Iryna Lomaga Carey and Allison Lissner provide an excellent checklist for tenants in their New Jersey Law Journal article "Subordination, Nondisturbance and Attornment Agreements: A Minimum Standard Tenant Checklist." Subordination, Nondisturbance and Attornment Agreements ("SNDA") should be the rule and not the exception for commercial tenants expending significant amounts of money and time on their leasehold improvements.
SNDAs are negotiated between lenders and ground lessors of commercial property to prevent their lease from terminating after a default by the landlord on its mortgage. Without a SNDA, after a default lenders can elect which tenants it wants to keep or replace without giving any consideration to the leases previously executed by the defaulting landlord and tenant.
What does an SNDA provide?
- Subordination: A lender will require that the tenant subordinate its interest in its lease to the mortgage to protect the lender's lien position. Tenants must agree to this provision and the attornment provision in order for the lender to agree not to disturb their tenancy after a foreclosure.
- Attornment: After foreclosure, a lender will also require the tenant to recognize the lender (or any successive owner after foreclosure) as the new landlord under the lease. The SNDA will create direct privity between the tenant and lender - obligating each party to perform their respective obligations under the lease, subject to any carve-outs.
- Nondisturbance: In exchange for the subordination and attornment agreements the tenant will require that the lender agree not to disturb the tenant's interest in the lease after a foreclosure. The tenant should also negotiate provisions in the SNDA to require the lender to take-over the obligations of the landlord under the lease.
Lenders will mostly ask that the following carve-outs be included in the SNDA, but tenants should strongly resist them:
1. No lender liability for the defaults of the prior landlord and no right of tenant to offset costs it expended in curing a landlord default
2. No lender liability for any construction obligations or tenant allowances
3. Lender not bound by any representation or warranty of the prior landlord
4. Lender not bound by any security deposits or rent received more than one month in advance
5. No modifications to the lease without the lender's consent
6. Prior consent of lender for assignments, sublets or alterations
7. Require lender's consent to terminate the lease
8. Lender limitation on the application of insurance proceeds and condemnation awards
Matthew L. Holden is a New Jersey real estate attorney representing clients throughout New York and New Jersey. Founded by Matthew L. Holden, The Law Offices of Matthew L. Holden, LLC is located in Hackensack, New Jersey.
