Should Her Commercial Real Estate Lease Have a Non-Disturbance Agreement?

Nashua Business Owner Asks

The short answer is, Yes.  Commercial leases often include what is known as a subordination, non-disturbance, and attornment agreement, commonly referred to as an SNDA.

SNDAs memorialize certain rights of the tenant, the landlord, and associated third parties, such as the landlord’s lender or a purchaser of the property. There are three components to an SNDA: the subordination clause, the non-disturbance clause, and the attornment clause. Overall, it is recommended to use an SNDA in a commercial lease to benefit both tenants and landlords.

The Subordination Clause

A subordination is a contractual agreement by the tenant that its leasehold interest in the leased property is subordinate to the mortgage on the property (if any). This agreement is important because if a tenant subordinates to the mortgage itself, then the tenant becomes bound by the terms of the mortgage, which may be different than the terms of the lease. Commercial leases regularly require subordination clauses to maintain the possibility of using the building as loan collateral. Most lenders will prohibit that a commercial property serve as security for a loan unless their mortgage interest is higher priority than any tenants’ leasehold interests. In other words, the lender will have the option to terminate the tenants’ lease in the event of commercial foreclosure.

The Non-Disturbance Clause

Non-disturbance is a contractual agreement by the lender not to disturb tenant’s possession of the property rented in the event of a foreclosure. A tenant should require a non-disturbance agreement from a lender in any situation in which the tenant is agreeing to subordinate the lease to the lien of the loan. It is also recommended that tenants seek a non-disturbance agreement from any existing lender when the tenant is entering the lease, since the lease automatically would be subordinate to the lien of the loan by virtue of being chronologically behind the lien. Many lenders are normally willing to grant non-disturbance to a good tenant in return for contractual subordination of the lease to the lien of the loan.

The non-disturbance clause offers some assurance to tenants that their rights to the premises will be preserved even if the landlord does not accomplish its duty to make payments to the lender. Being assured that they can remain in a location for the full term of the lease is important to business tenants, as changing location can possibly lead to unforeseen expenses, inconvenience, and loss of customers. Whether a landlord will agree to include a non-disturbance clause in the SNDA varies based on the tenants’ negotiating power.

The Attornment Clause

An attornment is the legal process by which the tenant agrees to recognize the lender, or the foreclosure transferee if not the lender, as the new landlord under the lease after the foreclosure is completed. It is this process that cements the direct privity of contract between the lender or other foreclosure transferee and the tenant under the lease. It is important to note, this clause usually requires the tenants to continue to pay rent regardless of who owns the property.

Conclusion

Tenants need to evaluate the risk of whether the landlord is likely to default on its mortgage loan and consider the effect that a forced removal from the premises would have on the tenant’s business. When a lender is reviewing a lease or an SNDA, the reviewer should remember that the review is not only for things that may affect a borrower’s ability to pay the loan, but also for obligations a lender may step into if it becomes a landlord.

For more information on commercial real estate leases, business transactions or general business planning and purchase and sale matters please contact John Polgrean or Thomas “Jay” Leonard at Welts, White & Fontaine PC.  Please contact us by clicking here or by calling (603) 883-0797. Welts, White & Fontaine is one of Nashua’s largest, multi-practice law firms and serves the legal needs of both individuals and businesses in towns such as Amherst, Milford, Hudson, Brookline, Windham, Hollis, Merrimack, Litchfield, Bedford, Londonderry, Pelham, and, of course, Nashua.

Author: John S. Polgrean, Esq.

This blog is intended for informational use only. The information contained herein should not be construed as offering legal advice or a legal opinion.

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