Does Your Tenant Client Really Need an SNDA?

When negotiating the letter of intent or the Lease for your commercial Tenant client, brokers routinely insert a requirement that the Landlord either “use commercially reasonable efforts” to obtain, or actually obtain, a Subordination, Non-Disturbance and Attornment Agreement (“SNDA”) for the Tenant's benefit. But is it really necessary?

The purpose of the SNDA is to protect a Tenant if the Landlord fails to pay the mortgage on the property and the lender forecloses. Depending on the jurisdiction, and also depending on when the lease and the mortgage have been executed or recorded, the Tenant's occupancy of its space may be in jeopardy if a foreclosure occurs. Upon obtaining possession of the property, the lender may have the right to terminate the Lease and evict the Tenant, even if the Tenant is complying with the terms of the Lease. But is that a practical risk?

In the aftermath of the 2008 financial crisis, many lenders recovered commercial buildings through foreclosures. While some leases undoubtedly were terminated due to the lack of an SNDA, the vast majority of leases at those foreclosed properties were not affected, even without an SNDA. The main reason for this is that a Tenant otherwise complying with the terms of its lease and paying rent creates an income stream for the lender, which it may use to pay property expenses and perhaps apply to the mortgage.

So, when is an SNDA really necessary for a Tenant? First, if the Tenant is contributing some of its own money to construct the improvements in the space, the Tenant wants to make sure that its investment is there for the full Lease Term. Second, if the Tenant is very large (often 30,000 square feet and over – but this number varies on the market and how tight it is), it will not be able to relocate quickly if the Lease is terminated. Third, if the rental rate on the Lease is well below current market rates (perhaps because of the long-term nature of the tenancy), the Tenant will want to protect that rate. And, finally, in certain retail situations the Tenant wants to protect its location. All of the foregoing would be prime candidates to request an SNDA.

Keep in mind, however, that some Landlords are unwilling to agree to use even “commercially reasonable” efforts to obtain an SNDA for the Tenant. An SNDA adds another administrative layer in the Lease negotiations, and the Landlord often has to pay its lender either to obtain the SNDA or to negotiate its terms. Thus, many Landlords require the Tenant to bear the cost of obtaining the SNDA, including legal fees incurred by the Landlord. All of these issues are negotiable, but often need to be addressed at the Letter of Intent stage.

These are just some of the questions you should be considering when negotiating your client’s Letter of Intent or Lease. The experienced commercial real estate attorneys at Oliveri & Tammadge, LLC, can help you work through those questions and help avoid future issues regarding this issue, as well as many others. Give us a call.