SNDA protection for commercial tenants in the event of foreclosure | Obermayer Rebmann Maxwell & Hippel LLP

Last month, it was reported that the Montgomery Mall in Montgomery Township, Pa., Had been foreclosed after failing to make monthly loan payments. What is the impact of this foreclosure on the tenants of the mall? Without the protection of an NSDA, these tenants can lose their stores.

Commercial leases often refer to a separate three-part contract called a subordination, non-disruption and recognition agreement (a “SNDA“). An NSDA is entered into between the lender of a commercial lessor and the lessee of the lessor. It establishes the protocol in the event the owner defaults under a mortgage or other financing agreement with the lender and the lender then becomes the new owner of the property following a foreclosure.

Under the terms of the first part of this contract, “subordination”, The tenant agrees that his leasehold interest in the property is less (or subordinate) to any right of the lender, more particularly, if the date of the lease is before the date of the loan. The second part, entitled “non-disturbance», Benefits the tenant. The lender agrees that if the landlord does not comply with the loan documents and the lender forecloses on the property, the tenant will not be disturbed i.e. they will not be evicted from their space. The “honorPart of the deal, once again benefits the lender. In the event of foreclosure, it provides that the tenant will recognize the lender (or the new owner following the foreclosure) as their landlord and will not opt ​​out of the lease.

Why wouldn’t a lender, as a new owner, want to honor a rental agreement?

Let’s say a lender enters under his loan agreement with an office owner. The lender is now the owner of the building. A tenant of this building does not have a lease agreement or any other direct relationship with the lender. While the likelihood of this happening is low, if it is in the lender’s best interest to get rid of low-profit tenants (for example, any tenant who has been fortunate enough to secure a lease for a space at one point). lower than market rent), the lender would be able to do this. Likewise, if the lender or his successor decides that the best use of the building would be residential apartments, the commercial tenants of that building would be out of luck. Having an SNDA with the homeowner’s lender prevents the above situations from occurring.

How does a tenant go about obtaining an NSDA?

During lease negotiations (or after lease negotiations in some cases), the tenant would ask the landlord to obtain the standard NSDS form from the lender. The larger the tenant, the more likely it is that the landlord will do what they can to get their lender’s agreement. When I represent landlords, if the tenant has more than 10,000 rentable square feet, I will always apply for an NSDA if asked.

Negotiate user-friendly language for tenants

An SNDA standard lender is not correct limited to the three parts set out above. It will have another user-friendly language that the tenant will want to try to soften. For example, it will most likely contain wording that if the lender becomes the new owner as a result of foreclosure (or similar), the lender will not be liable for any of the original owner’s unfulfilled obligations under the lease. A tenant will fail to dispute every item. For example, the lender is unlikely to agree to be liable for pecuniary damages resulting from the homeowner’s default that occurred before foreclosure. However, the lender may agree to preserve the tenant’s lease options should they become a landlord, such as the tenant’s renewal right, expansion right, contraction right, fire rights or others. damages or rights in the event that the property is attached by conviction. If the lease provides that the landlord will do construction work on behalf of the tenant or provide a building allowance, the tenant will certainly want to preserve this right by negotiating or having the lender negotiate their attorney for the lender to honor this promise if a foreclosure occurs before construction takes place or before compensation is paid.

An NSDA gives the lender and the tenant the contractual relationship. An NSDA that grants a lender a priority right to the landlord’s collateral in the event of foreclosure should also provide the tenant with a guarantee that they will not lose possession of the lease or their negotiated rights under the lease through no fault of their own.