The Tenant's Guide to Critical Lease Clauses, Part 1
Today and every week through August, we will be looking at some of the most critical and most costly lease clauses for your commercial real estate portfolio. Check in to see what to look out for, and how to avoid getting burned. So get your sunscreen and your highlighter, we’re going to show you how to stay cool all summer long! The first clause we will explore will be the SNDA (Subordination, Non-Disturbance and Attornment) Agreement.
When a lease is considered “subordinate,” it is typically in reference to its lacking priority over the mortgage of the property. That is, should a situation arise, wherein the landlord loses the property and the lender takes control, the foreclosure sale is recognized before the tenant lease agreement. And because landlords are often only able to refinance their mortgages under the condition that they include “automatic subordination” clauses in any future leases, many tenants find themselves dependent upon the financial stability of their landlords.
Unfortunately, many tenants fail to even consider this threat when negotiating and signing their leases, and don’t realize that they and their businesses are subject to such risks.
Suppose your landlord, under the pressure of economy or as the result of a few bad investments, defaults on the mortgage of your leased property. Upon foreclosure, the lender takes control of said property; and from this point, one of three scenarios will take place:
- Landlord exercises the right to evict you from your space and risk an extended period of vacancy
- You choose to leave the property, potentially disrupting operations
- You attorn to the lender, recognizing the lender as the new landlord under the attornment clause.
With an attornment clause, you are protected from the risk of being kicked out of your space when you have done everything necessary to fulfill your obligations as a tenant. Further, your new landlord – the lender or another lien holder – is protected from vacancy upon transfer of title.
Of course, while the protection is certainly great insurance in what could be a rather unsure time during your tenancy, it is important to remember that you could potentially be locked into that lease at a time that may be the least desirable. Consider the situation: if your landlord was unable to make the regular payments, there is a good chance that regular maintenance and other necessary costs were not met either. Or perhaps with such a high valuation on the property, you are stuck at a rate that is well-above market. As tumultuous a time as it may be, a foreclosure sale may be the out you need to escape from such a situation.
Check back next week for the Non-Disturbance and Attornment sections of this clause. And in the mean time, you can catch our latest and greatest blog posts any time at info.reoptimizer.com
Update: Part 2 & Part 3
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