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

The attornment agreement also presents an opportunity for the lender to cure any landlord defaults that the tenant is not waiving or that could give the tenant the right to terminate the lease (and, consequently, reduce the cash flow of the mortgaged property). Curing these defaults is especially vital in lien theory states when a landlord may have been in default long before the lender could possess the property through foreclosure. Depending upon the jurisdiction, lenders might otherwise not be able to cure until they receive possessory rights through foreclosure.' In addition, lenders that are the purchasers at a foreclosure sale, and who seek to sell the real estate quickly, do not want any proposed sale delayed because of the need to cure certain defaults under the leases.64

Tenants likely would demand immediate cure of certain defaults-- especially defaults involving basic services-or otherwise demand the right to exercise the tenants' rights often found in leases, to abate rent payments or to terminate their leases. Lenders, on the other hand, will seek a reasonable period of time after they obtain possession of the property to effect the cure. Negotiations are necessary to resolve these issues, and the resolution will depend on each party's respective market power and negotiating strength.

VI. DEVELOPMENTS IN SNDA LAW

Little case law deals with SNDAs, despite their importance in commercial leasing and lending. This is especially remarkable when considering the number of mortgage foreclosures and the pivotal role SNDAs can play in the foreclosure process. California courts have set forth the basic theories behind SNDAs in some recent decisions. In New York, statutory law has superseded the common law theory of attornment. One common theme among California law, New York law, and the limited number of cases from various other jurisdictions is that, absent an SNDA, either the tenant or mortgagee or both have uncertain positions in a foreclosure.

Four major cases in the past decade have set forth the standard for California's current law on SNDAs. In Dover Mobile Estates v. Fiber Form Products, Inc.,65 the court confirmed the general rule that, absent an SNDA, a foreclosure automatically terminates a subordinate lease.66 The court reasoned that because no privity of contract or estate exists between the foreclosure purchaser and the tenant, .the purchaser could treat the tenant as a trespasser, absent any implied or express agreement to the contrary.67 Even though this automatic termination worked against the interest of the foreclosure purchaser, who did not want the lease to automatically terminate, equitable considerations did not mandate giving the foreclosure purchaser the option of deciding whether to treat the lease as terminated automatically.68 If the parties had desired another result, the parties could have protected themselves by entering into an SNDA.69

In the second California case, Miscione v. Barton Development Company,70 the court held that if the parties to the lease so agree, foreclosure proceedings will not extinguish a subordinate lease because such an agreement rearranges priorities otherwise dictated by law.71 In Miscione, the court found that the lease survived foreclosure because the lease contained an agreement by the tenant to attom to the new landlord.72 The court also distinguished Dover by stating that ". . . the court in that case did not discuss whether the lease contained an attornment clause or what the effect of such a clause would be."73