Commercial real estate landlords in Seattle continue to struggle.  On October 26, 2010, Eric Pryne of the Seattle Times reported that The Blume Co.’s mostly vacant office building at 1100 Eastlake faces foreclosure.  And the forecast for commercial landlords remains gloomy— for example, see the press speculation about whether the owner of several major local buildings will be able to make a significant balloon payment when their loan matures.

Despite the instability swirling around landlords in today’s economic climate, lenders and commercial tenants can provide each other with a measure of certainty with an SNDA (subordination, non-disturbance, and attornment agreement).  An SNDA agreement is a contract whose main purpose is to clarify the relationship between a tenant and a lender in the event that the lender forecloses on the landlord’s property.

As its name indicates, an SNDA agreement contains three core components.  The tenant agrees that its interest in the landlord’s property under the lease will be subordinate to the lender’s security interest in the property, even if the lease pre-dates the lender’s security interest.  In exchange, the lender agrees to allow the tenant to remain in possession of the premises (non-disturbance) after foreclosure.  Finally, the tenant agrees to attorn to (look to) the lender, or the third-party that ultimately purchases the property, as its rent-collecting landlord following the foreclosure.  

In theory—and particularly in the current economy—an SNDA agreement can provide security to both lenders and tenants.  Without one, a tenant risks losing its lease in the event of foreclosure.  If a mortgage or deed of trust pre-dates a lease, a foreclosure might terminate the lease.  Depending on a tenant’s investment in the premises and other factors, the costs of relocating to a new space can be significant. 

Likewise, lenders without an SNDA agreement risk losing tenants to greener pastures in the event of a foreclosure terminating of the lease.  With the high inventory of vacant office space, a tenant whose lease is terminated might be able to find other, less expensive space that would more than make up for relocation costs.  For most lenders, maintaining existing tenants through an SNDA agreement should be a priority.  Empty buildings produce no income. 

As Eric Pryne’s recent articles indicate, foreclosure looms large over Seattle landlords.  Now more than ever, commercial tenants and lenders should consider protecting themselves with an SNDA agreement.

For more information: Susan Shyne will be speaking about lender and tenant issues, including SNDA documents,  at the upcoming CLE “Commercial Real Estate Leases” hosted by Law Seminars International in Seattle on December 2, 2010.