Commercial leases
While many people in business are familiar with the general workings of a commercial lease, fewer are acquainted with one of the most important mechanisms available to make their commercial leases more stable and secure: The subordination, nondisturbance and attornment agreement, or SNDA. As detailed below, an SNDA can offer substantial benefits to commercial landlords and tenants in situations where uncertainty might otherwise hold sway for their leases.
SNDA (Subordination Nondistrubance and Attornment Agreement)
The reasons why an SNDA can be so useful are rooted in the historical underpinnings of the law of real property and the concepts of priority of interest, rights of possession, and recognition of real property rights. While people usually do not think of a commercial lease as anything other than a contract, in our legal system, leases and other similar tenancies are a type of real property, subject to concepts that date back to the Middle Ages. For example, the terms “landlord” and “tenant” are rooted in feudalism and the rights it established for the landowner (the “lord of the manor”) and the persons who “hold” rights in land (the word “tenant” derives from the French word “to hold”) subject to the landowner’s rights.
While a systematic discussion of these topics is beyond the scope of this blog, it is sufficient to note that, by entering into a lease, landlords and tenants receive several well-recognized rights with regard to each other, not to mention with regard to other persons, relating to the possession and use of the leased property (the “premises”). If these rights are not exercised carefully, landlords and tenants, as well as other persons, could well face unwanted results. The concepts of subordination, nondisturbance, and attornment are concerned with, respectively, priorities of interest, rights of possession, and recognition of real property rights, and an SNDA can help ensure that these matters are properly governed and give landlord, tenants and others more certainty with respect to the premises and the workings of the lease, as outlined here.
The workings of a commercial lease
Subordination
Most people’s familiarity with priority of interest issues occurs in connection with mortgages, as a mortgage is an interest in real property—a security interest—that is given to a lender. While it is generally known that a first mortgage has precedence (“priority”) over junior mortgages, the concept of priority is broader than that, applying to all types of interests in real property. When a landlord signs a lease with a tenant, the landlord grants a leasehold interest in the premises to the tenant, and the lease has priority over interests in the premises arising later in time than the lease, including deeds (which transfer interests outright) and mortgages (which transfer a security interest).
This situation can be problematic for the property owner who subsequently needs to deliver title to the premises by sale or mortgage free of the priority of the lease. In an SNDA, a tenant agrees to give up its lease’s priority (“subordinate”) to certain subsequent transfers. By requiring the tenant to agree to subordinate its leasehold interest in the premises to subsequent transfers of interests in the premises pursuant to an SNDA, a landlord can preserve its ability to freely sell or mortgage its interest in the premises without having to go back and ask the tenant to subordinate its leasehold interest at the time of the sale or mortgage.
Nondisturbance
Looking at this state of affairs, one might ask: Why would a tenant ever agree to give up the priority of its lease? The reason lies in the tenant’s right under the lease to “possession and quiet enjoyment of the premises” from the landlord, i.e., the tenant’s right to occupy and conduct its business at the premises without being interfered with or disturbed by the landlord, as long as the tenant performs its obligations under the lease. Provided that the landlord continues to own the premises, the tenant has the power to enforce this right against the landlord. In the event the landlord sells the premises or title to the premises passes to another person through the lender’s foreclosure of its mortgage, however, the tenant’s ability to assert this right becomes more tenuous, depending on whether the new owner has agreed not to disturb the tenant.
As such, in return for its agreement in the SNDA for the subordination of its lease, the tenant will generally require the landlord’s agreement that, as long as the tenant performs its obligations under the lease, any successor to the landlord’s interest in the premises, whether by sale or foreclosure, shall not disturb the tenant’s quiet possession of the premises. By providing for nondisturbance in an SNDA, the landlord has put the new owner of the premises, whether by sale or foreclosure, on notice of the tenant’s nondisturbance rights, thus protecting the tenant
Attornment
Now that the new owner’s priority has been established and the tenant’s nondisturbance rights have been protected, everything should be fine, right? Well, not exactly. While it is important for the landlord and tenant to address their priority of interest and nondisturbance concerns, a critical issue remains to be addressed: The continued operation of the terms of the existing lease between the new owner and the tenant. Beyond the tenant’s nondisturbance rights, the other terms and conditions of the tenant’s continued tenancy in the premises remain to be resolved, as the original lease is no longer effective due to the original landlord’s exit from the premises.
Once the new owner takes title to the premises, there is nothing to bind the new owner and the tenant to the terms of the lease that was entered into between the tenant and the original landlord—unless the original landlord and the tenant have entered into an SNDA with provisions for attornment and recognition. What this means is that, in the event the landlord sells the premises, or title to the premises is transferred pursuant to foreclosure, the SNDA provides for the tenant’s attornment—namely, the tenant agrees to treat the new owner as its landlord under the terms of the existing lease—in exchange for the new owner’s recognition of the tenant’s rights under the terms of the existing lease. In this way, the continued effectiveness of the terms of the original lease can be ensured, providing stability and protection to the parties.
As you can see, while they may be arcane, these issues are of great significance to the planning and protection of the rights of parties to a commercial lease. While the negotiation and drafting of an SNDA can be complex, a well-prepared SNDA can provide a great deal of peace of mind for parties to a lease and other parties affected by the lease.
