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Foreclosure of Commercial Property: Understanding Subordination, Non-Disturbance And Attornment (“SNDA”) Agreements

When a commercial property owner defaults on its mortgage, the lender will foreclose on the mortgage and sell the property to a third party through a judicial or non-judicial sale (referred to herein as a “foreclosure sale”). 

In Virginia, an “automatic foreclosure” state, a foreclosure sale automatically terminates any interests in the property which are subordinate to the mortgage which is the subject of the foreclosure, including all leases executed by the former owner and its tenants.   Accordingly, following the foreclosure sale, the existing tenants have no contractual right to occupy the property, and the purchaser has no right to enforce the prior owner’s leases.

The execution of Subordination, Non-Disturbance and Attornment (“SNDA”) Agreements can eliminate some of the uncertainty that comes with foreclosure sale.  The SNDA Agreement is a tri-party agreement between the tenant, the landlord and the landlord’s lender.  At its core, it creates an agreement among the parties that allows the tenant to continue to occupy the property following a foreclosure sale, with the lender or the new owner of the property becoming the landlord.  As its name implies, the SNDA Agreement has three main provisions:  Subordination, Non-Disturbance and Attornment.

Subordination has to do with the priority of interests in the property.  In almost all cases, the landlord’s lender will require that its secured interest in the property (created by the landlord’s mortgage or deed of trust) be superior to any other person’s interest in the property.  Thus, in the event the landlord defaults on the mortgage, the lender can freely dispose of the property without the consent of any other parties.  Most commercial leases explicitly provide that the lease is subordinate to any existing or future mortgages entered into by the landlord.  The subordination section of the SNDA Agreement is a way for the lender to obtain additional assurance that the lease is subordinate to the mortgage.  In very rare circumstances, a lender will subordinate its property interest to that of a tenant.  This is uncommon, and usually only obtainable by large, national-chain tenants.

Non-Disturbance has to do with the tenant’s ability to continue occupancy of the property following a foreclosure by the lender, notwithstanding the tenant’s property interest being subordinate to that of the lender.  The non-disturbance section of the SNDA Agreement typically provides that the lender will not disturb the tenant’s right to possess the property if the lender assumes ownership of the property or sells it to a third party through a foreclosure sale.  However, most SNDA Agreements limit the lender’s obligations to the tenant, and do not require the lender to assume all of the landlord’s obligations under the lease.

Attornment has to do with the tenant’s rental obligations to the lender (if it assumes ownership) or the new owner of the property following the foreclosure sale.  If the tenant is required to “attorn” to the new owner following the foreclosure, the tenant must recognize the new owner as its landlord and pay rent to said party in accordance with the terms of the existing lease.  The attornment portion of the SNDA Agreement is a way for the lender to ensure that a lease will remain in effect following the foreclosure sale.

SNDA Agreements can protect both the lender and the tenant by eliminating the uncertainty that comes with a foreclosure sale.  The commercial landlord has little to lose or gain by signing the SNDA Agreement since it will only be applicable if the landlord defaults on its mortgage.  Accordingly, the landlord should be open to facilitate the execution of SNDA Agreements as a way to appease lenders and tenants.