Q. I am a licensed New York State real estate salesperson and I am representing a tenant in negotiating a letter of intent ("LOI") on a commercial property. There is a large underlying mortgage on the property and the attorneys are negotiating the "subordination and non-disturbance" portion of the LOI. What is a Subordination and Non-Disturbance Agreement?
A. In the context of a lease on a property (the "Property") that is encumbered by a mortgage (the "Mortgage"), a Subordination and Non-Disturbance Agreement ("SNDA") is an agreement between the holder of the Mortgage (the "Lender"), the Owner of the Property (the "Landlord") and the tenant (the "Tenant") that addresses how and when the rights of the Tenant will be superior or subordinate to the rights of the Lender.
It would not be uncommon for the Landlord to have a Mortgage on the Property. The Mortgage gives the Lender certain rights concerning the Property and the Landlord. In particular, the Mortgage will address what rights the Lender has in the event that the Landlord is in default of the Mortgage (the "Post Default Rights"). The Mortgage may also require that any lease (the "Lease") involving the Property contains language where a Tenant agrees that the Lease is subject and subordinate to the Mortgage.
Accordingly, it is very important for the Tenant to understand what the Lender’s Post Default Rights are, as the Lender’s rights are, in most cases, superior to the rights of the Tenant. For example, in the event that a Landlord is in monetary default under a Mortgage and the Property is foreclosed upon, the Lender may have the right to terminate the lease between the Landlord and the Tenant.
The goal of the Tenant, therefore, will be to include in the Lease an obligation of the Landlord to deliver to the Tenant a commercially reasonable SNDA from the Lender. The SNDA will ideally provide that the Lender will honor the Lease and permit the Tenant to remain in the Property even if the Lender takes possession of the Property from the Landlord.
Many times, the Mortgage will not contain an obligation on the part of the Lender to deliver an SNDA to a Tenant. In such cases, the best that the Tenant may be able to obtain from the Landlord is an obligation of the Landlord to "use commercially reasonable efforts" to secure an SNDA from the Lender.
Important Tip: It may be difficult to obtain an SNDA from many Lenders. However, the real estate broker and the Tenant’s attorney should certainly attempt to obtain the SNDA. In the event that the Lender is unable or unwilling to enter into an SNDA, it is important that the Tenant’s attorney explains to the Tenant the ramifications of not having an SNDA in place
The Legal Line Question by:
Neil B. Garfinkel
REBNY Broker Counsel
Partner-in-charge of real estate and banking practices at Abrams Garfinkel Margolis Bergson, LLP