After a commercial tenant signs a lease, he may think the paperwork is over and can get back to business. This article describes two other common documents that tenants often are asked to sign after the lease is executed. An Estoppel Certificate and an SNDA.
Let’s deal with estoppel first. When the landlord wants to sell the building or obtain a loan, the buyer or lender will want the tenant to sign an Estoppel Certificate to confirm certain key facts about the lease. If those statements later turn out to be not true, the tenant is “estopped” (or prevented from) saying otherwise.
This 1-2 page document typically will contain separate paragraphs describing such things as the date of the lease, size of the premises, start and end dates, and base and additional rent.
What should the tenant do?
First, someone familiar with the lease should review and confirm that each statement is accurate. Is the name of the “landlord” and “tenant” correct, or has there been a transfer? Does the “lease” description include all amendments? If the tenant is asked to state that there are no purchase options or extension or expansion rights, say “except as provided in the Lease.” Any statement that there is no default by landlord or tenant should be qualified by adding “to the best of Tenant’s knowledge,” especially as to the landlord.
Estoppels and SNDAs are not set in stone. But the likelihood of getting changes approved may depend on just how big a tenant you are.
Finally, be careful where the landlord is building out the space or owes the tenant a construction allowance. In those cases, the “Landlord Work” is not complete.
Now, what is an SNDA? It stands for “Subordination, Non-Disturbance, and Attornment” Agreement. When a landlord wants to get a new loan secured by a mortgage on leased property, the new lender will ask the tenant to execute an SNDA. In an SNDA, the tenant basically agrees to three things: (1) the tenant subordinates its lease priority to the mortgage, (2) the lender agrees to not disturb (evict) the tenant if there is a later foreclosure, and (3) after any foreclosure, the tenant agrees to recognize the lender as the new landlord under the lease (legally, the tenant “attorns” to the lender). So—S-ND-A.
Here are 10 issues and tips to think about when you first receive the lender’s SNDA form:
1. A lender will agree not to disturb the tenant, but only if there is no lease “default.” A tenant should modify this to state “that continues after all applicable notice and cure periods.”
2. Lender should agree not to name the tenant in any foreclosure unless required by law. Any foreclosure should not terminate the lease.
3. After the foreclosure, the tenant and landlord each should be bound by all terms of the lease—including extensions. This agreement should go both ways.
4. One big battle can occur when the lender (as new landlord after foreclosure) does not want to be bound by the acts or failures to act of the prior landlord. For example, how can a tenant protect himself if the roof starts to leak before foreclosure and still leaks after?
5. Lenders will not want to be bound by any sublease or lease amendment—or termination—made without the lender’s consent. Tenants should try to delete this, or at least add “except as set forth in the Lease.”
6. What happens to ten-ant’s prepaid rent and security deposit?
7. Another big battle—the lender will not want to be required to complete the building (or finish the build-out of tenant’s space) or fund any tenant improvements. If the old landlord goes out of business and a lender comes in, how is the tenant protected?
8. Lender will want additional time to cure any landlord defaults. Tenant should limit these additional cure periods.
9. The lender and landlord should sign this SNDA—not just the tenant.
10. The lender should represent that there is no default by the landlord (as borrower) under the loan. Lender also should agree that its mortgage lien does not apply to the tenant’s trade fixtures, signs, and personal property.
Overall, a tenant should always review the lease before signing any Estoppel or SNDA. The lease likely will describe what must be included in each document and—importantly—how many days the tenant has to sign and return.
Remember, Estoppels and SNDAs are not set in stone. Tenants can, and should, mark-up these documents, but the likelihood of getting changes approved may depend on how big a tenant you are.