How many of us (whether veterans in real estate, finance or law) OR those of us just learning the ropes in business have encountered these creatures and come away from a negotiation not exactly sure how they work? How do they fit together in a transaction? How are they different? The legal definitions are easy to explain, but often the practical aspects prove difficult. Here are some explanations and guideposts:
1. SUBORDINATION -NON-DISTURBANCE AGREEMENT
The SNDA is typically employed where a buyer is obtaining financing from a lender in connection with the sale of real property from the current owner (or a landlord is entering into a lease with a tenant). The SNDA generally performs three different functions.
First, it requires that the any parties holding an interest or rights in the in the property subordinate that interest to that of the lender.
Second, any junior interest holders (especially tenants) are requried to “attorn” (look to) the lender as the owner/landlord if there is a foreclosure or other proceeding whereby the lender takes control and ownership of the real property.
Third, in exchange for these promises, the lender agrees that during the period that the loan is in effect, they will not disturb the interests of the tenant or other parties who have interests in the property.
In most cases, lenders will require that their form SNDA be accepted without modification. If there is some wiggle room to negotiate terms, the party presented with the SNDA should focus on:
A. Scope and strength of the non-disturbance language;
B. Notice requirements for the lender; and
C. Remedies for non-compliance or violation of the SNDA by the lender.
For landlords, make sure:
A. You are using the proper form SNDA from your lender; or
B. If the lender has not provided a form SNDA, make sure the lease provides that the SNDA will be in a “form reasonably acceptable to landlord”.
2. TENANT ESTOPPELS
In connection with a sale, lease or obtaining financing, owners and landlords will often send their tenants “estoppel” documents which require the tenant to affirm the basic terms of the Lease and that there are no outstanding defaults by landlord. Again, these are often driven by transfer or financing transactions. Tenants should review the document thoroughly and provide the most accurate information possible. In addition, any unknowns or incorrect terms should be identified. Landlords should be vigilant in their review of the filled out Estoppels to make sure they are complete and do not contain any red flags (allegations of landlord default, contradictory information, inaccuracies etc.).
The failure to scrutinize the Estoppel can produce problems for all parties:
A. Tenants may lose their right to assert landlord defaults or other lease rights such as options to renew and options to purchase;
B. This is often the best time for tenants to make sure landlords cure any defaults or problems with lease; and
C. On the other hand, Landlords may create continuing liability for themselves from the buyer and/or lender if the Estoppels are not complete or accurate .
KEY = take these seriously!
3. MEMORANDUMS OF LEASE
A “Memorandum of Lease” (MOL) is unlike the SNDA and the Estoppel in form and function.
These instruments are tenant driven documents that, if properly filed, protect the tenant’s leasehold interest from subsequent transferees of the landlord. Different states have different requirements for when a Memorandum Of Lease is necessary to be filed for such protection. However, if allowed, tenants should attempt to negotiate for the right (and the cooperation of the landlord) to file MOLs.
On the landlord side, MOLs are generally disfavored as they may make the commercial property less marketable to potential purchasers and lenders. One twist on this trend is where the landlord has solid, well-performing tenants that may make the real estate more attractive to buyers and lenders who can see the vibrancy and profitability of the Center, Business Park or Office Building by reviewing MOLs in the chain of title in addition to rent rolls and other financial information provided by the landlord. In general though, most landlords seek the additional clarity and flexibility that is provided with a property uncluttered by MOL filings.