What Exactly Is A Subordination, Non-Disturbance And Attornment Agreement? Why Do I Need One?
October 28, 2014 |
By David Allen
Most commercial leases contain a requirement that the tenant will execute a “Subordination, Non-Disturbance and Attornment Agreement,” commonly referred to a “SNDA.” A majority of tenants who have signed such leases, and most likely several of the real estate agents who have represented those tenants, would be hard pressed to explain the meaning of a SNDA and why they are needed by both commercial lenders and tenants.
As implied by its name, a SNDA is really three agreements all wrapped up in one neat package. All three aspects of the SNDA only come into play in the event that the leased property is foreclosed by a lender holding a security interest (mortgage or deed of trust) secured by the leased property. Let’s first look at the “subordination” part of the SNDA. If the lease is in existence at the time that the lender records its security interest against the property, then the lease is superior to the security interest. Upon foreclosure by the lender, the title obtained by the purchaser at the foreclosure sale will be subordinate, or subject to, the existing lease. When a tenant signs a SNDA, the tenant is agreeing to reverse the priorities and resultant outcome upon foreclosure; namely, that the lender’s security interest becomes superior to the pre-existing lease. Upon foreclosure by the lender, the title obtained by the purchaser at the foreclosure sale will be superior to the existing lease. Such change in priority is critical for the lender, as absent a non-disturbance agreement, based upon its superior interest the lender or other purchaser at the foreclosure sale would have the right to terminate the lease upon completion of the foreclosure.
The “non-disturbance” part of the agreement, which is also referred to as a “right of quiet enjoyment,” is exactly as indicated by its name. By entering into a SNDA, the lender has agreed that upon acquiring title to the leased property through a foreclosure sale, that the lender, or any other purchaser at the sale, will “not disturb” the tenancy of the tenant. This is the case so long as the tenant is not in default and that such tenancy will continue as if the foreclosure had never occurred.
The “attornment” part of the agreement, which perhaps is the most confusing part of a SNDA, simply means that the tenant is agreeing to acknowledge the purchaser at the foreclosure sale as the new landlord under the lease. This is merely a way to formalize the legal relationship that exists between a landlord and the new owner of the property.
The SNDA is beneficial for both the lender and for the tenant. A lender is able to avoid any consequences having a leasehold interest in a superior position to its lien or its title in the event of foreclosure. The tenant is given the peace of mind of knowing that if the landlord loses the leased property through foreclosure that the tenancy will not be disturbed.
David Allen, a partner in the Phoenix law firm of Jaburg & Wilk, has been representing clients in both transactional and litigation real estate and business related matters for over thirty years. He is licensed as an attorney in both Arizona and California, and is also a licensed Arizona real estate broker. He can be reached at 602.248.1082 or at email@example.com.
This article is not intended to provide legal advice and only relates to Arizona law. It does not consider the scope of laws in states other than Arizona. Always consult an attorney for legal advice for your particular situation.