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SNDAs – (S)o Do you (N)eed those (D)ocuments (A)nyway?

Date

June 1, 2009

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4 minutes

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You are nearing the final days of the 30-day due diligence period under your contract to acquire a 200,000 square foot shopping center and everything looks good. You then receive a call from your attorney advising you that your lender has added a condition to its loan commitment requiring that you obtain Subordination, Non-Disturbance and Attornment Agreements (commonly called “SNDAs”) from all 20 tenants at the property.

You ask your attorney: “Does the lender really need these documents? Can we get the lender to waive this requirement?”

The answer to these questions lies in a better understanding of the purpose of SNDAs. The first three letters (SND) stand for “subordination and non-disturbance.” For the most part, lenders gain little from subordination agreements accompanied by non-disturbance agreements with tenants. Although the subordination provisions give the lender’s mortgage priority over the tenant’s lease and, in theory, will allow the lender the option to terminate the lease in the event of a foreclosure, the non-disturbance provisions prohibit the termination because the lender has agreed “not to disturb” the tenant’s interest.

One ancillary benefit to the lender of a well-drafted subordination provision, however, is clarification that the lender’s rights under its mortgage take precedence over any conflicting right of the tenant under the lease, such as the rights with respect to the application of insurance proceeds and condemnation awards. Whether such a benefit is an adequate reason to require the SNDAs is speculative, at best.

The fourth letter (A) stands for “attornment.” Attornment is the act of recognizing the rights of others. In the event of a foreclosure, the lender wants the tenant to recognize the lender's (or foreclosure purchaser's) rights as the new landlord under the lease. In Illinois, there are cases that provide that a tenant whose lease is subordinate to a mortgage may be released from its liability under the lease upon a foreclosure of the mortgage, unless the tenant has expressly agreed to attorn to the lender.

Therefore, attornment agreements can be very important. Most commercial leases, however, contain a self-operative attornment agreement, alleviating the need for the “A” in SNDA, in most cases.

Based on the foregoing, SNDA(s) hardly seem necessary. Why do the lenders even bother? One answer may be the additional comfort that lenders obtain by knowing they have a definitive attornment agreement, and, while they cannot disturb the tenant’s lease upon foreclosure, a definitive subordination agreement. If this were the only answer, however, many lenders who request SNDAs probably would not bother.

The other, more persuasive, answer may be the fifth letter in SNDA. If you are confused, what you do not realize is that most SNDAs really have a silent “E” on the end that stands for “extras.” These extra lender benefits may occupy half of the document, or more, and include, to name a few: (1) the lender’s right to notice from the tenant of any landlord defaults, and (often lengthy) rights to cure those defaults before the tenant can exercise any remedies, (2) exculpation provisions in favor of the lender permitting the lender to escape liability from such things as prior landlord defaults or the obligation to return the tenant’s security deposit in certain circumstances; (3) the lender’s right to void amendments to the lease entered into without the lender’s consent, and (4) the tenant’s express agreement to pay the rent due under the lease directly to the lender on default or at the lender’s request.

So while there may be very persuasive arguments to talk the lender out of requiring the Ss, the Ns, the Ds, and the As, it may be harder to convince the lender to give up the Es. With that in mind, a compromise that a lender might consider is to forego the standard SNDAs, provided that the “extras” (and attornment agreements, if necessary) are included in the estoppel certificates required from the tenants. Unlike SNDAs, tenant estoppels will likely be required by both the lender and the purchaser in almost every commercial real estate transaction.

This article was first published in the “Legal Advisor” section of the June 2002 edition of Real Estate Chicago magazine.


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