When the economy is thriving, it is a rare occurrence for a borrower to default on its loans so profoundly that its secured lender needs to repossess its assets. It is even rarer for a commercial landlord to suffer such a profound loss of cash flow that it cannot service its mortgage debt and ultimately loses the property to its mortgagee. Consequently, few in the industry were well practiced in either scenario in 2008. After the past couple of years, however, we are all too familiar with these situations, though, in some cases, we wish we had better documentation to make the repossession process proceed more smoothly.

Landlord Waivers

If a borrower/tenant defaults and its lender, as a secured party, opts to repossess inventory or equipment, it is important for the lender to have a clear agreement in place with the borrower’s landlord that explains the following:

  1. The landlord does not have any claim on the borrower’s assets (or any claim it does have is subordinate to the lender).
  2. The lender has the right to enter the property as necessary to repossess the borrower’s assets.
  3. The lender is responsible only for rent extending through the reasonable time during which it is executing its repossession rights or arranging for a sale, plus any damage it causes during that time.

Without these provisions, it is likely the lender will end up fighting about these issues with the landlord, which slows down the repossession process and makes it more expensive. Contracting for the above provisions up front sounds simple enough, so why is it that lenders do not always do so? Answer: Landlords do not like to agree to these provisions because they are a pure giveaway of rights without receiving any value.

Further, obtaining these agreements from the landlord can be costly for the borrower/tenant. Landlords with strong leverage can charge legal fees to the borrower/tenant for the cost of having the landlord’s counsel review the proposed agreement. These landlords may also charge a processing fee or extract some other costly concession in exchange for the landlord’s consent.

And because landlords dislike these agreements, negotiations can take a lot of time. In cases where these agreements are heavily negotiated, they often result in an awkward three-way conversation among lender counsel, tenant counsel and landlord counsel—each trying to avoid responsibility for moving it along. Whoever has the most leverage (usually the lender) generally imposes its will. The borrower/tenant almost always ends up getting caught in the middle.

Subordination, Non-Disturbance and Attornment Agreements

One major concern for a tenant (and, potentially, lenders who have secured interests in the tenant’s property) is that if the tenant’s landlord defaults on its mortgage loan to its mortgagee, the tenant could lose its lease rights and be evicted (if the lease is on tenant-attractive terms) or see its rent expense greatly increased. An aggressive mortgagee also could try to obtain property belonging to the tenant (which also may be security for the tenant’s loans with its lender) if there is any ambiguity about whether the property belongs to the tenant or is a fixture belonging to the property owner.

It is important in this case to have an agreement in place among the tenant, its landlord, and the landlord’s mortgagee to protect the tenant and, in many cases, the tenant’s lender. This agreement is typically referred to as a Subordination, Non-disturbance and Attornment Agreement, or “SNDA.” First, the SNDA states that even if the landlord defaults and the mortgagee forecloses, the mortgagee will respect the tenant’s lease on its terms (Non-Disturbance).

In return, the mortgagee reasonably asks for the tenant’s acknowledgment that, subject to Non-Disturbance, its lease rights are subordinate to the landlord’s mortgage (Subordination). The mortgagee will also ask the tenant to acknowledge that it does not own any of the fixtures to the mortgaged property. To the extent there is ambiguity regarding whether any of the tenant’s property is a fixture, the tenant will want to ensure this is clarified in the agreement. Finally, the mortgagee will ask the tenant to acknowledge that it will pay rent to the mortgagee after any foreclosure (Attornment).

Again, obtaining such an agreement makes sense, so why do we not see more of them? Answer: They, too, are painful to negotiate. However, since an SNDA may be sought by either the tenant (seeking Non-Disturbance) or the mortgagee (seeking Subordination and Attornment), there often is more common ground to work from than there is with landlord waivers.

Takeaway

Landlord waivers are helpful tools for loans for which equipment or inventory are material collateral. Subordination, Non-Disturbance and Attornment Agreements (SNDAs) are helpful tools when the tenant/borrower has important lease rights or the landlord/mortgagor has existing leases in place. Consider seeking these agreements, but know that it will be a bit of a struggle.