Expert: Leases Are Credit Instruments
Real estate attorney Robby Pinnamaneni argued that business owners should view commercial leases as credit instruments rather than simple rent agreements. He stressed that tenants risk losing their lease and improvements if a landlord defaults on their mortgage without a Subordination, Non-Disturbance, and Attornment (SNDA) agreement in place. Pinnamaneni urged tenants to negotiate terms presented as "boilerplate," stating they often have more leverage than they realize.
- An SNDA is a three-party agreement between a tenant, a landlord, and the landlord's lender. Its purpose is to define the relationship and responsibilities between the tenant and the lender in the event the landlord defaults on their loan. - The "subordination" clause makes the tenant's lease secondary to the lender's mortgage. This is a critical clause for lenders, as it gives their security interest priority over the lease. Without it, a pre-existing lease could have priority over a new mortgage. - The "non-disturbance" portion of the agreement is a vital protection for tenants. It ensures that as long as the tenant is not in breach of their lease, their tenancy will not be terminated if the landlord is foreclosed upon. - The "attornment" clause requires the tenant to recognize the lender or the purchaser at a foreclosure sale as the new landlord. This formalizes the legal relationship and prevents the tenant from being able to walk away from the lease after a foreclosure. - Without an SNDA, a commercial tenant's legal standing during a foreclosure often depends on state law and when the lease and mortgage were signed. In many jurisdictions, a foreclosure automatically terminates a lease that was signed after the mortgage was recorded. - The best time for a tenant to negotiate an SNDA is before the lease is signed. At this stage, the landlord is motivated to complete the deal and is more likely to encourage their lender to negotiate terms. - So-called "boilerplate" or standard clauses in commercial leases, including those related to subordination, can often be negotiated. Factors such as the desirability of the tenant and the landlord's eagerness to fill a vacancy can increase a tenant's negotiating leverage. - Beyond the SNDA, tenants can negotiate other protective clauses, such as the right to "self-help," which allows them to make necessary repairs that the landlord has neglected and deduct the cost from their rent.
