Preparing Yourself for a Commercial Purchase with Tenants

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While a SNDA and an Estoppel Certificate are usual and customary components to a commercial real estate transaction, their use may be foreign to first time buyers, sellers, or agents.  A “SNDA” is an acronym for a Subordination, Non-Disturbance and Attornment Agreement. Use of a SNDA most often arises in commercial real estate transactions in which there is one or more tenants occupying the property under written leases.

In the event a buyer’s purchase of commercial property is being financed, the buyer’s lender is going to require that its mortgage be in the best possible security position.  If the lender is ever forced to take back the property after a default, the lender is not going to want to encounter difficulties with existing tenant(s).
Accordingly, prior to closing and during the due diligence period, most commercial lenders will require two documents from tenants:
  •          an Estoppel Certificate, and
  •          a Subordination, Non-disturbance and Attornment Agreement
As additional security for a commercial loan, a buyer/borrower will assign its right to collect rent from a tenant (as landlord under a lease). The rental income from any lease of property pledged as collateral for the loan is often the primary source of repayment. Should the borrower default, the lender will want to have access to the repayment source without a lengthy court fight; the lender will want to step into the shoes of the borrower (as the landlord under the lease), collect rent, otherwise enforce the landlord’s rights under the lease, and apply the lease payments toward the outstanding debt.
An Estoppel Certificate prepared by the lender will ask the tenant(s) to confirm:
  •          the term of the lease
  •          the amount of the lease payments and that lease payments are current
  •          is there a security deposit
  •          are there any non-monetary defaults (obligations of the tenant (or landlord) under the lease that either party has failed to perform), and
  •          otherwise confirm material terms of the lease
The SNDA includes three (3) basic agreements that establish the relationship between the lender and the tenant under a lease of the property being mortgaged (in the event the borrower/landlord defaults on the loan):
  •          In the “subordination” part of the agreement, the tenant agrees to treat the lease as if it came after the mortgage even though the lease was executed before the mortgage. This subordination allows the lender to terminate the lease in the event of a foreclosure. In exchange for the subordination, the lender agrees not to disturb the tenant’s right to possession, provided the tenant is not in default under the lease.
  •          The “non-disturbance” agreement permits the tenant to stay on in the event the lender or other purchaser at a foreclosure sale takes title to the property that is subject to the lease.
  •          And, the “attornment” portion of the agreement obligates the tenant to recognize the lender or purchaser at a foreclosure sale as the new landlord. Usually, the attornment is only given by a tenant if the lender agrees to the non-disturbance (sometimes called a “right of quiet enjoyment”) agreement.
As always, we recommend that you contact a knowledgeable commercial real estate attorney should you have any questions regarding commercial real estate issues.
Sincerely,
Berlin Patten Ebling, PLLC
Article Authored by Mark Hanewich, Esq.  mhanewich@berlinpatten.com
This communication is not intended to establish an attorney client relationship, and to the extent anything contained herein could be construed as legal advice or guidance, you are strongly encouraged to consult with your own attorney before relying upon any information contained herein.
All rights reserved. This copyrighted material may not be re-published without permission. Links are encouraged.
 
 
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