If you’re borrowing funds which will be secured by a commercial property that you will in turn lease out to tenants, then a subordination, non-disturbance and attornment (SNDA) agreement will be a crucial part of finalizing the deal. As with other aspects of the loan underwriting and real estate purchase process (such as title insurance), the typical SNDA agreement is intended to establish legal boundaries of the relationships between lender, borrower (also owner and landlord), and tenant and to protect the interests of all three.

The 3 Parts of an SNDA Agreement:

• Subordination: This is the section of the agreement which most concerns lenders as it establishes that the mortgage they are financing has the superior claim on the property should the borrower default on the loan. In addition to the borrower, tenants must also agree that their leases are subordinate to the mortgage that has been issued by the lender.
• Non-disturbance: Since the first part of the agreement can result in hardship and financial distress for the tenant in the event that foreclosure occurs, this section of the agreement provides the tenants with security in exchange for agreeing to the subordination of their leases. It generally stipulates that lenders will not disturb (or terminate) a tenant’s lease as long as the tenant abides by the lease terms and continues to pay rent on time and in full. This alleviates concerns on the part of a tenant that they could be evicted from the property, resulting in additional expenses and losses—such as lost build-out funds, the loss of any long-term lease benefits, the cost (in both time and money) of relocating—if the borrower fails to repay the debt.
• Attornment: This final section of the agreement creates a contractual agreement between lender and tenant which sets forth that the tenant will recognize the lender as landlord in the event of a foreclosure. This protects the lender by ensuring that the tenant cannot abandon the lease while the property is in foreclosure and also establishes the responsibilities and duties that the lender must fulfill for the tenant while acting as landlord.

The first two sections create a balance in the triadic relationship between lender, borrower, and tenant by ensuring that both will have protected rights in a worst-case scenario event where the borrower is removed from the picture through foreclosure proceedings. It allows the borrower, acting as landlord and owner, to provide any future tenants with an assurance that their investments in the location as an office or retail space will not disappear overnight or without warning, while still maintaining the appeal of an income-producing property with leases that will not interfere with current or future loans from traditional or private lenders who want to know that their funds will be properly secured with first-position mortgages.

Note: This blog is intended for informational purposes only and should not be regarded as legal counsel or advice.