Subordination Tranquilo and Attornment Agreements

We recently visited my son Jordan who is living and teaching in Spain.

It can provide a healthy perspective to spend some time in another country and when traveling I always try hard not to be the “Ugly American.”

But language is one barrier that makes me feel like (more than usual) a bumbling idiot. They say if you speak two languages, you are bi-lingual, if you speak three languages, you are tri-lingual, and if you speak one language, you are American.

And yes, it is true, I have been trying to learn Spanish online. Kind of a bucket list thing, plus they say learning a language keeps those (few remaining) brain synapses firing and fends off dementia. At least I think they say that; I cannot remember.

But I was an ugly American and an ongoing disturbance of the peace by one simple act; renting a car.

Notwithstanding regular driving in the video game of Manhattan streets, I was no match for las calles of Spain.

Between signs in Spanish or Basque, crosswalks that sometimes require you to go or stop for pedestrians, and teeny hotel garages, I was the Spanish equivalent of Sponge Bob when it came to driving proficiency.

I will take a rabid landlord on steroids providing optional services for outlandish rents over another Spanish roundabout any day!

In commercial leasing we have a very pleasant sounding notion to avoid leasing disturbances, that is, the subordination, non-disturbance and attornment agreement or “SNDA”.

If a landlord defaults under its mortgage or ground lease, its mortgagee/ground lessor can take over the landlord’s position under the lease but, since the lease is almost always subordinate by its terms to superior mortgages and ground leases, that mortgagee/ground lessor can choose to terminate the lease or, based on the lease subordination language, not be required to meet all of the landlord’s obligations.

If a tenant has invested a significant amount of time and money into a build out of its premises, or is counting on its landlord to fund a tenant improvement allowance to build out that space, this can be the commercial leasing equivalent of the Spanish roundabout.

The SNDA is a three-way agreement among the tenant, landlord and mortgagee/ground lessor, which confirms the subordination of the lease to the mortgage or ground lease, requires that the tenant “attorn” or recognize the mortgagee/ground lessor as its landlord once it succeeds the defaulting landlord and provides that the mortgagee/ground lessor will not disturb the tenant’s possession.

Although we have addressed in past newsletters (and I know you save them all) how a tenant can protect itself in its lease by requiring an SNDA from underlying mortgagees or ground lessors, in today’s newsletter we focus on the protections a tenant should require under the SNDA itself.

Make sure your lease does not vamos out the door by addressing the following seven issues in your SNDA:

• Cover your non-disturbance. As long as your lease in in full force and effect and you are not in default after applicable notice and grace periods, you should not be named or joined as a defendant in the exercise of the mortgagee/ground lessor’s rights (unless required by law and then only for that purpose, not to terminate your lease or affect your rights under the lease). To the extent that your lease is extinguished, a new lease should automatically go into effect on the same terms.

• Cover deed in lieu of foreclosure. Make sure that “foreclosure” is defined broadly to include a deed or other conveyance of your landlord’s interest in lieu of foreclosure.

• Require undertaking to perform. Your SNDA may provide for you to attorn to the mortgagee/ground lessor, but make sure it also affirmatively requires a reciprocal covenant by the mortgagee/ground lessor to perform your landlord’s lease obligations.

• Retain lease economics. You should remain entitled to the terms that you negotiated with your landlord and which are likely reflected in your rent; after all, your lease helped create the value for the loan or ground lease in the first place. This is true with respect to the following provisions that are often subject to negotiation:

• Casualty. The mortgagee/ground lessor should perform casualty and condemnation repairs in the same manner as your landlord (sometimes this is limited to the amount of insurance proceeds received, but the mortgagee/ground lessor should not otherwise get a better deal than your landlord).

• Options. You should remain entitled to any options set forth in your lease (e.g., renewal, expansion, rights of first offer, etc.).

• Performance. Generally, mortgagees/ground lessors will not be liable for your landlord’s acts or omissions or failure to perform before the mortgagee/ground lessor controls the property, but there should be exceptions to the extent that such failure to perform (a) continues after the date of attornment, (b) is of a nature that the mortgagee/ground lessor can cure by performing a service or making a repair, or (c) is of a nature of a continuing repair, replacement or service, or other obligation that affects your occupancy.

• Offset rights. Many SNDAs prohibit any offset rights, but you should be entitled to any offsets under your lease after the date of attornment.

• Amendments. The mortgagee/ground lessor may want approval rights with respect to amendments to your lease, but a better approach is to provide that the mortgagee/ground lessor shall not be bound by any amendments made without its consent and you should specifically exclude amendments contemplated by your lease (such as options mentioned above).

• Understand (add address) unprotected risks. Some risks are customarily placed on the tenant and, if important, should be addressed in a different manner with either your landlord or the mortgagee/ground lessor.

• Security/rent. The mortgagee/ground lessor is generally not responsible if your landlord misapplies your security deposit (unless actually received by the mortgagee/ground lessor) or for rent paid more than one month in advance.

• Construction. Although you should require that the mortgagee/ground lessor remain obligated to complete construction that your landlord does not complete and to fund tenant improvement allowances, most mortgagees/ground lessors will not agree even though they will be entitled to the rent for a presumably fully built out premises. If your landlord’s financial stability is a concern or you otherwise have sufficient leverage, you may want to consider requiring a guaranty of payment from another entity or even the posting of the full tenant improvement allowance by letter of credit. You can also provide in the SNDA that if the mortgagee/ground lessor does not agree to complete construction obligations or to fund an allowance within an agreed upon time, you can elect to either complete such work yourself and be entitled to offset all reasonable costs against rent or to terminate the lease.

• Address extended cure periods. Mortgagees/ground lessors often require cure periods for landlord defaults, but these time periods should not be unlimited and should be tied to the time needed to obtain control of the property (and appointment of a receiver should be deemed to be such control) and the mortgagee/ground lessor should provide early notice of its intention to cure.

• Rent payment notices. Many SNDAs provide that after written notice by the mortgagee/ground lessor of the landlord’s default, the tenant is obligated to pay all rent directly to the mortgagee/ground lessor. If your SNDA includes this provision, your landlord should consent to this arrangement and execute the SNDA to confirm.

I spent much of my Spain trip calculating. Celsius to Fahrenheit (x°C × 9/5 + 32 = x °F) and kilometers to miles (1 km = (1/1.609344) mi = 0.62137119 mi), since it can be disturbing to hear the temperature is 8 degrees outside and you are driving down the road at 120 kilometers an hour. Cover the seven issues above in your SNDA and you will be truly tranquilo, not disturbed.