When a commercial property owner defaults on its mortgage, the lender will
foreclose on the mortgage and sell the property to a third party
through a judicial or non-judicial sale (referred to herein as a “foreclosure
sale”). In Virginia, an “automatic
foreclosure” state, a foreclosure sale automatically terminates any interests
in the property which are subordinate to the mortgage which is the subject of
the foreclosure, including all leases executed by the former owner and its tenants.
Accordingly,
following the foreclosure sale, the existing tenants have no contractual right
to occupy the property, and the purchaser has no right to enforce the prior
owner’s leases.
The execution of Subordination,
Non-Disturbance and Attornment (“SNDA”) Agreements can eliminate some of the uncertainty that comes with
foreclosure sale. The SNDA Agreement is a
tri-party agreement between the tenant, the landlord and the landlord’s
lender. At its core, it creates an
agreement among the parties that allows the tenant to continue to occupy the
property following a foreclosure sale, with the lender or the new owner of the
property becoming the landlord. As its
name implies, the SNDA Agreement has three main provisions: Subordination, Non-Disturbance and
Attornment.
Subordination
has to do with the priority of interests in the property. In almost all cases, the landlord’s lender
will require that its secured interest in the property (created by the landlord’s
mortgage or deed of trust) be superior to any other person’s interest in the
property. Thus, in the event the
landlord defaults on the mortgage, the lender can freely dispose of the
property without the consent of any other parties. Most commercial leases explicitly provide
that the lease is subordinate to any existing or future mortgages entered into
by the landlord. The subordination
section of the SNDA Agreement is a way for the lender to obtain additional assurance that
the lease is subordinate to the mortgage.
In very rare circumstances, a lender will subordinate its property
interest to that of a tenant. This is
uncommon, and usually only obtainable by large, national-chain tenants.
Non-Disturbance has to do with the tenant’s ability to continue occupancy of the property following a foreclosure by the lender, notwithstanding the tenant’s property interest being subordinate to that of the lender. The non-disturbance section of the SNDA Agreement typically provides that the lender will not disturb the tenant’s right to possess the property if the lender assumes ownership of the property or sells it to a third party through a foreclosure sale. However, most SNDA Agreements limit the lender’s obligations to the tenant, and do not require the lender to assume all of the landlord’s obligations under the lease.
Attornment
has to do with the tenant’s rental obligations to the lender (if it assumes
ownership) or the new owner of the property following the foreclosure sale. If the tenant is required to “attorn” to the
new owner following the foreclosure, the tenant must recognize the new owner as
its landlord and pay rent to said party in accordance with the terms of the
existing lease. The attornment portion
of the SNDA Agreement is a way for the lender to ensure that a lease will remain in
effect following the foreclosure sale.
SNDA Agreements can protect both the lender
and the tenant by eliminating the uncertainty that comes with a foreclosure
sale. The commercial landlord
has little to lose or gain by signing the SNDA Agreement since it will only be applicable if the landlord defaults on its mortgage.
Accordingly, the landlord should be open to facilitate the execution of
SNDA Agreements as a way to appease lenders and tenants.
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