need to be able to offer an SNDA from your lender in order to attract tenants, and you need to be able to offer lenders an SNDA from each of your tenants in order to refinance the property. Of course, by the time the SNDA needs to be exercised, the landlord will probably be out of the picture. For that reason, many landlords are happy with whatever SNDA makes their tenant and lender happy.

How does the SNDA accomplish all that? Subordination, non-disturbance and attornment are closely related concepts. Subordination is the tenant’s agreement that its interest under the lease will be subordinate to that of the lender. Of course, in many situations, the mortgage will already be superior, depending on when the mortgage was recorded and when the lease was recorded or the tenant took possession of the property. But the lender will want to make sure its priority is not lost if the loan documents are amended, and both the lender and the landlord will want to protect the landlord’s ability to refinance with a different lender.

Attornment is a holdover from feudal law, when the law considered the relationship between landlord and tenant to be personal. Attornment is the tenant’s agreement to become the tenant of someone other than the original landlord and who has now taken title to the property. A 1939 Ohio case applied this doctrine to release a tenant from the duty to pay rent to its landlord’s lender after foreclosure of the mortgage, because the tenant had never attorned. New York Life Ins. Co. v. Simplex Products Corp., (1939) 135 Ohio St. 501, 21 N.E.2d 585.

A year later, in a case concerning another lease, the Ohio Supreme Court found that certain language in that lease made attornment automatic. Liberal Savings & Loan Co. v. Frankel Realty Co. (1940), 137 Ohio St. 489, 30 N.E. 2d 1012. The opinion in Liberal Savings & Loan Co. also suggested that the modern changes in the law make the entire doctrine of attornment obsolete, even without specific attornment language in the lease. Most modern leases continue to require the tenant to attorn to the mortgagee, the purchaser at foreclosure, and any other person who succeeds to the interest of the landlord.

Non-disturbance, as the name implies, is the lender’s promise not to disturb the tenant’s right to occupy the premises in the event of a mortgage foreclosure. In many states, including Ohio, foreclosure of the mortgage automatically terminates the lease, unless the lease is superior, or the mortgage holder has specifically agreed that the lease will survive. Non-disturbance agreements are typically combined with the tenant’s confirmation of its subordination and attornment obligations into an SNDA. The extent of the non-disturbance protection will vary, which I hope to discuss in a future article.

Of course, not every landlord will agree to provide a non-disturbance agreement to every tenant. A major tenant may rightly insist on receiving an SNDA, and might even attach its required SNDA form as an exhibit to the lease. Smaller tenants may not be able to obtain an SNDA at all; they are simply not important enough for the landlord to bother the lender.

Keeping It Real.  The lending climate may have an impact on what the lease requires the landlord to do, even for a major tenant. What does your lease say about subordination? If you are negotiating a new lease, what should the lease say? What provisions should tenants and lenders look for in an SNDA? Future posts in Keeping It Real will address some of those questions.

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