SNDA Agreements for Commercial Tenants: What Actually Happens If the Lender Forecloses?

From a tenant’s perspective, this raises a practical question: what happens to the lease if the landlord’s lender forecloses?

In many commercial leasing transactions, the lease will provide—either expressly or by operation of a future subordination clause—that the tenant’s interest in the leased premises is subordinate to any existing or future mortgage encumbering the property.

The answer often depends on whether the tenant has obtained a Subordination, Non-Disturbance and Attornment Agreement, commonly referred to as an “SNDA.”

Automatic Subordination in Commercial Leases

Most commercial leases provide that the tenant agrees to subordinate its leasehold interest to the lien of any present or future mortgage affecting the property. This allows the landlord to obtain acquisition or refinancing debt without seeking further consent from existing tenants.

Absent additional protections, however, subordination creates the risk that the tenant’s lease could be extinguished in a foreclosure proceeding. If a lease is junior in priority to the foreclosing mortgage, and no separate agreement exists between the tenant and the lender, the lender may have the right to terminate the lease upon foreclosure.

For tenants operating retail locations, restaurants, medical offices, or industrial facilities in Massachusetts, the loss of a leasehold interest in this manner could result in significant business interruption.

The Role of Non-Disturbance

The “non-disturbance” component of an SNDA addresses this risk by providing that, so long as the tenant is not in default under the lease beyond applicable notice and cure periods, the lender agrees not to terminate the lease or disturb the tenant’s possession of the premises in the event of a foreclosure.

In effect, the lender agrees that if it succeeds to the landlord’s interest—whether through foreclosure or deed in lieu—it will recognize the lease and permit the tenant to remain in occupancy for the balance of the lease term.

From the tenant’s standpoint, this is often the most critical protection afforded by an SNDA.

Attornment Following Foreclosure

In exchange for this protection, the tenant agrees to “attorn” to the lender or any subsequent purchaser at foreclosure. Attornment means that the tenant will recognize the foreclosing lender as its new landlord and will continue to perform its obligations under the lease in favor of that successor.

This provision ensures continuity of rental income for the lender (or foreclosure purchaser) and allows the lease to remain in place notwithstanding the change in ownership.

Practical Issues in a Foreclosure Scenario

While the basic framework of an SNDA is relatively straightforward, the treatment of certain lease-specific issues in a foreclosure context is frequently the subject of negotiation.

Prepaid Rent

Lenders will often provide that they are not bound by any rent paid by the tenant more than one month in advance, unless such rent has actually been received by the lender following foreclosure.

Security Deposits

Similarly, lenders may disclaim responsibility for security deposits not transferred to them by the prior landlord. Tenants may seek to require that the lender credit any security deposit reflected in an estoppel certificate delivered to the lender in connection with its loan underwriting.

Tenant Improvement Allowances

If the lease provides for a tenant improvement allowance that has not yet been funded at the time of foreclosure, the lender may resist any obligation to fund such amounts. Tenants should consider negotiating for the lender to honor any unfunded TI obligations that have been earned or are subject to pending reimbursement requests.

Renewal Options

Tenants may also seek confirmation that any renewal or extension options contained in the lease will remain enforceable following foreclosure, particularly where such options are material to long-term operational planning.

Common Lender Carve-Outs

Notwithstanding a non-disturbance covenant, most lender forms of SNDA will include limitations on the lender’s post-foreclosure obligations. These may include provisions stating that the lender will not be:

• Liable for any acts or omissions of the prior landlord;
• Subject to offsets or defenses arising from prior landlord defaults; or
• Obligated to complete construction or fund capital improvements.

Tenants should review these carve-outs carefully to understand the extent to which lease rights—such as repair obligations or improvement allowances—may be affected in a foreclosure scenario.

Massachusetts Considerations

Under Massachusetts law, a foreclosure by exercise of the statutory power of sale will generally extinguish interests junior in priority to the foreclosed mortgage, which may include leasehold interests that are not protected by a separate non-disturbance agreement.

As a result, tenants leasing space in Massachusetts commercial properties should not assume that continued occupancy will be permitted following foreclosure absent an SNDA with the landlord’s lender.

These issues may also arise in the context of ground leases where multiple layers of debt may exist and priority among interests becomes more complex.

Final Thoughts

An SNDA allocates risk among the landlord, tenant, and lender in the event of a foreclosure. For tenants, it provides assurance that leasehold rights will be preserved notwithstanding a change in ownership resulting from the landlord’s default. For lenders, it preserves the value of in-place leases by ensuring continuity of tenancy following foreclosure.

As with many provisions in commercial leases, the practical effect of an SNDA depends on the specific language negotiated by the parties and the extent to which tenant protections are limited by lender-imposed carve-outs.