I recently wrote about the importance of including "non-disturbance" language in commercial lease agreements, but thought with current economic conditions, doing so is becoming increasingly important. Therefore, I decided to add another post dedicated to this topic.Let’s face it, the current economic conditions in the U.S. and specifically, the banking crisis is severely challenging commercial landlords. As a result of these conditions, many properties will be returned from owner to lender through the foreclosure process. Here in my home market of Indianapolis, where I own and operate CARMEN Commercial Real Estate Services, there is more than a handful of office, industrial, and retail landlords that have properties that are in the unfortunate “Deed in Lieu of Foreclosure process”.
As a result of these conditions, I’m recommending to my Indianapolis office and industrial clients that we demand "non-disturbance" clauses in all lease renewals and new lease negotiations, which should accompany subordination and attornment language in their leases. These lease components often accompany each other and are commonly referred to as the "SNDA" clause.
In essence, SNDA language safeguards a tenant's right to remain in its leased space should a lender foreclose on a property and take over as landlord. The "subordination" clause, common to almost all commercial leases, means that the lender's lien on leased space is the first lien, or highest priority lien. The majority of lenders require landlords' leases to include subordination clauses that give the lender's lien priority not only over leases, but all other agreements between the landlord and tenants, regardless of when any of them were signed.
After a lender takes over as landlord, it is "attornment" language that requires all tenants to formally recognize the lender as their new landlord. This is critical to the lender because it prevents a tenant from being released from its lease obligation when a new landlord assumes control. It provides the lender with the assurance that the building's revenues will remain intact during and after the transition, according to the previously agreed-to lease terms.
While the attornment language prevents the tenant from terminating a lease, a lender can still terminate a lease at its discretion if the tenant does not have the right protection language in its lease. This poses a particularly hazardous proposition for tenants that are paying below market rent at the time of the foreclosure or would otherwise be undesirable to the new landlord due to their usage of the space, business type or location within the building. It is for this reason why the third component of the SNDA language, the right to "Non-Disturbance," is so critical for tenants. It is this language that protects the tenant's right to remain in its space after a lender forecloses.
As part of the non-disturbance language, tenants should consider negotiating for terms that state the lender specifically agrees to assume all responsibilities of the landlord, which include the building's ongoing operation. This is especially important if the building was under renovation or the landlord was responsible for outstanding repairs to the building prior to foreclosure.
Most lenders located here in Indianapolis and elsewhere around the U.S. are going to insist your landlord include subordination and attornment clauses in your next lease. They are considered reasonable terms of any lease for commercial real estate. However, make sure your tenant representative properly represents your interests and negotiates for adequate non-disturbance language as well, especially as the nationwide rate of commercial foreclosures continues to rise.
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