California SNDA Agreements: The Crucial Subordination, Non-Disturbance, and Attornment Clause in Commercial Real Estate

A commercial lease can be disrupted by a foreclosure even when you have paid every dollar of rent on time. If your landlord’s lender has priority over your lease, a foreclosure could put your right to remain in the property at risk.

That is why a Subordination, Non-Disturbance, and Attornment Agreement (SNDA) matters. The agreement determines what happens to your lease if the landlord’s loan goes into default and the lender takes control of the property. The language can protect your lease, your tenant improvements, and your ability to keep operating, or leave important protections unresolved.

Scheer Law Group has spent two decades representing lenders, landlords, and commercial tenants in these transactions. That experience provides insight into the provisions that matter before an SNDA is signed.

Key Takeaways

• An SNDA can protect a commercial tenant’s right to remain in the property after a foreclosure, provided the tenant is not in default.
• California’s recording laws can determine whether a lease takes priority over a later interest in the property.
• Commercial lenders commonly require an SNDA before funding a loan secured by leased property.
• SNDA terms are generally easier to negotiate before the lease is signed or the loan closes.
• An attornment clause can require a tenant to recognize a lender or foreclosure buyer as its new landlord.

If you are being asked to sign an SNDA, having the agreement reviewed before you sign can help identify provisions that could affect your lease later.

What Is an SNDA Agreement and Why California Lenders Require One

An SNDA is a three-party agreement between a commercial tenant, landlord, and the landlord’s lender. It establishes what happens to the tenant’s lease if the lender forecloses on the property.

The lender wants its deed of trust to have priority over the lease. The tenant, meanwhile, wants assurance that a foreclosure caused by the landlord’s default will not automatically end its tenancy.

The agreement addresses that conflict by establishing the parties’ rights before a foreclosure occurs. For lenders, an SNDA can resolve lease-priority issues before a loan closes. For tenants, it can provide contractual protection against losing a commercial space because of a landlord’s financial problems.

The Three Parts of an SNDA: Subordination, Non-Disturbance, and Attornment

An SNDA contains three related provisions, each addressing a different part of the lender-tenant relationship.

Subordination

The tenant agrees that its lease will be subordinate to the lender’s deed of trust. This gives the lender priority in the event of a foreclosure. Without that protection, a lender may face uncertainty about whether existing leases could interfere with its rights in the property.

Non-Disturbance

In exchange for the tenant recognizing the lender’s priority, the lender agrees not to disturb the tenant’s possession as long as the tenant continues complying with the lease. For a commercial tenant, this protection can be critical because losing the premises can also mean losing a location, buildout investment, equipment, and established customer relationships.

Attornment

The tenant agrees to recognize the new owner as its landlord and continue performing its lease obligations, including paying rent. The exact terms matter because an attornment provision can affect the tenant’s rights after ownership changes.

What Happens to a California Commercial Tenant Without an SNDA

Without an SNDA, the tenant may have less protection if the landlord’s lender forecloses.

The outcome can depend on the timing of the lease and mortgage, whether the lease was recorded, and whether the lender had notice of the lease.

California’s recording rules can therefore matter just as much as the terms of the lease itself. A tenant that assumes its physical possession automatically protects its lease may discover otherwise after a foreclosure.

California’s self-help eviction guide also distinguishes commercial evictions from residential matters and directs commercial landlords and tenants to seek legal advice.

The earlier an SNDA or lease-priority issue is reviewed, the more options the parties generally have to address it.

How California’s Recording Laws Decide Who Wins a Priority Dispute

California uses a race-notice recording system that can affect the priority of a commercial lease against a later-recorded deed of trust.

Under California Civil Code Section 1214, a later-recorded interest can take priority over certain earlier interests when the statutory requirements are met, including circumstances involving value, recording, and lack of notice.

California’s first-in-time lien statute also addresses priority among competing interests.

For commercial tenants, the timing and recording of the lease and the lender’s deed of trust can affect what happens if the property is foreclosed. An SNDA can address those concerns directly rather than leaving the parties to rely solely on recording priority.

Key Terms Commercial Tenants Should Negotiate in an SNDA

An SNDA often accompanies an estoppel certificate, which confirms important lease information for the lender. Both documents should be reviewed carefully.

Depending on the transaction, tenants may want the SNDA to address:

• Rent and payment terms: The tenant should know whether its existing rent and payment obligations continue unchanged after a change in ownership.
• Notice and cure rights: The agreement can address whether the tenant receives notice and an opportunity to cure before the lender takes action based on a landlord default.
• Tenant improvements: The agreement should account for improvements and buildout the tenant has already paid for.
• Personal property: Equipment and other tenant property should be addressed so that a foreclosure does not create unnecessary disputes over ownership.
• Lender obligations: The agreement should establish what the lender must do before relying on its rights under the SNDA.
• Execution and timing: The parties should confirm that the lender has actually signed the agreement before the tenant relies on its non-disturbance protections.

The right terms depend on the lease, financing documents, property, and negotiating position of each party.

Common Mistakes California Landlords and Tenants Make with SNDAs

One of the most common mistakes is treating an SNDA as routine closing paperwork.

The document may be lender-drafted, but that does not mean every provision is harmless to the tenant or landlord. A tenant that signs without reviewing the non-disturbance and attornment provisions may discover limitations only after the lender exercises its rights.

Landlords can make the opposite mistake by assuming the lender’s form is not open to negotiation. Addressing problematic provisions before the loan closes can be easier than trying to resolve them after a default.

Scheer Law Group has represented lenders, landlords, and tenants in these transactions for two decades. One of the firm’s partners also helped develop California’s first institutional retail Tenant-in-Common loan program in 2005, working with a bank and title companies on lien and leasehold priority issues.

That experience gives the firm a practical understanding of how these agreements operate from multiple sides of a commercial transaction.

Frequently Asked Questions

Who pays for an SNDA agreement in California?

The lender usually drafts the SNDA, and the landlord typically pays the lender’s drafting costs as part of the loan closing. Tenants generally pay their own attorney to review the agreement.

Can a commercial tenant refuse to sign an SNDA?

A tenant may be able to refuse, but the lease may already require the tenant to sign an SNDA when requested by the landlord’s lender. Negotiating the terms can be more useful than refusing to sign outright.

Does an SNDA need to be recorded in California?

Not necessarily. An SNDA can be enforceable between the parties without being recorded. Recording can provide notice to future purchasers and lenders, however, which may be important under California’s recording laws.

What happens if the lender never signs the SNDA?

Without the lender’s signature, the tenant generally does not have the lender’s contractual promise of non-disturbance. Tenants should confirm that the agreement has been properly executed before relying on it.

How long does SNDA negotiation usually take?

A straightforward SNDA can take one to two weeks to negotiate. More complicated transactions, including those involving anchor tenants or multiple lenders, can take longer.

Scheer Law Group, LLP: Your California Commercial Real Estate Law Firm

An SNDA can determine what happens to a commercial lease if the landlord’s financing goes into default. By the time a foreclosure begins, it may be too late to negotiate the protections that should have been addressed when the lease or loan was created.

Scheer Law Group has drafted, negotiated, and litigated commercial real estate agreements from the perspectives of lenders, landlords, and tenants since 2006. Its attorneys work from offices in San Rafael and near Aliso Viejo.

If you have received an SNDA from a lender, are negotiating a commercial lease, or are concerned about an existing lease and your landlord’s financing, contact Scheer Law Group for a review of your situation before you sign.