Taking advantage of the depressed office market, as a savvy tenant you just renegotiated your office lease reducing your rent and locking in a low rent structure for the next several years. But did you close a big loop hole that could negate this great deal? If your lease is like most leases, it contains a subordination clause making your lease inferior in position to any existing or future lenders. In many states where a lease is subordinate to a mortgage and the lender forecloses on the property, the tenant is at the lender’s mercy as the lender can elect to terminate or recognize the lease. In such an event, the subordinate tenant is in a very vulnerable position as the lender has leverage to force the tenant to renegotiate the lease on the lender’s terms. To plug this loophole, a tenant should have a Nondisturbance provision in its lease and have a Nondisturbance Agreement with the existing and future lender(s). In today’s market, tenants are well advised to preserve some negotiating capital for this important issue.To make the lease financeable, as lenders typically look to be superior in title to a tenant’s lease, it is completely understandable that the landlord’s form lease has language of subordination and attornment. Attornment means the tenant agrees to look to the lender as its new landlord. The third leg of the tenant’s stool is Nondisturbance. This third leg is typically omitted from the landlord’s form lease. A Nondisturbance Agreement is an agreement between lender and tenant (or among landlord, lender and tenant) that in the event of a foreclosure that the lender will recognize the tenant’s lease assuming there are no defaults.
Tenants should be aware that a typical Nondisturbance Agrement which is part of an overall Subordination, Nondisturbance and Attornment Agreement (“SNDA”) may alter terms of the lease. Here’s a quick list of some of the points the lender’s SNDA will look to alter: extended cure periods for lender to cure default; lender consent to any amendments to lease; absolving the lender from any liability of acts of the prior landlord; prevent tenant from terminating the lease without lender consent; require lender consent to subletting or assignment.
Tenants looking to negotiate the SNDA after the lease is signed should not have high expectations. With an understanding of the landlord’s debt structure and where the tenant has leverage, they should include SNDA as part of their pre-lease negotiations. Also, where there is a lender in place and while the landlord will resist, tenants should request a copy of their form SNDA before heading into lease negotiations. Tenants should also try to negotiate the SNDA concurrently with the lease.
While a tenant may not be successful in negotiating changes to the lender’s form SNDA, the important point is that they have a Nondisturbance agreement which will preserve their lease in the event of foreclosure.
Blackacre Advisors LLC
DISCLAIMER. Our writings are from a real estate transaction perspective and for informational purposes only. Nothing herein shall be considered legal, accounting, tax, or architectural advice. Please consult with the appropriate professional(s).