Estoppels and SNDAs, Which to Use for Lending?

At times when financing real estate with commercial tenants, lenders will use legal forms called Estoppels or Subordination, Non-Disturbance, and Attornment forms.  Now I have never seen these for a residential rental and I have not seen them for smaller commercial deals or small leases. 

The most common document for a lease administrator is the estoppel.  This document is usually sent by the property owner or management company to a tenant, whenever the owner is refinancing or may be selling the property.  Either way, the estoppel is to find the executing party to specific statements of fact.  These may include certain details about the lease terms, rental rates, maturity, and status of any breaches of the lease contract from the landlord or the tenant. 

The purpose of the estoppel is to benefit third parties, like lenders, who may not understand the details of the landlord-tenant relationship.  Courts have held that a landlord can’t use the estoppel against a tenant.  An example her may be if the tenant has “agreed” that the landlord has not overcharged for common area maintenance charges.  But care must be given by the tenant when asked to execute the estoppel.

A more detailed form is the SNDA.  Actually, this is three agreements in one.  The first is subordination.  This permits the lender whose lien is junior to the lease (usually because the lease was recorded before the mortgage was recorded), to be recognized as superior to the lien of the lease.  Once the lender’s lien is superior, in the event of foreclosure, the lender can eliminate all junior liens.  Most lenders will insist their loan is in a first lien position.  Most property owners recognize their property is more valuable and attractive to a lender if the lease is subordinate to subsequent mortgages.  Most landlords will have leases that frequently include provisions that declare the lease is subordinate to the mortgage.

The next part of the SNDA is the non-disturbance section.  This section protects the tenant and allows the lease to stay in force if the tenant is not in default.  A tenant who has a long-term lease or who has spent a large sum of money for their custom tenant improvements, has a big vested interest in having this section in place.  This section may need to be added to the lease, as many of them may not include an adequate provision here.  For the lender, the SNDA means that if the tenant is not in default, the lease remains in place, even after foreclosure.

The final section is attornment.  This section protects the lender and it binds the tenant to fulfilling the lease terms, even after the lender forecloses on the property.  This is necessary in some states where lease agreements are extinguished during foreclosure.  This creates a bond between the tenant and the third-party mortgage holder. 

Many of the SNDA agreements also have a survivorship clause where the agreement will continue if the lender on the property changes due to refinance, lender merger, or loan sale to a third party. 

It is also worth noting another document here that is executed with the mortgage or deed of trust, and may be included inside that document.  This is an assignment of rents.  It allows the lender to step between the landlord and tenant to collect rents in the event the property owner fails to make payments in a timely manner, yet continues to receive rent payments from the tenants. 

It is important for the commercial lender to have knowledge of these forms--estoppels, SNDAs, and assignment of rents—when working with commercial tenants on a property you are financing.