What To Know About Lease Subordination, Non-Disturbance and Atonement Causes
Whether you’re a tenant or lender, it’s important to understand the purpose and benefits of a subordination, non-disturbance, and attornment agreement. An SNDA can benefit commercial landlords, commercial tenants, and lenders taking out a mortgage on a commercial property. If you’re in the early stages of negotiating a lease, it’s important to understand how an SNDA works and how to include it in your lease.
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What is an SNDA?
A subordination, non-disturbance, and attornment clause outlines the rights of the tenant, landlord, and third parties with an interested in the property. Potential third parties included in an SNDA include a lender funding the building or a party buying the property.
What is Subordination Clause?
A subordination clause is a key element in any Subordination, Non-Disturbance, and Attornment Agreement (SNDA), and it plays a foundational role in determining the order of rights between tenants and lenders when a property is under financial duress, such as foreclosure. While the SNDA as a whole provides a framework for managing the relationships among tenants, landlords, and lenders, the subordination clause specifically establishes the legal priority of interests—who gets paid or recognized first in a financial dispute or foreclosure scenario.
Defining Subordination in Real Estate
In real estate terms, subordination means voluntarily placing one party’s claim or interest below another’s. Within a lease agreement, a subordination clause essentially states that the tenant’s leasehold interest is subordinate—or junior—to the rights of the lender who holds a mortgage on the property. This is especially critical when a lender provides financing secured by a lien on the property.
For instance, if a tenant signs a lease and the landlord later takes out a mortgage, the lender may require that the lease be subordinated to the mortgage. This ensures that if the landlord defaults on the loan and the lender forecloses, the lender’s rights take precedence, and the lease could be terminated—unless other protective clauses like non-disturbance are in place.
Why Lenders Require Subordination Clauses
From a lender’s perspective, a subordination clause protects their investment by ensuring they have first priority in the event of default. Lenders want to make sure their lien on the property is senior to all other claims, including leases. Without a subordination clause, a pre-existing lease could limit a lender’s ability to foreclose or reduce the property’s value due to long-term tenant obligations that remain in force.
Many commercial lenders refuse to approve financing or refinancing unless they receive signed SNDA agreements that include subordination clauses from all tenants. This is because the lender needs to be assured that their mortgage rights are not compromised by existing lease agreements.
The Tenant’s Perspective
At first glance, a subordination clause might seem like a disadvantage for the tenant, especially since it places their lease at risk during foreclosure. However, in practice, most subordination clauses are paired with non-disturbance provisions to balance the rights. The subordination clause may place the lease below the mortgage in priority, but the non-disturbance clause ensures that the tenant can stay in the space even if the property is foreclosed upon—provided they remain in good standing with the lease terms.
In essence, the subordination clause is a necessary legal mechanism that enables all parties to work within a structured hierarchy of rights. It allows the lender to feel secure, encourages landlords to secure financing, and ultimately protects tenants through the broader SNDA framework.
Types of Subordination Clauses
There are a few common forms that subordination clauses can take, including:
- Automatic Subordination: The lease automatically becomes subordinate to any existing or future mortgages without needing further documentation.
- Conditional Subordination: The lease is subordinate only if the lender agrees to a non-disturbance provision.
- Negotiated Subordination: The tenant agrees to subordinate only if the lender signs an SNDA, creating a balance of protection for both sides.
Understanding which version is included in your lease is vital, as it determines how exposed your leasehold interest is in the event of a foreclosure.
Practical Implications in Lease Negotiations
When negotiating a commercial lease, tenants should never overlook the importance of the subordination clause. While landlords often include standard language in leases, tenants should insist on reviewing the clause closely and requesting a full SNDA agreement if one is not already included. This ensures that the tenant’s rights are protected and that they can maintain business continuity even if ownership of the property changes.
Landlords, on the other hand, should ensure that all leases include subordination clauses that are favorable to lenders. Doing so facilitates easier financing and increases the marketability of the property. However, they must also be ready to negotiate reasonable non-disturbance terms with tenants.
Why You Need an SNDA as a Tenant, Landlord, or Lender
If you are a tenant, it benefits you to have an SNDA in your lease. This clause protects you from being evicted if your rental goes into foreclosure due to the landlord not paying the mortgage. Unless your lease has an SNDA, your lease will be canceled if the property is foreclosed upon. This leaves tenants in a dangerous and time-sensitive position where they have to find a new property in rental time, often without the security deposit paid to the original landlord.
Landlords also benefit from an SNDA. In many cases, you’ll struggle to find tenants without being able to offer an SNDA—no one wants to rent a property that they could be forcibly evicted from through no fault of their own. Furthermore, you’ll be unable to refinance or mortgage the property if you cannot provide lenders with an SNDA from each of your tenants. Simply put, an SNDA smoothes the transaction in both directions for landlords.
Lenders have good reason to want an SNDA for any properties they finance. If the lease on a property predates the mortgage, the lender may not have the first lien against the property. This can make it difficult for a lender to foreclose on a property where the owner has stopped making payments.
Understanding Subordination
The concept of subordination is that the tenant’s interest in the property comes second to the lender’s interest in the property. This ensures that, if a property is no longer being paid for, the lender can come in and begin foreclosure proceedings. In most cases, the mortgage predates the lease and is automatically given first priority. Still, having a subordination clause makes this crystal clear and makes it easier for lenders to move forward with whatever action is necessary.
What is Non-Disturbance?
Non-disturbance refers to a tenant’s right to continue living on the premises if the property is foreclosed upon. Foreclosure of a mortgage leads to automatic lease termination in many states, and a non-disturbance clause overrides that and allows the lease to carry over to the party that owns the property during and after foreclosure.
How Attornment Works
Attornment is somewhat similar to non-disturbance, although there are key differences. In short, attornment is when a tenant agrees to be someone else’s tenant when another party takes ownership of the property. This is how tenants are allowed to continue living on a property after it has been foreclosed upon. Their lease transfers to the bank during foreclosure and, eventually, to the party who buys the property at auction.
As you can see, subordination, non-disturbance, and attornment clauses all work together to protect lenders, landlords, and tenants simultaneously. Whichever side of the agreement you fall on, it’s important to know how to include these clauses in your lease in a way that is legally enforceable.
Discuss Your Real Estate Legal Needs with Evans Law
Real estate law can be complex and overwhelming, which is why you need an experienced and trustworthy real estate attorney working alongside you. At Evans Law, we assist in a wide range of real estate legal issues. Schedule a consultation with our team now by calling us at 410-626-6009 or getting in touch with us online. We look forward to working with you.
