Prior to foreclosing on a lenders commercial real estate collateral, Lenders should evaluate whether a landlord's rights under a commercial lease or the lenders rights under a mortgage or deed of trust (collectively, a "mortgage")  is superior. If a lease is superior, a foreclosure of the mortgage will not affect the lease; the purchaser at foreclosure is simply substituted for the former landlord.  A lease that is entered into after a mortgage will make the mortgage superior, and the lease is generally subordinate to the mortgage with the consequence that the tenant assumes the risk that its lease may be terminated if the lender forecloses.

When the lease is superior to the mortgage, the lenders rights are often restricted.  Complicating matters, when the mortgage is superior to the lease, state laws vary on the effect of a foreclosure.  In about half of the States, the foreclosure will automatically terminate a commercial lease; in other States, a commercial lease will not automatically be extinguished by the foreclosure, and the lender will be in the enviable position of being able to choose whether or not to terminate a commercial lease. To address these uncertainties, a Subordination, Non-disturbance and Attornment Agreement ("SNDA") is often utilized.

In a typical SNDA, the subordination provision requires the tenant to subordinate its lease to the lender's mortgage.  The SNDA thereby changes the priority interests of the parties by having the tenant of a mortgaged property, whose lease predated the mortgage, agree to accept a junior priority to the mortgage, which may allow a lender to terminate that commercial lease upon foreclosure. The attornment provision requires the tenant to attorn to, or recognize, the lender as its new landlord upon a foreclosure. The non-disturbance provision is a promise by the lender not to disturb the lessee's tenancy or terminate its lease if the lender foreclosures on the mortgage, provided the tenant is not in default under the lease.

The benefits to the lender of entering into an SNDA are several.  A superior lease can be made subordinate to the mortgage.  In the attornment provision, the lessee must recognize the lender as the new landlord in the event of a foreclosure.  In order to obtain the attornment by the tenant and enable the lender to enforce its rights, the lender will often have to agree not to disturb the tenancy or terminate the lease. While the non-disturbance section may not be particularly beneficial for lenders, financial institutions may want the security of knowing that, upon foreclosure, they will have a rent-paying tenant.  Because of the benefits provided to lenders, SNDAs are a valuable tool that should be considered when financing commercial transactions. 

For more information regarding commercial leases, please contact Joe at jernst@starfieldsmith.com or at 267-470-1227.