Why are SNDAs & Tenant Estoppels Important in Commercial Real Estate?

When you are using financing to buy a multi-tenant commercial property, obtaining signed SNDA agreements from its tenants to cover subordination, non-disturbance, and attornment will likely be a condition to fulfill. Also, the landlord should provide you with fully executed tenant estoppels.

So, what exactly are SNDAs and estoppels, and why is it so crucial to have tenants sign them before the sale? Here’s some main points. 

What is an SNDA?

• WHAT: Subordination, non-disturbance, and attornment agreement that is signed by the lender, tenants and landlord  
• WHO: Landlord requests of tenants
• WHEN: Buyer is obtaining financing or when a property is going to be sold
• WHY: To confirm there are no outstanding lease issues/requests from the tenants. Moreover, it states the lease will be subordinate to the mortgage loan and tenants agree to recognize the lender as their new landlord  
• HOW (LONG): Tenants are required to sign and return within 10 days 

Who Does it Protect?

• Landlord: Signed SNDAs from each tenant are required by the lender to prove their loan is higher priority over the leases
• Lenders: Provides assurance that if there must be a foreclosure, the rent stream from the leases can be received
• Tenants: Secures a safeguard in the unfortunate event of a foreclosure

To break it down, an SNDA states that the lender (new landlord in the case of foreclosure) agrees to non-disturbance of the tenant’s rights under the lease, so their lease will not be terminated. Without it, the tenant could essentially be evicted so that the lender could re-tenant at a higher rate should the landlord default on their loan.

Obtaining SNDAs is just one item to check off during a buyer's due diligence period. Here's a checklist of more important details to finalize before the buy.   

What is a Tenant Estoppel?

This other important instrument is a tenant-signed agreement that certifies for the landlord/buyer that a lease exists, certain terms are correct, there are no defaults, and when a specific rent amount shall be paid. Common terms that will be covered include rented square footage, base rent, term, any options to extend, etc. There are typically other statements of fact such as the landlord is not in default and/or the tenant is not waiting for anything from the landlord. Note: This is signed only by the tenant.

Why is it Important?

A useful way to remember the significance of an estoppel is that the term literally means to stop someone from making a claim that contradicts what one has said or done before, or what has been legally established. Simply put, it prevents a tenant from going back on their word, thus providing proof of cash flow to the lender.  

This high-level overview should give you a baseline understanding of why SNDAs and tenant estoppels are so important when it comes to commercial real estate transactions. Aside from the fact that it would be required by a lender, it is a highly beneficial practice from a landlord’s perspective.

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