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Wins & Insights

Tenant Leasing Illustrated – Oct 2015 – The Amazin’s and Subordination

The Amazin’s and Subordination

The irony of having the New York Mets featured in our October issue is not lost on me.

Strunk and Whites’ “The Elements of Style” forbids even using “October” in the same sentence as “NY Mets” (as Casey Stengel would say, “you can look it up”).

But I am no bandwagon jumping newbie. I was there for the miserable years and taunting collapses, went to the ’69 World Series (watch it, I was in grade school!) and (along with 300,000 other people) the Mookie Wilson/Bill Buckner sixth game of the ’86 World Series.

I even still have my Ron Hunt coffee mug.

Mets fans were feeling unusually good this spring and I was no exception, but like any Mets fan with an eight run lead in the ninth inning, I was always ready for the collapse.

True to form, in July the Mets were struggling, David Wright and others were injured, Wilmer Flores was crying, disaster was imminent. After all, as a Mets fan, there is crying in baseball!

But then, faster than you can say “Yoenis Cespedes”, the Mets made some nifty trades, their young players stepped up and the team surged, sweeping their rivals the Washington Nationals and vaunting to a nice lead.

So, here it is almost October, the Mets are selling playoff tickets, and I steel myself for inevitable doom.

In commercial leasing, a tenant must also be ready for potential calamity. Sometimes, it is not even the tenant’s calamity, but it could become the tenant’s problem if not properly protected.

For example, if a landlord defaults under its mortgage or ground lease, its mortgagee or 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 or ground lessor can choose to terminate the lease.

Even if the lease is not terminated, the subordination language will generally provide that such mortgagee or ground lessor is not subject to all of the obligations of the defaulting landlord (e.g., funding negotiated tenant improvement allowances).

Just like the Phillies in 2007 and 2008. Disaster looming.

The way a tenant protects itself is by obtaining a Subordination Non-disturbance and Attornment agreement or “SNDA”.

This 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 takes over the lease from the defaulting landlord and provides that the mortgagee/ground lessor will not disturb the tenant’s possession subject to the terms of the lease.

SNDAs are not always obtainable, particularly for smaller leases, so tenants need to do a practical analysis of the risks in not obtaining an SNDA. These risks are clearly lessened with an institutional landlord with equity who is not likely to walk away from a valuable property and recognition that mortgagees or ground lessors who inherit defaulted property generally (subject to market conditions) want to maintain the cash flow and recoup their investment, not terminate non-defaulting tenants.

Cover all bases in your subordination provision by addressing the following seven issues:

  • Obtain representations. Your landlord should represent and warrant as to all of the then current mortgagees and ground lessors.
  • Require SNDA up front. You should require an SNDA from each current mortgagee and ground lessor simultaneously with the execution of your lease, with the form of SNDA attached as an exhibit to your lease. Some landlords will try to make the SNDA a post-signing obligation and allow the tenant a termination right if the SNDA is not delivered within some period of time (e.g. 60 or 90 days), but this is likely to be of little value to a tenant that has moved in, commenced construction or invested valuable time.
  • Make the subordination conditional. Ideally, your lease should provide that the subordination itself is subject to your landlord providing an adequate SNDA protecting your rights from all current and future mortgagees/ground lessors. This is generally only possible to obtain for large tenants with a good deal of leverage, and will only be effective with respect to future mortgagees/ground lessors (existing mortgages at the time of the lease will already be recorded and hence superior).
  • Provide a fallback for smaller leases. It is not unusual with smaller leases that your landlord will not agree to obtain the SNDA at the time of lease execution (possibly the mortgagee or ground lessor will not agree or your landlord may be reluctant to inquire). At a minimum, you should require that your landlord make commercially reasonable efforts to obtain an SNDA after lease execution.
  • Be careful about the future SNDA form. Landlords will often require that the SNDA be on the future mortgagee or ground lessor’s then standard form. Standard forms of lenders and ground lessors are often extremely one-sided so any such future SNDAs should be “reasonably acceptable” to you or on a form “substantially similar” to the form signed at lease execution.
  • SNDA provisions. Although beyond the scope of this issue (we will discuss the issues to cover in your SNDA itself in a future newsletter – – how’s that for gripping suspense!), the SNDA form can be a heavily negotiated document, with the mortgagee/ground lessor looking to limit its obligations once it obtains possession, and the tenant looking to maintain the negotiated terms of its lease. For example, a mortgagee or ground lessor may not be willing to fund an anticipated tenant improvement allowance, but you as tenant may need to be creative and find some other avenue to protect your economic position, such as an offset right against future rent.
  • Avoid strict compliance with mortgage/ground lease terms. You should try to avoid broad covenants to comply with the terms of existing mortgages or ground leases (which can be a way to side step your negotiated non-disturbance or other rights) unless you have reviewed and understand such terms or your landlord represents that compliance with the terms of your lease will constitute the required compliance. Your landlord should also covenant not to amend the mortgage or ground lease terms if it will have more than an insignificant effect on your rights under the lease.

Every twenty years or so, like clockwork, the Mets manage to pull off a fleeting miracle ride that makes our inner Marvelous Marv Throneberry briefly give way to unbridled optimism. Address the seven issues above and you will not need a miracle to ride smoothly through your lease’s subordination provisions.