Who's on first-protecting the commercial mortgage lender: A lender's overview of subordination, nondisturbance, and attornment agreements

Real Property, Probate and Trust Journal, Fall 2001 by Homburger, Thomas C, Eiben, Lawrence A

In addition, attornment agreements are convenient vehicles to create additional provisions governing the relationship with the tenant if a new landlord succeeds the original landlord following foreclosure, or even prior to default. Some typical provisions that drafters may include in attornment agreements are:

1. the tenant's waiver of claims against the lender for landlord defaults that occurred under the lease prior to foreclosure;48

2. the tenant's waiver as to the lender of any offsets or defenses that the tenant may have against any prior landlord;

3. an agreement that the tenant will give the lender notice of any default under the lease and will permit the lender some additional time to cure the default;

4. a prohibition against any assignment or subleasing without the lender's prior written consent;

5. a statement that the lender is not bound by rent previously paid to the prior landlord;

6. a statement that the lender will not be responsible to return any security posted with the prior landlord unless actually received by the lender; and

7. a statement that the lender will not be bound by lease amendments and rent reductions made without the lender's prior approval.49

Lenders can also use attornment agreements to ensure that the lease will not obviate certain loan provisions agreed to by the lender and the landlord.50 For example, the lender may use the attornment agreement to obtain the tenant's concurrence that, notwithstanding any contrary provision in the lease, all insurance proceeds from a casualty or condemnation will be applied first to the outstanding loan balance, as provided in the loan documents.

Attornment agreements can also add obligations not found in the original lease. For example, the lender can require the tenant to indemnify the lender against any liability that the lender may incur by reason of any environmental contamination on the leased premises caused by the tenant.51

Attornment agreements should provide expressly that they "run with the land" to inure to the benefit of subsequent purchasers from the lender if the lender is the successful purchaser at the foreclosure sale.52 Most lenders do not wish to be forced into the real estate leasing business following a purchase of the leased premises after a foreclosure sale. Therefore, the right to make the benefits of the attornment agreement available to a subsequent purchaser will make the real estate much more marketable to third parties who will succeed to all the lender's rights as landlord, as modified by the attornment agreement.

One practical concern for a mortgagee is whether to record an SNDA. As a general rule a mortgagee should have an SNDA recorded if the tenant has perfected a prior interest in the property either by recording a memorandum of lease or by taking prior possession of the leasehold property. If a mortgagee has an interest superior to that of the tenant, the mortgagee's decision to record the SNDA is influenced by whether the property is located in a state in which a foreclosure proceeding automatically terminates a subordinate lease or in a lien theory jurisdiction where a mortgagee may choose whether to extinguish a subordinate lease.53 In automatic termination jurisdictions, an SNDA does not need to be recorded because the courts in these jurisdictions fully recognize provisions set forth in an SNDA even without recording.54 In jurisdictions where the foreclosure rules allow mortgagees to choose which leases they wish to terminate, mortgagees generally do not record an SNDA signed by a subordinate tenant. However, one concern is that courts may choose to ignore some of the direct contractual arrangements between the mortgagee and the tenant if the agreement is not recorded.55 Recording an SNDA may well ensure that the court in a foreclosure proceeding will recognize all of the provisions set forth in the SNDA.56 However, recording an SNDA could subject the direct contractual arrangements between the mortgagee and tenant to the scrutiny by the courts. Mortgagees will need to balance their concerns over the enforceability of the direct contractual arrangements set forth in the SNDA with the risks associated with the court's review and possible interpretation of these direct contractual arrangements.