What Tenants Should Know Before Signing Estoppel Certificates and SNDA Agreements
By Eric D. Bernheim
While estoppel certificates and subordination, non-disturbance and attornment (SNDA) agreements are common in commercial real estate transactions, many tenants are not familiar with them until they are asked to sign one. Before you sign on the dotted line, it’s important to understand the purpose of these agreements and to ensure that your rights are protected under the terms.
Estoppel Certificate
As a commercial tenant, you may be asked to sign an estoppel certificate when your landlord is selling the property to a buyer or refinancing the mortgage with a lender. An estoppel is a binding certification from the tenant that gives buyers or lenders information on the landlord-tenant relationship that will affect them. It includes the material terms and conditions of the lease – such as start and end dates, the rental rate and each party’s obligations – and states whether there are any defaults on payments owed by the tenant or landlord to each other. This document helps ensure that all parties are on the same page regarding the current status of the lease arrangement.
When you sign an estoppel, if it is not accurate, you are in effect modifying the terms of your lease. Therefore, it’s crucial that the certificate be accurate. If your landlord owes you a tenant improvement allowance and that’s not indicated in the estoppel, you may be waiving your right to the allowance. As landlords sometimes give tenants hundreds of thousands of dollars to improve their space, you could be leaving a significant amount of money on the table by signing an inaccurate estoppel. The new party could say you agreed that there were no outstanding amounts to be paid by the landlord, which would be accurate if the signed estoppel does not correctly reflect the terms of the lease.
SNDA Agreement
An SNDA is a covenant between the tenant, the landlord and the landlord’s lender. As its name implies, the SNDA has three parts.
Lenders typically require the “subordination” portion, which states that their loan is in the first lien position and that the lease is subordinate. The “attornment” portion is also in place to protect the lender. It requires the tenant to acknowledge that the lender who forecloses on the property is the tenant’s new landlord.
The “non-disturbance” part of the agreement offers protections for the tenant. It states that in the event of foreclosure, the tenant could keep the space and maintain all its rights under the lease, as long as the tenant is not in default.
SNDAs can be tricky, hence you need to read the fine print. Lenders often say that if they do take title, they won’t be responsible for certain rights that you negotiated in your lease with the landlord, such as a tenant improvement allowance, landlord construction commitments and landlord repair requirements. By signing the SNDA under those terms, you waive your rights to the landlord obligations stipulated in your original lease.
Tenants Should Request an SNDA
As a tenant, you always want to secure an SNDA when you sign a lease. If not, you can lose your space in the event of a foreclosure if the bank doesn’t like the terms of your lease. Additionally, when negotiating your agreement, you should include a provision that states you will not be subordinate to future mortgages unless you get a commercially reasonable SNDA. This will require the landlord and a future lender to negotiate a reasonable SNDA with you if the property is ever refinanced.
Before signing a lease agreement, estoppel certificate or SNDA agreement, it is important to consult an attorney with deep experience in commercial real estate law.
Eric D. Bernheim, managing partner at FLB Law in Westport, Conn., represents tenants, developers, municipalities and lenders in transactions of all kinds, including leases, acquisitions, dispositions and financing, in addition to handling zoning and land use matters. Contact Eric at bernheim@flb.law or 203.635.2200. For more information about FLB Law, click here.
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