By: Jerry Gonzalez and Jean Marie Crahan.
The following are a few recent take a-ways from a foreclosure challenge to a commercial lease by a lender:
—-Q: What is the purpose of SNDA provisions in commercial leases?
A: Quiet enjoyment for the commercial lessee, reasonable ability to finance for the landlord, lender willingness to loan. The Subordination Non-Disturbance and Attornment (SNDA) clause common in most commercial leases is used by lenders to confirm that landlord financing takes priority over a commercial leasehold interest, subject to the lessee having quiet enjoyment of their lease. The lessee gains non-disturbance and peaceable enjoyment under the Lease; the landlord gains the flexibility of securing financing (or re-financing of mortgages) without running afoul of a quiet enjoyment provision in a lease. The lender agrees to loan the landlord money without a risk of subordinating its lending terms, beyond quite enjoyment, to a Lease.
—-Q: Does the SNDA provide security of on-disturbance to a lessee where the lender is pursuing foreclosure against the landlord?
A: An SNDA can remain in force for the lessee with a carefully drafted settlement agreement or consent decree that protects its rights. To get clear title to land, a foreclosing lender generally must continue to foreclose out all defendants on an in rem basis and get an in rem judgment against all interested parties to the land. In recent litigation, we noticed that some tenants allow themselves to be defaulted in foreclosure readily relying on the good graces of the lender and to a lesser degree, the court to continue their peaceable enjoyment of the property being leased. We believe it to be a better practice to demand provision for quiet enjoyment as a part of a settlement document while working with the lender who needs to gain total control over the property in foreclosure. In this way, careful counsel can determine any potential hidden motive to extinguish the lease while properly protecting their client.
—-Q: Are there times a lender may want to cancel a commercial lease for reasons beyond simply gaining proper title in a foreclosure petition?
A: Absolutely. It can be preferable for a lender to simply sue all lessees, counting on the lessee to fail to properly protect its interest, and thereby extinguish the lease interests in the proceeding. This could benefit the landlord in many ways including releasing the landlord from terms it considers onerous, or simply controlling the terms of new leases that are more favorable to the lender. Perhaps the Lender sees better things with a new real estate development that make terminating otherwise viable leases a net economic win for the lender albeit a loss for the lessee. Therefore, cautious commercial tenants should not solely rely on the SNDA language in their leases to protect them in foreclosure. Instead, they should answer pleadings and stay on top of foreclosure proceedings. Cautious lenders should also consider whether extinguishment risks releasing good tenants from lease obligations that favor lender.
—-Q: What is the moral of the story?
A: Trust the process, but protect your client’s interests by participating in it. A lender may be trying to gain leverage and renegotiate your lease by extinguishing it in a foreclosure action. Although you may believe, the lender is simply positioning to remove the landlord, you should not assume your lease’s SNDA provision will protect you and that gaining in rem jurisdiction over the property is all the lender wants. If your client has favorable existing lease terms, these could be in jeopardy and renegotiation forced on your client, or lease extinguishment despite priority.