Among commercial lenders, few loan-closing requirements generate more confusion than the Subordination, Non-Disturbance and Attornment Agreement, or SNDA.
Many lenders know that an SNDA is something they are “supposed to get” when financing leased real estate, but the practical reason for it is often less clear. That can lead to two opposite mistakes: (1) ignoring them altogether when the lender is relying heavily on the property’s rental income and tenant roster, or (2) requiring SNDAs from every tenant regardless of significance, creating unnecessary closing friction and expense.
The better approach is to understand what an SNDA actually accomplishes and then make a deliberate risk decision.
What Does an SNDA Actually Do?
An SNDA addresses the relationship among three parties: the landlord/borrower, the tenant and the lender. Its name describes its three principal functions:
- Subordination. The tenant agrees that its lease is subordinate to the lender’s mortgage. In other words, the lender’s lien has priority over the tenant’s leasehold rights.
- Non-Disturbance. In exchange for the tenant’s subordination, the lender generally agrees that if it forecloses, it will not terminate the tenant’s lease so long as the tenant is not in default.
- Attornment. The tenant agrees that following foreclosure or another transfer to the lender or its successor, the tenant will recognize (attorn to) the new owner as its landlord and continue performing under the lease.
That arrangement benefits both sides. The tenant receives assurance that a foreclosure will not unexpectedly eliminate its right to occupy the property. The lender receives assurance that a valuable tenant—and the rent supporting the loan—will remain in place after foreclosure, without facing endless liability for the sins of a predecessor landlord.
The SNDA also gives the lender an opportunity to address other important matters, including notice of landlord defaults, cure rights, amendments to the lease, rent prepayments, offsets, security deposits and the obligations of a foreclosure purchaser.
The trigger: Anytime a lender is making a loan secured by real estate with one or more tenants, the SNDA issue must be considered.
Why Does the Lender Care?
Consider a retail property where the value and debt service depend heavily on several leases. If the lender forecloses, it generally does not want to acquire an empty building. It wants the tenants to remain, pay rent and preserve the value of the collateral.
At the same time, the lender does not want to discover after foreclosure that the tenant claims months of prepaid rent, significant offsets against future rent, undocumented lease modifications or obligations that the lender never anticipated.
An SNDA helps establish the rules before there is a problem. That is particularly crucial for a major tenant whose departure could materially affect occupancy, cash flow or collateral value.
Should the Lender Require an SNDA for Every Tenant?
Not necessarily. This is where lenders and their counsel should work together to assess practical risk.
On a $50 million loan secured by a single-tenant property, obtaining an SNDA from that tenant may be essential. On a $1 million neighborhood strip-center loan with five tenants, insisting upon a heavily negotiated SNDA from every 1,200-square-foot tenant may create more transaction cost and delay than the risk justifies.
A sensible policy is often to focus on material tenants. A lender might require an SNDA where a tenant:
• occupies a substantial percentage of the property;
• contributes a material percentage of rental income;
• is an anchor or otherwise important to the property’s value;
• has a particularly long-term or unusual lease;
• possesses significant renewal, purchase or termination rights; or
• is otherwise important to the lender’s underwriting.
For smaller tenants, the lender may decide that the existing lease language, mortgage priority and other protections are sufficient.
There is no universal cutoff. The important point is that the lender should make that decision consciously—not simply waive all of them because they are inconvenient, or conversely spend hours chasing down minor tenants on a small loan.
How Much Should a Lender Negotiate?
Another common mistake is treating every provision in the lender’s SNDA form as equally important.
The lender should identify its core protections and distinguish them from provisions on which reasonable compromise is acceptable. Subordination, attornment, continuity of rent payments, protection against undisclosed lease amendments or prepayments, and appropriate limitations on a foreclosure purchaser’s liability are usually fundamental concepts.
Other provisions may be negotiable depending on the tenant, property and transaction.
A sophisticated national tenant, for example, may refuse to sign the lender’s standard form without changes. That does not necessarily mean the lender should abandon the SNDA. It means the lender should work determine which requested revisions affect genuine credit or collateral risk and which do not.
Furthermore, a sophisticated lease agreement (particularly with a national tenant), may set forth the exact form of SNDA the tenant is bound to execute. Negotiation for additional items is possible, but can be an uphill battle against a national powerhouse.
The Right Questions
Lenders should ask: “Which tenants matter to our underwriting? What could happen to their leases following foreclosure? What protections do we need? And how much friction is justified by that risk?” Once lenders understand the purpose of the SNDA, those decisions become much easier.
An SNDA is not merely another closing document. Properly used, it is a tool for protecting the income stream, occupancy and value of leased real estate collateral—while giving important tenants greater certainty about what happens if their landlord’s lender ever has to step in.
