This Common Administrative Procedure Is Now Killing Some Deals

An often-overlooked administrative procedure common to most commercial real estate transactions is gaining new significance, influencing deals in unexpected ways. Known as the SNDA, or Subordination, Non-Disturbance, and Attornment Agreement, this process is being utilized by tenants and lenders in novel ways that can potentially delay or even derail transactions, according to one expert who handles hundreds of these deals every year.

An SNDA is an agreement between a landlord’s lender and a tenant. It ensures that if the lender takes over as the landlord, the lease remains subordinate to the mortgage, yet the tenant’s rights are protected. This agreement is vital because, in some states, a tenant’s rights can automatically supersede a new mortgage, potentially jeopardizing the lender’s position. The SNDA solidifies the mortgage holder’s rights, providing clarity and security.

The agreement comprises three main components. First is subordination, which places the lease below the lien of any mortgage on the property, ensuring the lender’s priority. Next is non-disturbance, which promises that the tenant’s possession of the property won’t be disrupted if the lender forecloses. This aspect is crucial, as some state laws might otherwise allow a mortgage holder to terminate leases during foreclosure.

These agreements are common and beneficial for both lenders and tenants. As Annie Malo, a commercial real estate attorney at Holland & Knight, told GlobeSt.com, “Tenants don’t want to be sent packing if there is a foreclosure, and a lender knows that the only chance it has of recovering any money from a foreclosure is if a tenant continues to pay rent.”

However, the use of SNDAs is evolving, with significant implications for real estate transactions. For starters, Malo reports a shift in lender requirements: “When I first started practicing, it was common for the lender to require an SNDA only from tenants that leased more than 10,000 square feet or were the sole tenant in a standalone building.”

At the same time, even smaller tenants are now demanding these agreements due to rising construction costs and the substantial investments involved in build-outs. This shift places additional burdens on landlords, who view these agreements as a necessary but cumbersome part of doing business.

As construction costs soar, even a small-sized lease can represent a significant investment, prompting tenants to seek protection through SNDAs. Malo observes, “Because even a 2,500 square foot lease these days could represent millions of dollars in a build-out, and no one wants to walk away from that if there is a foreclosure. People are looking to protect that investment.” Consequently, landlords are finding themselves under pressure to ensure their lenders are responsive to tenant needs.

While landlords might consider the review of SNDA documents a minor task, the implications can be far-reaching. Having all leases in a building subordinate to the mortgage can prompt lenders to scrutinize the mortgage more closely, potentially delaying financing or even jeopardizing deals.

“The lender is going to read every lease that you have on the property and every lease that requires an SNDA,” Malo warns. “The lender is going to insist that those SNDAs be in their hands before they’re going to fund their loan. So I have seen it kill deals where the landlord isn’t focusing on that, and then the loan doesn’t go through.”

As leases roll over and mortgages mature, this scrutiny is expected to intensify. Malo notes a trend of landlords increasingly running leases by their lenders and insisting on simultaneous execution of SNDAs with leases, making these agreements almost a mandatory ancillary document in the commercial real estate landscape.