• Advice for Landlords: Two Key Lease Provisions to Ensure Your Property Is Financeable
  • June 20, 2016 | Author: Matthew Gerald DiMeglio
  • Law Firm: Lerch, Early & Brewer, Chartered - Bethesda Office
  • When financing or refinancing commercial property, lenders often require that leases are subordinate to the lender’s deed of trust or mortgage securing the debt and that the tenants deliver estoppel certificates outlining facts about their leases. These conditions place a burden on landlords and require cooperation from tenants. Landlords can more easily satisfy these conditions by requiring their tenants to deliver Subordination, Nondisturbance, and Attornment Agreements (SNDA) and estoppel certificates in their leases.

    Subordination, Nondisturbance, and Attornment

    When financing commercial property, lenders generally are concerned about being constrained by the prior acts of the landlord or stuck with a poor tenant in the event the loan goes into default.

    The SNDA provides three assurances that can help alleviate the lender’s concerns. First, the SNDA provides that the landlord and tenant agree that the lease will be subordinate to the lien of any present or future deed of trust or mortgage on the property. Second, it dictates in the event of a foreclosure that the tenant’s lease will not be terminated nor its possession of the space disturbed, so long as the tenant is not in default under its lease. Finally, the SNDA provides that the tenant agrees to recognize and acknowledge any successor to the landlord, while not holding the successor landlord responsible for any wrongful acts of the previous landlord.

    All three parties (landlord, tenant, and lender) benefit from the SNDA provision. The landlord benefits because it is able to comply with the lender’s financing requirements. The lender benefits because it is provided assurances that its income stream will not be disturbed, and it avoids assuming any liabilities that may have been created by the prior landlord. And, finally, the tenant benefits because it is assured that its lease will not be terminated in the event of a foreclosure.

    Estoppel Certificate

    The second critical lease provision to help facilitate the financing process is the requirement that the tenant deliver an estoppel certificate to the landlord within a specified number of days after receiving notice. The estoppel certificate is a document outlining facts about a lease. Lenders regularly require estoppel certificates in order to determine and identify potential issues or claims that could impact the income generated from the lease. Typical estoppel certificate provisions require the tenant to certify to some of the following:
    • Lease execution date.
    • Commencement date, rent commencement date, and expiration date.
    • Monthly rent amount and the date through which monthly rent amount has been paid.
    • That the lease is in full force and effect, and that neither party (landlord nor tenant) is in default.
    The estoppel certificate allows the lender to gain knowledge about the lease, but also benefits the tenant because it gives the tenant an opportunity to give notice if the landlord is in default. As a result of identifying a default, the lender may require the landlord to cure the default before financing the property.

    Include SNDA and Estoppel Certificates in Leases to Ensure a Smooth Financing Process

    Financing or refinancing can be a stressful and timeconsuming process for landlords. Lenders can sometimes overwhelm landlords with requirements and closing checklist items. Requiring SNDAs and estoppel certificates in their leases gives landlords plenty of lead time to obtain the cooperation of their tenants and, as a result, facilitate a smooth financing process.