New office tenants are under a lot of pressure to find the perfect properties. They’re tasked with maintaining a delicate balance of securing the best prices on the market while ensuring that the deals are not too good to be true in the long run.
Because record low office valuations are increasingly putting landlords at risk of default. But if that happens, they’re not the only ones going down with the ship. Tenants and lenders will undoubtedly be implicated in the event a landlord hands back the keys…that is, unless you have an SNDA.
Let’s discuss the Subordination, Non-Disturbance, and Attornment Agreement (SNDA) and the critical things every tenant should know about it.
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1. The SNDA is Critical in Today's Leasing Environment
Commercial tenants should be prepared for the very real possibility that their landlord may be in for trouble. One third of landlords are at risk of default right now.
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About 30% of U.S. office buildings, which is translated to a collective estimate of $1.1 trillion are at high risk of becoming obsolete. -data from research analyst for Goldman Sachs, Randall Zisler |
An environment where major landlords are defaulting at exponential rates is uncharted territory. Because there’s no telling what would happen to existing tenants in the event their lease gets taken over. Several nightmare scenarios can take place (especially if your original lease was outlined by the landlord’s broker) from service disruptions to a looming risk that their right to tenancy is voided.
If you’re signing a new lease, ensure that you receive a Subordination, Non-Disturbance, and Attornment Agreement (SNDA) among yourself, the landlord, and the landlord’s lender. This guarantees your right as a tenant to the leased premises in case of landlord default or foreclosure. The SNDA allows the tenant to keep occupying the property according to the existing lease terms, even if the landlord loses ownership.
2. The SNDA is a Three-Part Agreement
The SNDA constitutes a pivotal legal contract that establishes a delicate balance between the interests of a:
- Commercial tenant
- Commercial landlord
- The landlord's lender, usually a bank
This three-way agreement serves to address the intricate interplay between the financial commitments of the landlord and the rights of the tenant.
The "Subordination" aspect of the SNDA pertains to the tenant agreeing that their leasehold interest is secondary to the landlord's mortgage or deed of trust. In other words, the tenant acknowledges that if the property faces foreclosure due to the landlord's default on their loan, the lender's claim takes precedence over the tenant's leasehold rights.
The "Non-Disturbance" component is where the tenant gains a significant safeguard. It stipulates that as long as the tenant abides by the terms of their lease, the lender will not disrupt their occupancy or terminate the lease in the event of foreclosure. This provision ensures that the tenant's business operations can continue uninterrupted despite the financial turmoil faced by the landlord.
The "Attornment" facet obligates the tenant to recognize the lender as the new landlord if foreclosure occurs. This essentially signifies that the tenant agrees to maintain their lease obligations to the new landlord – the lender – rather than the original landlord who is now facing financial difficulties.
In essence, the SNDA encapsulates a complex web of legal arrangements that safeguard the interests of all parties involved… And right now, this is a critical step all tenants should look to take.
3. Don’t Expect Your Landlord to Offer it On a Silver Platter
Landlords often resist lease clauses that reduce their control, including the SNDA. In normal market conditions, landlords may push back or outright reject the inclusion of an SNDA. However, in the current tenant-favorable market, tenants with significant corporate presence or leasing large spaces can leverage their negotiating power to insist on an SNDA especially with the guidance of a True Tenant Rep™ advisor.
It's important to recognize that the landlord may perceive the SNDA and other tenant rights as encroaching on their authority, so the tenant's value and the overall landlord's perspective will play a significant role in the negotiations. This means that the SNDA will be contingent on:
- The size of your company
- The size of the deal
- How much the landlord desires your tenancy
- How long your tenant relationship will be, etc.
Remember, the SNDA empowers tenants to assume agreements with banks or lenders, which may require landlords to relinquish some authority, making it crucial for them to consider the value you bring to the table.
4. No SNDA = No Protection
As with any critical lease clauses, tenants don’t have access to them unless they’re already outlined in their current lease. Tenants without SNDAs in this market may not be adequately protected in the event of the foreclosure because they’ll have no legal leg to stand on.
Negotiation for the SNDA can only take place before signing the lease. This pre-lease negotiation stage offers tenants the best opportunity to assert their position and achieve favorable terms in the SNDA agreement. Because prior to finalizing the lease, both the landlord and the lender are motivated to ensure a smooth transaction. The landlord aims to secure a deal and may even exert pressure on the lender to execute the SNDA. Similarly, the lender, whether the loan has been granted or not, is typically eager to close the loan or secure a tenant who can contribute rental payments towards meeting the required debt-service coverage ratio.
Lacking an SNDA in the lease leaves tenants vulnerable in case of landlord default or foreclosure, exposing them to disruptions and limited negotiation power.
To protect their interests and secure their position, tenants should proactively ensure the inclusion of an SNDA during lease negotiations, rather than relying on the landlord's willingness to provide it. Safeguard your tenancy by asserting your position and securing favorable terms in the SNDA agreement prior to finalizing the lease.
Because not only are you at risk of becoming subordinate to the rights of the landlord's lender which can most assuredly cause disruptions to the tenant's occupancy and business operations. But beyond the obvious, the absence of an SNDA may limit the tenant's ability to directly negotiate with the lender or take necessary measures to alleviate any negative consequences arising from the landlord's default. Therefore, it is essential for tenants to ensure they have an SNDA in their lease to safeguard their interests and maintain a secure position in such situations.
5. Consult Your Lawyer
When dealing with any legal matters, it's essential to always consult a qualified commercial real estate attorney. Their expertise will ensure that you make informed decisions and navigate the complexities of such agreements with confidence. This is especially true with the SNDA, since it is a delicate balance between tenant, landlord, and lender.
Consulting an attorney helps tenants understand the agreement's implications fully, safeguarding their rights and ensuring a smooth transition in the event of landlord default or foreclosure.
What Tenants Should Takeaway
Amidst the widespread financial struggles of landlords, the SNDA emerges as a vital safety net for tenants. Although not a customary inclusion in leases, its impact on your tenancy after the "Office Apocalypse" cannot be underestimated.
This escalating significance serves as a stark reminder that we're treading in uncharted leasing territory. With new apprehensions on the horizon, conducting thorough due diligence is paramount. To stay informed about the evolving commercial real estate and office scene, subscribe to our blog. As devoted True Tenant Reps™, our commitment to tenants extends to our content, providing insights that give you a competitive edge!
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