by Kevin Walsh
What is the role of tenant estoppels and subordination, non-disturbance and attornment agreements (“SNDAs”) in real estate transactions? The two terms tend to get lumped together and can be confusing to clients, but they share one thing in common in that they need to be reviewed by the business representatives for the client and by the client’s attorney.
A tenant estoppel is simply a certification as to the terms of a lease at a given point in time. The intent of the estoppel is to confirm facts. The purchaser of a property or the lender may request that an estoppel be signed by the tenant at the time the property is being sold or financed. Typical issues addressed include: (i) the date of the lease; (ii) a disclosure of any amendments or modifications to the lease; (iii) the current base rent and pass-through expenses being paid by the tenant; (iv) whether or not the tenant has accepted the premises; (v) disclosure of any defaults under the lease by either the landlord or the tenant; (vi) whether or not there are any off-sets that the tenant is entitled to under the lease; (vii) whether or not the tenant has any options under the lease to renew the term of the lease, expand the premises or purchase the property; and (viii) whether or not the tenant has paid a security deposit to the landlord. Buyers and lenders request that tenants deliver an estoppel in order to verify that the terms contained in the lease are still true and are not in dispute. Be aware that some lenders attempt to combine SNDA provisions into tenant estoppels and as they serve two separate purposes it is recommended that the instruments be kept separate.
SNDAs are different from estoppels in that they are an on-going contractual agreement that survives foreclosure. Most sophisticated tenants will require that the landlord obtain an SNDA as a condition precedent to the effectiveness of the lease. SNDA’s typically contain three parts. The “subordination” portion permits the lender whose lien is junior to a tenant’s lease (usually because the lease was entered into or a memorandum of lease was recorded prior to the lender’s security instrument), to become superior to the lease. The “non-disturbance” portion assures the tenant that it can continue to occupy the space under the terms of the lease in the event of a foreclosure. The “attornment” portion assures the lender that the tenant will honor its obligations under the lease following a foreclosure of the lender’s security instrument.
What should the tenant look for in an SNDA? For the tenant the most critical issue is the non-disturbance provisions. At a minimum the tenant should require that so long as there is no event of default under the lease the lender agrees not to disturb the tenant in the event of a foreclosure of the lender’s security instrument. Larger or credit tenants may insist that the lender agree to assume all of the obligations and duties of the landlord in the event the lender takes title to the property through foreclosure or deed-in-lieu. Keep in mind that if there is on-going construction the tenant wants to make sure that the lender agrees to make funds available to complete the construction. Further, the terms of the SNDA should not relieve the lender of the obligation to cure the on-going defaults of its borrower or deny the tenant of any pre-negotiated off-set rights that are permitted under the terms of the lease, particularly if the tenant has incurred expenses to cure a landlord default or is owed money for a tenant improvement allowance.
One of the issues that will arise in negotiating estoppel and SNDA provisions in the lease is the timing for the tenant to respond to the request to deliver an estoppel or an SNDA. The landlord does not want the delivery of an estoppel or SNDA to delay its sale of the property or the closing of its financing, so the landlord generally wants a short notice period that is often tied to a power-of-attorney for the landlord to sign the estoppel or the SNDA if the tenant fails to sign and deliver the documents within the given time period set forth in the lease. Property management and lease administration people are often the first people contacted when there is a request for an estoppel or SNDA. Make sure that the lease includes clear instructions for the delivery of legal documents. In the pressure to get documents out, estoppel and SNDA requests may be dropped off at the tenant’s space in the building contrary to lease requirements that direct notices be sent in a specific manner and to the attention of specific individuals or departments. By the time the request reaches the proper tenant representative the time period to respond to the request may have lapsed. At a minimum any request for a tenant estoppel or SNDA should allow the tenant 15 business days to respond to the request running from the date the notice was delivered in accordance with the notice provisions set forth in the lease. Further, tenants should be careful in any situation where the landlord has the power-of-attorney to sign documents on their behalf as they may end up being bound by terms that they would not otherwise agree to. If the tenant cannot negotiate out the power of attorney, one alternative is to treat the failure of the tenant to deliver an estoppel and SNDA as an event of default requiring the landlord to give the tenant a second notice for the request before the landlord can exercise the power-of-attorney.
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