Did you know you can be evicted from your Premises even if you have been paying rent on time and are not in default under your lease? If you do not have a Subordination, Non-Disturbance and Attornment Agreement (“SNDA”), then your tenancy will be at the mercy of your landlord’s financial ability to make its loan payments.

With an estimated $1.5 trillion in commercial real estate debt coming due by the end of 2025, many landlords will be unable to refinance and many commercial real estate assets will be at risk of foreclosure. Without an SNDA, a lender can foreclose on your property and evict you from the premises – it does not matter that you have been a model tenant and that you are still willing and able to continue paying rent.

In one case, a technology company (1) leased office space that has specialized improvements unique to its operations, (2) consistently paid rent on time and has never been in default under its lease, and (3) failed to obtain an SNDA during lease negotiations. Unbeknownst to the tenant, the landlord had financial problems and defaulted under its loan resulting in the lender foreclosing on the property. The tenant’s employees arrive to work and find a notice of default and an eviction notice on the front door. This is catastrophic for the tenant because (i) the tenant can no longer operate from the premises, (ii) the tenant’s attorneys have been unsuccessful in quickly contacting the correct person at the lender who has authority to approve of their continued tenancy, and (iii) the tenant cannot quickly relocate because of market conditions, the needed specialized improvements, and the regulatory approvals that are associated with the existing address. All of this could have been avoided if this tenant had an SNDA.

What is an SNDA? An SNDA is a legal document between the landlord, tenant and lender that contains three key provisions:
o Subordination: You (as the tenant) agree that your lease is subordinate (junior) to the rights of the landlord’s lender. If a landlord defaults on its loan, your lease will be subject to the lender’s rights. Importantly, most leases have subordination provisions that automatically apply even without a separate SNDA, so you have likely already agreed to subordinate.
o Non-Disturbance: This is the critical provision that protects tenants. Put simply, through this language, the lender agrees not to disturb your occupancy of the premises even if the landlord defaults and the lender forecloses. The non-disturbance provisions ensure that, as long as you are not in default under your lease, the lease will remain in place and your possession of the premises will not be interrupted.
o Attornment: If the lender forecloses, you agree to recognize the lender as your new landlord under the lease.

Why is an SNDA important?

(1) Continued Operations:
– An SNDA protects a company by ensuring the company has the contractual right to continue to occupy the Premises without disruption even if the landlord defaults on its loan and the lender forecloses.
– Ongoing transactions that a company may be engaged in will not be disrupted (such as an M&A transaction where an important component is that the lease is in full effect and can be assigned to the acquiring entity).
– Quickly relocating in the event of an eviction is difficult (if not impossible) for many companies. For example, (i) suitable replacement space may not be available and, if it is, time is required to negotiate a lease and build any tenant improvements, (ii) certain companies have regulatory approvals necessary for their operations that are associated with the address, and (iii) many companies have expensive and specialized improvements unique to their business (such as benching, chemical hoods, etc.).
– The negotiated SNDA can ensure that the company will receive a return of its security deposit despite the foreclosure action.
(2) Clearly Defined Terms & Preserving Rights: The SNDA reduces uncertainty in the event the lender forecloses and steps in as the new landlord. Instead of needing to determine what is required of a lender under applicable law, the SNDA will clearly state that the terms of the lease apply, subject only to modifications made in the SNDA. This minimizes uncertainty and the exposure to risk in the event a landlord defaults.

Is the lender’s form SNDA negotiable? Yes. Every lender typically has a standard form, which is negotiable by a tenant’s attorneys.

Things to Check:
o Do you have an SNDA?
o Does your lease require the landlord to deliver an SNDA?
o If you have an SNDA, is it with the current lender or has the property been refinanced at any point? One clue as to whether this occurred is whether the landlord recently requested an estoppel certificate or if you are otherwise aware the landlord has changed.
o If you have an SNDA, did you have an attorney review and negotiate it to ensure that you are adequately protected? Given this economic climate, it is worth having an attorney confirm that you are adequately protected.

Re:Align exists to get better and more favorable deals for commercial real estate tenants with an emphasis on the life sciences and professional service provider sectors. We are a group of experienced professionals with unique backgrounds in law, finance, venture capital, strategic planning and real estate development, so we bring a higher level of expertise to our clients’ real estate requirements and a better understanding of their financial and operation business drivers, which allows us to develop the best real estate strategies.

Please note: the information provided in this article does not, and is not intended to, constitute legal advice;instead, all information and content is for general informational purposes only.