In all commercial real estate lending transactions, both borrowers and lenders are paralyzed when relying on the participation of third parties. Let’s face it—the normal transaction has gone from months to weeks and even days in a fast-moving and unpredictable market. While sellers in an acquisition have an incentive to move quickly, tenants often fail to see the benefit in addressing disputed maintenance or financial obligations. Well-drafted commercial leases require the timely return of tenant estoppel certificates and subordination, non-disturbance and attornment agreements (SNDAs). Ideally, forms of agreements incorporating lender concerns were previously negotiated within the lease, addressing such issues as notice/cure rights, restricted substantive amendments to financial terms, casualty proceeds and condemnation awards and parties’ rights during a foreclosure. While this is not a replacement for a complete review of all underlying due diligence, these instruments assist in establishing several crucial terms and conditions, providing purchasers and lenders an opportunity to better understand the commercial property.
The trend: place estoppels on steroids and SNDAs on the back burner
Prior practice was to request estoppels and SNDAs from every tenant; however, lenders are reluctant to request SNDAs from every tenant on the first closing checklist. While many practitioners recall when estoppels were only a page at most, estoppels have evolved from minimum confirmations of basic financial terms to pages of questions establishing co-tenancy, exclusivity, termination, purchase and other terms. Smaller tenants are generally compliant in delivering lenders’ form estoppels, while more sophisticated larger tenants will demand standard in-house forms. When identifying required SNDAs, a common approach is to review title, and in those cases where leases are recorded, instruct borrowers to obtain SNDAs based upon the assumption that tenants with rights such as future purchase and expansion options typically record memoranda of leases to preserve such rights against interested third parties. Even with recorded memoranda of leases and the absence of SNDAs, title companies routinely offer lenders coverage in the form of additional endorsements and affirmative language against future purchase and expansion options following rigorous due diligence for the benefit of the lender.
So why bother?
Given new, more substantive estoppel forms and title insurance coverage, you may be thinking that SNDAs have outlived their usefulness. To the contrary, SNDAs address a wide range of business and legal concerns. In a practical sense, they may offer the only opportunity for both the purchaser of the property and the lender to have direct contact with the tenant or its counsel, including, for lenders, continued tenant communication after closing. Generally, notice of breaches and rights to cure under commercial leases are freely given to lenders. While an administrative tangle for the tenant, this provides tenants with an additional resource for relief. It also provides lenders the opportunity to negotiate for both restrictions on substantive amendments without lenders’ consent and, equally important, the control and use of insurance proceeds and condemnation awards. These, of course, are harder to negotiate with savvy tenants, but a clearer understanding of the underwriting of the property follows such candid conversations. For those leases that do have rights to purchase, SNDAs are the only mechanism that will effectively subordinate tenants’ rights to purchase. The worst case scenario is a tenant with a right to purchase the property at a lower price than either the purchase and/or loan amount, underscoring the importance of thorough due diligence. Additionally, landlords and borrowers are not the only interested parties in obtaining SNDAs, as tenants may effectively lose their leases in some jurisdictions during a foreclosure, although those same tenants may need to be reminded of attornment benefits from time to time.
Although landlords will attempt to negotiate commercial lease forms that adequately address lender concerns at the onset of the landlord-tenant relationship, SNDAs are likely here to stay. Changing market conditions and underwriting concerns make addressing every potential issue difficult, if not impossible. Most important, SNDAs will continue to allow open communication between all interested parties in evaluating everyone’s interest in and understanding the terms of the deal. Due to the ever-increasing fast pace of commercial real estate transactions, best practice will necessitate sufficiently thorough yet expeditious due diligence.
Bert Greenwell serves as counsel in Alston & Bird’s real estate finance and investment group.