Commercial real estate loans, by their nature, often are collateralized by real property in which third parties to the loan have concurrent interests and estates. Care should be taken by a lender making such a loan to ensure that these other third parties’ interests do not jeopardize the lender’s priority in its collateral. There are three form documents which are commonly used by lenders making commercial loans secured by real property where tenants are in possession of the real property: a Subordination, Non-Disturbance and Attornment Agreement (“SNDA”), a Tenant Estoppel Certificate, and a lease review form. When lenders use these three forms together in processing and documenting commercial loans, they can address priority and underwriting concerns.
Combatting “Borrower Loan Fatigue”
Obtaining SNDAs and tenant estoppel certificates from third parties is often a time-consuming and frustrating process for lenders. Sometimes this is because tenants are unresponsive, but more commonly, failure to obtain SNDAs and tenant estoppel certificates stem from a general “borrower loan fatigue”. This develops when the borrower is frustrated, after having provided all of the necessary underwriting documentation to the lender, that it must also explain to tenants why they must execute an SDNA and/or estoppel certificate for the loan. Sometimes, when borrower loan fatigue is at its maximum, the borrower stops assisting in the process.
Lenders can avoid borrower loan fatigue and increase the chances of obtaining executed SNDAs and tenant estoppel certificates by targeting early which specific tenants MUST return executed tenant estoppel certificates and SNDAs, allowing the borrower to focus their efforts and energy on just those that are most essential to the deal. Lenders may do this by:
- Using a good lease review form as a due diligence tool to summarize the leases, sharing those review forms between the loan processor and underwriter;
- Asking the underwriter to identify those leases which are critical to his/her value analysis, and including just those leases in the “must have” tenant set who are required to provide executed tenant estoppel certificates;
- Being willing to accept other form tenant estoppel certificates when they are substantially similar to the lender’s form;
- Targeting specific tenants who will be required to deliver an SNDA, based on the underwriting value of the leases and the language in the lease agreements;
- Recognizing which tenants are likely to require their own form SNDA, and being willing to negotiate and accept their forms, when commercially reasonable; and
- Communicating those requirements to the borrower early and clearly, at the same time the lender provides its targeted SNDA and estoppel forms.
Under this method, a lender requires the borrower to produce executed tenant estoppel certificates from a subset of the tenants based on the underwriting value of the leases, likely including a mix of targeted high-underwriting-value tenants and additional lesser-value tenants. Additionally, the lender requires the borrower to produce executed SNDAs from a different, but possibly overlapping, subset of tenants specifically selected based on the underwriting value of the leases and lease language.
If this method fails to produce SNDAs and tenant estoppel certificates as needed, a lender may elect to proceed to closing anyway, using a landlord estoppel certificate; and/or a post-closing agreement for later delivery of the tenant documents. However, a lender should carefully consider the risks associated with electing to proceed to closing without a targeted SNDA or tenant estoppel certificate. For example, depending on the language of the particular lease, the lender may be subject to making very hard decisions in a workout or foreclosure situation that result in terminating an economically favorable lease it desires to keep, or taking the property subject to an economically unfavorable lease it desires to avoid, including, sometimes, taking on very expensive obligations of the landlord. All of this may impact the underwriting of a loan in a distant future the lender cannot easily imagine. Additionally, any time a lender agrees to accept post-closing an SNDA or estoppel certificate that it wanted to receive pre-closing, the lender has potentially lost some leverage and must determine what remedy it will truly be willing and able to receive if an acceptable SNDA or estoppel certificate is never received.
Subordination, Non-disturbance and Attornment Agreement (“SNDA”): The standard form and purpose
At its core, an SNDA establishes the rights and priorities between a lender’s mortgage lien and a tenant’s leasehold interest in the same commercial property. This document typically includes language on lien subordination, tenant attornment to a new landlord, how to handle landlord defaults, the effect of lease amendments, and mortgagee protection provisions, taking into account the effect of state and local law on the enforceability and construction of those matters. Because an SNDA impacts the rights of the lender, the property owner (in its dual roles as borrower under the loan and as landlord under the property leases), and the tenant under the commercial lease, the SNDA should be entered into by the lender, the borrower-landlord, and the commercial tenant.
Some standard provisions in SNDAs are described in items 1 through 9, below. The lender typically benefits from the agreements in a lender’s standard SNDA because the tenant (and in some cases, the borrower-landlord) contractually agrees that:
1) The lien created by the leasehold estate is and remains subordinate to the lien of the mortgage until the loan is repaid, regardless of the time each was created;
2) The lender is not liable for any borrower-landlord defaults under the lease, but may cure such defaults if it chooses;
3) The lender is not obligated to perform any of the duties of the borrower-landlord unless and until the lender takes ownership of the mortgaged property through foreclosure or deed in lieu of foreclosure;
4) The tenant will not exercise certain rights under the lease; and
5) If the lender acquires the property through judicial or non-judicial remedies, including foreclosure, or the borrower-landlord defaults under the lease, the tenant will attorn to the lender as its new landlord and/or pay rent directly to the lender.
Most tenants want an SNDA from the lender to get the benefit of non-disturbance, especially if the lease is already subordinate by time or can be terminated in foreclosure. Standard and customary non-disturbance provisions of an SNDA ensure that:
6) The tenant will not be named or joined in any foreclosure action (lawsuit) unless local law requires tenant to be named or joined;
7) The tenant’s use and possession of the premises will not be disturbed by the foreclosure;
8) The leasehold estate will not be terminated by the foreclosure; and
9) Transfer of title in the real property to the lender at the end of the foreclosure action will not affect the lease or the tenant’s leasehold estate.
Negotiating changes and revisions to the SNDA form, or accepting another form
The standard SNDA is a “pro-lender” form because it contains lender-favorable language which the lender’s lawyer has drafted. However, there are some typical revisions that savvy tenants will request and which can often be safely made. The key concepts which should not be changed from the lender’s perspective would include those listed in items 1-5 above, as well as any language that is specific to the lender’s risk tolerance as it relates to the specific facts of the loan and property. For example, if a lease provides for a large tenant improvement allowance which has not been paid to the tenant by borrower-lender at the time the loan closes, the lender may not want to strike the language providing that lender is not liable for any sum or credit owed to tenant. As another example, if the borrower-landlord could foreseeably default under an important lease and the lender is willing to cure the default by payment of money, the lender may not want to change its preferred language giving it that cure right.
Other revisions to a lender’s form SNDA are appropriate in certain circumstances, such as when the SNDA is given for a purchase financing of the real property (in which event, the current landlord and future landlord-borrower are not the same parties), when the lease is a ground lease rather than a space lease, when there are subleases, when the borrower-landlord and the tenant are related parties, or when a single borrower-landlord does not own the leased property in fee simple.
In some lease negotiations, borrower-landlords and tenants negotiate and agree on a form SNDA that the tenant must deliver upon borrower-landlord’s request, and the parties typically attach such pre-negotiated form as an exhibit to the lease. Usually, the lease requires the tenant only to deliver the same (or substantially the same) agreement as the one required under its lease. If the lender was not a party to the SNDA negotiations or did not approve the lease with the pre-negotiated form SNDA attached, the lender is not bound to accept the form SNDA agreed upon between the borrower-landlord and the tenant; but, the lender may not easily get any other form. Additionally, credit tenants almost never deliver an SNDA on a lender’s standard form. In these situations, lenders are often pragmatic and agree to accept a pre-negotiated form or the credit tenant’s form, if such form is commercially reasonable.
Self-subordination language in SNDAs: opting to forego an SNDA
Many leases have “self-subordinating” language which appear sufficient such that an SNDA may not be necessary for the leasehold interest to be subordinate to the lender’s lien. Parsing through self-subordinating language can be difficult, but as each lease is unique, so is such language, and so there is no easy or off-the-shelf answer to whether all self-subordinating language may be sufficient. Even if it is sufficient, whether or not to forego obtaining an SNDA is a fact-specific question and depends on the lease’s other language, the loan underwriting with respect to the value of the lease, the difficulty of obtaining the SNDA on the landlord-friendly form, and the lender’s risk tolerance. Furthermore, the benefits of obtaining an SNDA when there is already self-subordinating language include getting an agreement containing all of the concepts in items 1-5 above and as otherwise desired, and having privity (an enforceable, contractual relationship between parties) with the tenant.
Tenant Estoppel Certificate: The standard form and purpose
A tenant estoppel certificate is a tenant’s certification directly to the borrower-landlord and/or landlord’s lender (and/or the purchaser and/or the purchaser’s lender) that certain material terms of its lease and specific facts pertaining to the landlord-tenant relationship are correct. The tenant estoppel certificate is a tool with two purposes: first, it helps the underwriter to confirm important facts of the lease, including financial terms; and second, tenants signing an estoppel certificate are prevented from later claiming a different set of facts exist. Providing such a form and asking the tenant to complete blanks in the estoppel certificate with specific terms such as rent rate, commencement date, termination date, and the like, all as of the date that the estoppel certificate is signed, will help to confirm that the terms of the written leases provided to the lender by the borrower-landlord have not been amended and that all parties to the lease are on the same page.
Because of the importance of an estoppel certificate to underwriting, it is often more important to obtain an executed tenant estoppel certificate than to obtain an executed SNDA. Underwriting and legal analysis may demonstrate that the leases for which a tenant estoppel certificate are needed are not identical to those where an SNDA is needed. Therefore, it is often helpful to keep tenant estoppel certificate language separate from SNDA language and treat each as a separate form. Because the resulting forms are simpler, a lender may be able to obtain more executed tenant estoppel certificates, as a result.
Negotiating changes and revisions to the tenant estoppel certificate, or accepting another form
As above, there are circumstances (such as purchase financing, among others) where the form tenant estoppel certificate should be revised, where another form estoppel certificate will have already been elected by the parties, where credit tenants will insist on using their own estoppel form, or the lease will specify what statements the tenant estoppel certificate must contain. Sophisticated tenants often negotiate the language of the estoppel certificate, as well. Whether or not to a lender should agree to accept revisions to its form tenant estoppel certificate or accept another form tenant estoppel certificate depends on the language offered and the facts and underwriting value of the lease. Again, practical-minded lenders will often agree to accept a tenant estoppel certificate based on another form, if such form is commercially reasonable. In the event a lender has real trouble obtaining a necessary acceptable tenant estoppel certificate for a lease, it may consider, as a fallback option, obtaining a landlord estoppel certificate for such lease.
Lease Review Form
During due diligence and underwriting of a loan, a lender typically reviews the property leases to assist in:
- Determining the leases which require a tenant estoppel certificate;
- Determining the basic financial terms of each lease, including the terms that a tenant estoppel certificate should confirm;
- Determining which leases are automatically subordinate to the mortgage and which require delivery of an SNDA to become subordinate;
- Confirming which tenant leases require the delivery of an SNDA for other reasons, and what agreements, if any, tenants must make in an SNDA; and
- Considering which tenants are likely to request their own form or a pre-negotiated form SNDA be used, and the legal ramifications of a tenant delivering (or not delivering) an SNDA.
A good lease review form used by a lender’s loan processors and underwriters can identify the key provisions in a lease which are germane to the above issues, and answer whether a tenant estoppel certificate and/or SNDA will be required from each tenant. Questions, which should be included in such a form, may include:
- Basic lease and underwriting terms, which will facilitate review of the tenant estoppel certificates received;
- Confirmation that the reviewer has copies of all executed lease documents (if not, the reviewer should request those documents from the borrower-landlord before completing the estoppel certificate and lease review form);
- Whether the lease is important to the underwriting of the loan, based in part on the answers to the first question, and if so, whether a tenant estoppel certificate is recommended;
- Identification of mortgagee protection language, defaults and remedies, self-subordination and automatic attornment language, and lien restriction language which may be in the lease, and if so, whether an SNDA is recommended; and
- Whether the terms of the lease according to the review form match the terms of the lease as reflected on the rent roll offered by the borrower-landlord.
Additionally, a good lease review form will prompt the reviewer to complete follow-up action items to remedy problems discovered in the course of the review.
Such a review form can allow these determinations to be made in a routine and consistent way, although the form will necessarily be supplemented by the opinion and discretion of the reviewer. In the case of discrepancies between documents, difficulty in parsing language, or problems with lease language that may impact the lender’s lien, legal counsel should also review the lease documents.
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