SNDA Basics for Commercial Lenders … Why sign one?

For two consecutive days I’ve advised different clients, both commercial lenders, on exactly the same issue:  An existing lender holds a mortgage on commercial property and a new tenant requests that the lender execute a Subordination and Non-Disturbance Agreement (an “SNDA”).  Here’s my basic answer to each of them:
SNDAs are used to modify or confirm the relative priority of a lender’s mortgage lien on real property and a tenant’s rights under its leasehold interest in that property. Typically, SNDAs are required by a lender when the lender makes a loan and records a mortgage as security for the loan and there is an existing tenant with a lease already in place. The lender would want the SNDA from the tenant because the tenant would be agreeing to subordinate its leasehold interest in the property to the lender’s mortgage and because the tenant would be also be agreeing to make its lease payments direclty to the lender if the borrower goes into default (i.e. to “attorn” to the lender.) So, the SNDA in that situation protects the lender.
In this case, since the lender’s mortgage was recorded before the lease was executed, the tenant’s leasehold interest is already subordinate to the mortgage by virtue of having arisen later in time, so the lender is really gaining nothing from executing the SNDA.  In fact, in the absence of the SNDA, if the lender foreclosed on the property, it could wipe out the lease entirely if it wanted to get rid of this tenant for any reason (i.e. the rent is lower than market rent, it’s a troublesome tenant, the property is more valuable or more marketable without the tenant, etc.) Therefore, in this case, the tenant wants the SNDA because it wants to know that, if the lender forecloses and takes ownership of the property, the tenant won’t be evicted by the lender as long as it keeps making its rent payments directly to the lender. So, the SNDA in this situation protects the tenant.
Unless it has agreed to do so in its prior loan documents, the lender is under no obligation to execute this SNDA, although it may decide to do so as an accommodation to its borrower and its borrower’s tenant.  A possible benefit to the lender of signing it is that the lender would be obtaining the tenant’s written agreement to attorn to the lender if the the borrower defaults and the lender steps in as landlord and that the lease will remain in full force and effect even if the lender becomes landlord, so it might be worth signing for that purpose from the lender’s perspective. However, even if the lender decides to execute the SNDA the lender should be aware that in this situation the SNDA primarily benefits the tenant because the effect of it is that the lender is giving up its right to wipe out their lease in the event of a foreclosure.
As always, thanks for reading. BH

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