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Ruth A. SchoenmeyerPircher, Nichols & Meeks If you find this article helpful, you can learn more about the subject by going to www.pli.edu to view the on demand program or segment for which it was written. |
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Negotiating a lease can feel like herding cats. Brokers, operations personnel, risk managers, leasing representatives, property managers, attorneys and, of course, lenders all weigh in with their sometimes conflicting concerns regarding a lease. The purpose of this article is to address a lender’s potential concerns regarding a lease, the relative priority of leases and loan documents, and two documents that lenders often require to be executed in connection with a loan: a subordination, non-disturbance and attornment agreement (also known as an “SNDA”) and an estoppel certificate.
A. Lender Approval Rights |
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B. Subordination |
When reviewing a lease, a lender also considers which document should have priority: the lease or the mortgage. Priority is generally determined by the “first in time, first in right” rule (e.g., a lease executed after a mortgage is subordinate to it), but landlord, tenant and lender can contractually agree to reverse the order of priority by executing an SNDA, by addressing the issue in the lease or by executing a subordination agreement.
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C. Estoppel Certificates |
In addition to approving a lease and addressing subordination in an SNDA, the lease or other document, a lender also asks the tenants of property with respect to which lender is providing financing to execute estoppel certificates for lender’s benefit. A borrower/landlord will usually resist providing estoppel certificates with respect to all tenants of a multitenant property, but lender will usually insist upon receiving estoppels from some combination of key tenants and a percentage of other tenants. As is the case with the SNDA, lender and tenant have different interests where an estoppel certificate is concerned. A lender wants an estoppel certificate to be so detailed that it need not review the lease. A tenant, on the other hand, wants to commit to as little as possible with respect to the lease. A tenant’s general rules with respect to estoppel certificates are as follows:
1. | Attach an acceptable form of estoppel to the lease |
2. | Alternatively, include in the lease a list of statements that will be included in the estoppel (do not include “and such other certifications as lender may reasonably request” language, or lender will ask for the moon) |
3. | Strike all easily ascertainable statements (e.g., number and length of options, ROFR, ROFO) |
4. | Include conflict/inconsistency language that explicitly provides that the lease prevails |
5. | Protect against liability if tenant has made a good faith mistake |
6. | Make certain statements (e.g., existence of default) to the actual, then-current knowledge of the certifier without duty of investigation (maybe if a single person; lender should include a certification that the single person would have knowledge of the items included in the estoppel) |
7. | Do not include statement that there are no events which, with the giving of notice, passage of time or both, would constitute defaults |
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8. | Include the date of certification |
9. | Be careful about who is entitled to rely upon the estoppel |
An estoppel that has been blacklined to show tenant’s proposed revisions is attached hereto as Attachment 2.
D. Cases |
Miscione v. Barton Development Co., 52 Cal. App. 4th 1320 (4th Cir. 1997): In this case, the plaintiff-lender sued a defendant-tenant, who had signed an SNDA, for defaulting on its rent and vacating the premises after its landlord foreclosed. The defendant-tenant claimed that the original deed of trust had priority, and extinguished all subordinate liens when the borrower/original landlord foreclosed. The court ruled against the defendant-tenant, heavily relying on the “attornment” portion of the SNDA. The court held that the borrower/original landlord’s “foreclosure did not terminate the obligations of the tenant under the lease. The tenant had contracted to alter the priorities otherwise established by law. Defendants, in the clear language of the lease, had agreed to attorn to the purchaser at a foreclosure sale.”
CW Capital Asset Management, LLC v. Chicago Properties, LLC, 610 F.3d 497 (7th Cir. 2010). This case held that the plaintiff-servicer cannot sue under an SNDA for funds the borrower-defendant received from a tenant if the borrower-defendant has not actually defaulted on the loan.
In this case, the tenant Blockbuster had defaulted on its lease and the suit resulted in a settlement, which settlement funds the servicer-plaintiff claimed it had the right to. The borrower-defendant continued to make full monthly mortgage payments. The SNDA had the standard provision stating that the lender is not bound by any pre-paid rent or any modification in the lease without the lender’s consent that reduces the tenant’s monetary obligations. The 7th Circuit ruled against the plaintiff-servicer, holding that the servicer-plaintiff was not “injured by not receiving rent payments from Blockbuster, for had it received them it would have applied them to reduce the debt that [borrower-defendant] owes it, and it has not presented evidence that Blockbuster’s failure to direct rent to it has impaired the value of its collateral.”
Because the borrower-defendant was still making all mortgage payments in full, Blockbuster’s liability under the SNDA was not triggered. (Secondary, but still important note: The 7th Circuit also held that a settlement does not constitute pre-paid rent anyway.) The court did note that
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E. Conclusion |
A lender who loans money to a borrower who is a party to a lease, either as a landlord or a tenant, can spend an inordinate amount of time and money clarifying the rights and responsibilities of the other party to the lease, and lender may legitimately ask itself whether the risks of failing to explicitly address subordination justify the expense of obtaining an SNDA or estoppel. In states in which the lease automatically terminates in a foreclosure action if the parties have not otherwise addressed subordination, obtaining an SNDA or otherwise addressing subordination is critical if lender wants to preserve the lease. In other states, the answer is unclear. As for the estoppel, the document is probably important enough that it is worth the time spent wrangling over it. Lenders who elect to obtain SNDAs and estoppels are probably best served by requiring borrower to pay for the costs of obtaining them, and landlord would be wise to require a tenant to pay for an SNDA that it requests pursuant to its lease. Cat-herding is much more palatable when it’s on someone else’s nickel.
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ATTACHMENT 1
SNDA FORM BLACKLINED TO SHOW TENANT
COMMENTS
SUBORDINATION
NONDISTURBANCE
AND ATTORNMENT AGREEMENT
DEFINED TERMS
Execution Date: |
Lender & Address: |
Tenant & Address: |
Landlord & Address: |
Loan: A first mortgage loan in the original principal amount of $_____________ from Lender to Landlord. |
Note: A Promissory Note executed by Landlord in favor of Lender in the amount of the Loan dated as of _________________________. |
Mortgage: A Mortgage, Security Agreement and Fixture Filing dated as of _______________ executed by Landlord, to Lender securing repayment of the Note to be recorded in the records of the County in which the Property is located. |
Lease and Lease Date: The lease entered into by Landlord and Tenant dated as of _______________ covering the Premises. [Add amendments] |
Property: The Property is more particularly described on Exhibit A. |
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THIS SUBORDINATION, NONDISTURBANCE AND ATTORN-MENT AGREEMENT (the “Agreement”) is made by and among Tenant, Landlord, and Lender and affects the Property described in Exhibit A. Certain terms used in this Agreement are defined in the Defined Terms. This Agreement is entered into as of the Execution Date with reference to the following facts:
A. | Landlord and Tenant have entered into the Lease covering certain space in the improvements located in and upon the Property (the “Premises”). |
B. | Lender has made or is making the Loan to Landlord evidenced by the Note. The Note is secured, among other documents, by the Mortgage. |
C. | Landlord, Tenant and Lender all wish to subordinate the Lease to the lien of the Mortgage. |
D. | Tenant has requested that Lender agree |
NOW THEREFORE, in consideration of the premises and the mutual covenants contained herein, the parties agree as follows:
1. | Subordination. | ||||||
2. | Acknowledgments by Tenant. Tenant agrees that: (a) Tenant has notice that the Lease and the rent and all other sums due under the Lease have been or are to be assigned to Lender as security for the Loan. In the event that Lender notifies Tenant of a default under the Mortgage and requests Tenant to pay its rent and all other sums due under the Lease to Lender, Tenant shall pay such sums directly to Lender or as Lender may otherwise request. (b) Tenant shall send a ====== 127 ====== | ||||||
3. | Foreclosure and Sale. In the event of a Foreclosure Sale,
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4. | Subordination and Release of Purchase Options. Tenant represents that it has no right or option of any nature to purchase the Property or any portion of the Property or any interest in the Grantor. To the extent Tenant has or acquires any such right or option, these rights or options are acknowledged to be subject and subordinate to the Mortgage and are waived and released as to Lender and any Foreclosure Purchaser. | ||||||
5. | Acknowledgment by Landlord. In the event of a default under the Mortgage, at the election of Lender, | ||||||
6. | Construction of Improvements. Lender shall not have any obligation or incur any liability with respect to the completion of tenant improvements for the Premises | ||||||
7. | Notice. All notices under this Agreement shall be deemed to have been properly given if delivered by overnight courier service or mailed by United States certified mail, with return receipt requested, postage prepaid to the party receiving the notice at its address set forth in the Defined Terms (or at such other address as shall be given in writing by such party to the other parties) and shall be deemed complete upon receipt or refusal of delivery. | ||||||
8. | Miscellaneous. Lender shall not be subject to any provision of the Lease that is inconsistent with this Agreement ====== 130 ====== | ||||||
9. | Liability and Successors and Assigns. In the event that Lender acquires title to the Premises or the Property, Lender’s liability to Tenant shall be limited to its interest in the Property |
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IN WITNESS WHEREOF, the parties have executed this Subordination, Nondisturbance and Attornment Agreement as of the Execution Date.
LENDER: | |
__________________________________________________ | |
By_____________________________________________ | |
Its_____________________________________________ | |
TENANT: | |
__________________________________________________ | |
By_____________________________________________ | |
Its_____________________________________________ | |
LANDLORD: | |
__________________________________________________ | |
By_____________________________________________ | |
Its_____________________________________________ |
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PROPERTY DESCRIPTION
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ATTACHMENT 2
ESTOPPEL FORM BLACKLINED TO SHOW TENANT
COMMENTS
TENANT: | ________________________________________ |
DATE OF LEASE: | ________________________________________ |
AMENDED: | ________________________________________ |
PREMISES: | ________________________________________ |
ESTOPPEL CERTIFICATE
To: | _________________________ |
_________________________ | |
_________________________ |
Re: Lease between ____________, a ____________, and
____________, a ____________
The undersigned hereby certifies to __________________ (“Buyer”) and ____________________ (“Lender”) as follows
1. | The undersigned is the “Tenant” under the above-referenced lease (“Lease”) covering the above-referenced Premises (“Premises”). A true, correct and complete copy of the Lease (including all addendums, riders, amendments, modifications and supplements thereto) is attached as Exhibit “1”. |
2. | The Lease constitutes the entire agreement between landlord under the Lease (“Landlord”) and Tenant with respect to the Premises and the Lease has not been modified, changed, altered or amended in any respect except as set forth above. |
3. | The term of the Lease commenced on ____________, and, including any presently exercised option or renewal term, will expire on ____________. Tenant has ______ options to extend the term of the Lease upon the terms and conditions more particularly set forth in the Lease. ====== 136 ====== |
4. | As of the date of this Estoppel Certificate, to the best of Tenant’s knowledge, there exists no breach or default |
5. | Pursuant to the Lease, Tenant is currently obligated to pay rental in monthly installments of $____________ per month and monthly installments of rental have been paid through _______________. Pursuant to the Lease, Tenant is obligated to pay monthly installments of common area maintenance charges equal to 100% of the common area maintenance costs of the project, in the amount of $______. No other rent has been paid in advance under the Lease |
6. | Tenant has no option or preferential right to purchase all or any part of the Premises (or the real property of which the Premises are a part) nor any right or interest with respect to the Premises other than as |
7. | Tenant has no option, right of first offer or right of first refusal to lease or occupy any other space within the property of which the Premises are a part |
8. |
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9. | All insurance required of Tenant by the Lease has been provided by Tenant and all premiums have been paid. |
10. | This Estoppel Certificate is made to Buyer in connection with the prospective purchase by Buyer, or Buyer’s assignee |
Dated this _____ day of ________, 2016. “Tenant”
__________________________________________________,
a _____________________________________________
By: _____________________________________________
Name: _____________________________________________
Its: _____________________________________________
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Copy of Lease (including all addendums, riders, amendments, modifications and supplements thereto) is attached.