Commercial lease clauses can significantly impact the rights and obligations of landlords and tenants. Subordination, non-disturbance and attornment (“SNDA”) provisions are standard in commercial leasing and they have a substantial affect on the nature of the relationship between the landlord’s current and future tenants. As such, consideration of such clauses is essential in the negotiation of any commercial lease.
Generally speaking, SNDA’s are covenants between the tenant and landlord that outline the rights of the parties, and certain non-parties, to the lease where third party lenders are involved. The three key elements – subordination, non-disturbance, and attornment are closely related. Subordination to a third party lender is problematic for tenants without the inclusion of non-disturbance language.
The Subordination Clause
A subordination clause is a lease provision whereby the tenant subordinates its possessory interest in the leased premises to a third-party lender, usually a bank (the rights of the tenant are thus subject to the rights of the lender). The purpose of this provision is to allow a landlord seeking financing for the purchase of a commercial property additional flexibility in dealing with lenders. Most lenders are unwilling to finance (or refinance) commercial loans where the tenants’ leases do not contain subordination clauses. Before they will extend financing, lenders require that all tenants subordinate their possessory interest in the premises to the lender’s mortgage interest. This is so that the lender has the ability to terminate the tenant’s lease (absent a non-disturbance clause) and initiate foreclosure proceedings should the landlord default on the mortgage.
Usually tenants lack the bargaining power necessary to refuse the inclusion of a subordination clause in a commercial lease. That’s why it is important that tenants always request the addition of a non-disturbance provision.
The Non-Disturbance Clause
The non-disturbance clause affords tenants that are not in default the right to continue occupying the leased premises. The effect of the non-disturbance clause is to protect the tenant in the event a subordination clause is triggered. A typical non-disturbance clause states that the lease shall not be subordinate to any mortgage arising after the date of the lease unless and until the landlord provides tenant with an agreement from the mortgagee (lender) stating that so long as the tenant is not in default, the landlord’s and the tenant’s rights and obligations under the lease shall remain in force and tenant’s right to possession shall be upheld. Without the protection afforded by a non-disturbance clause, a commercial tenant, through no fault of its own, could easily find itself evicted from a property due to the delinquent loan obligations of the landlord. Maintaining the possessory interest in leased premises is especially important in the commercial leasing context because tenants are usually businesses that would suffer substantial losses if forced to move locations.
The Attornment Clause
The attornment clause requires tenants to acknowledge any new owner of the property as the landlord. The purpose of the attornment clause is to guarantee the beneficiary of a subordination clause, such as a third-party lender, that tenants will continue to honor their obligations under the terms of their leases, even if the property is foreclosed upon or sold.
Most landlords recognize the importance of including non-disturbance clauses alongside subordination and attornment clauses and their standard leases include all three provisions. Even those landlords that omit the non-disturbance clause from their standard leases will agree in most cases to add non-disturbance language when asked.
Commercial leasing can be particularly complex. As such, whether a landlord or tenant, it is best to contact a San Diego Commercial Lease Attorney to assist in drafting and negotiating any commercial lease.