What to Know About Lease Subordination, Non-Disturbance and Attornment Clauses
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.
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.
