The Basic Guide to Property Subordination, Non-Disturbance, and Attornment Agreements in Commercial Real Estate  

With today’s volatile economy characterized by high loan interest rates and strict regulations on credit, it has become very important for all parties to commercial real estate transactions to have subordination, non-disturbance, and attornment agreement known as SNDA. SNDA is a key document that enables various players within the property industry including lessees, lessors, brokers, and lenders among others to maneuver through transaction intricacies especially during times when the economy is experiencing downturns. This article explores what an SNDA is, why it’s crucial and the specific risks and financial exposures it mitigates giving much emphasis on how lawyers are significant in executing this customary paper.  

Understanding SNDA 

In essence, an SNDA can be broken down into three broad parts:  

  1. Subordination – Tenants agree that their leases are inferior or “subordinated” to lenders’ claims on properties. This is mostly for the benefit of the areas that favor lenders traditionally.  
  1. Non-Disturbance – This is where a lender assures that if he/she takes ownership of the property (often via foreclosure), then he will not kick out the tenant provided clauses in the lease agreement are adhered to.  
  1. Attornment – In this case, a tenant commits to accept a lender or any other subsequent owner following foreclosure as a landlord.  

Importance of SNDA 

It can prevent significant financial loss and disruption to all parties involved. Here are some elaborate examples:  

Example 1: Industrial Tenant’s Protection 

Scenario: Alex owns a leased industrial structure within which he operates a high-tech manufacturing firm. He has invested $500,000 in specialized machines and constructions.  

Risk without SNDA: Since the property owner defaults on the mortgage leading into foreclosure, Alex risks getting evicted hence losing $500,000 equipment related investment plus a working place for him.  

Protection with SNDA: With the nondisturbance agreement in place Alex could still continue his business uninterrupted even under new management hence protecting his investment as well as job opportunity.  

Example 2: Landlord’s Property Value 

Scenario: Mr. Thompson has several warehouses that are valued at $10 million each and desires long-term tenants for stability.  

Risk without SNDA: High foreclosure risk may discourage potential tenants thereby causing high vacancy rates which could result in the diminishing value of his property.  

Protection with SNDA: SNDAs given by Mr. Thompson guarantee lease continuity security for his tenants making his property more appealing thus possibly maintaining or raising its worth.  

Example 3: Broker’s Sales Process 

Scenario: Ms. Lee supervises the sale of a fully occupied warehouse complex going for $15 million.  

Risk without SNDA: The issue of whether leases will continue amid new ownership would complicate marketing hence causing loss of sale price estimated at up to 20% because buyers would factor in perceived risks related to this matter.  

Protection with SNDA: Prospective buyers are reassured that under SNDAs, existing commercial tenants remain in the property thereby maintaining its worth.  

Example 4: Lender’s Investment Security 

Scenario: Elite Commercial Bank intends to mortgage a logistics center valued at $8 million.  

Risk without SNDA: Should the owner default, and the bank institutes foreclosure measures absent of SNDAs, then there is a great likelihood that the tenants may vacate leading to difficulty for the bank in realizing its loan through rental revenues.  

Protection with SNDA: Without SNDAs enabling tenants to stay post-foreclosure gives the bank continued rentals and an increased chance of recovering the loan.  

The Role of Legal Professionals 

Legal professionals in this transaction are supposed to be behind the inclusion of an SNDA in a lease. The administration of SNDAs requires a lawyer for both landlords’ as well as tenants’ representatives if only to mention but a few of them who are engaged in real estate deals. This integrates their particular needs to safeguard them thereby promoting good just transactions within one’s property.  

Conclusion 

The inclusion of an SNDA in commercial leases is not just a mere legal compliance; but a way of cutting down on monetary perils and ensuring that there is solid ground for the brokers, lenders, landlords and tenants. In the volatile real estate environment of commercial business, each party’s interests can be safeguarded by appreciating the essence and employing SNDAs as well as making sure that competent legal counsels incorporate them properly in any transaction. 

Your thoughts are welcome to share with others.

Leave a Comment

Your email address will not be published. Required fields are marked *