Location, location, location. The real estate saying is perhaps never more true than when it comes to where a business is located. There's a reason banks prefer corner locations on busy streets and bail bondsmen are often found near jails and courts. Depending on your type of business venture, where you sign your commercial lease can be the difference between success and failure.
Leases between business owners and commercial property landlords are intended to be beneficial for both parties. To succeed, the employer requires a building that fits their needs - the right size, the right location, the right amount of rent, or a combination of all three. Paying a lease requires much less capital than purchasing a structure or property outright.
On the other side, landlords want their tenants to adhere to the lease and make their payments on time. The landlord may have a mortgage on the property that requires them to make payment to a lender, such as a bank. As a business owner, you've held up your end of the lease agreement with your property owner. But what happens to the tenants if there's a foreclosure sale?
SNDA Is the Way
It's a common practice for landlords to include something called an SNDA when a commercial lease is about to be signed with a tenant. They can also ask the business owner to sign it long after a lease was agreed on and signed. What is an SNDA, and why is it so important?
SNDA is an abbreviation for an agreement that includes subordination, non-disturbance, and attornment. An SDNA presented well into a lease often indicates that a change in ownership of the property is on the horizon.
An SDNA can benefit the lender, the landlord making the mortgage payments, or the tenant. This is situational and can depend on when it's introduced. A tenant will likely have more negotiating power if it's part of the initial lease. In most cases, the lender will include an SDNA in case they have to foreclose. It positions them to derive the most benefit from the situation.
The Power of Three
Depending on who is in the driver's seat, the three aspects of an SDNA can wax and wane in importance when part of the foreclosure process. Each has a specific purpose.
Subordination
"First in time, first in right," is another real estate saying that holds sway when it comes to commercial leases. Subordination refers the the order in which entities get paid in case of foreclosure proceedings.
Lenders often include subordination clauses to ensure they get paid first if there's a default on the mortgage loan. Subordination also makes property takeovers due to foreclosure easier. With one in place, they have a better chance of using a non-judicial foreclosure, which avoids the need and expense of going to court.
Subordination clauses also give a new owner more legal options with the existing tenants. This includes eviction, but this requires court permission. In most instances, a new landlord will want the commercial tenants to stay and continue the influx of rental income. However, this gives the owner leverage for renegotiating leases that are below market value.
Non-Disturbance
It's common for a change of property ownership to not affect the tenants. Non-disturbance clauses tend to work both ways. For a tenant, it means the lender will not try to alter the lease during a sale or a takeover. Lenders will use this clause to both cement their priority for payment and block the tenants from canceling their leases in case of foreclosure.
As tenants, a lack of maintenance upkeep can be a warning that the current owner is close to foreclosure or a notice of default. If you want to break your lease, doing so before real estate legal proceedings start can make your task easier. For tricky situations like these, consulting with a commercial real estate attorney is a great idea.
Attornment
The third side of the SDNA triangle is attornment. This follows the idea of "If it ain't broke, don't fix it." An attornment agreement often allows the tenant's existing lease to remain unmolested if the commercial property owner sells the land or is foreclosed on. The buyer or lender is made aware of this clause before the deal is finished.
A stable of small business tenants making steady payments makes taking on a foreclosure or buying a property more attractive. Attornment will make the new landlord think twice about trying to renege on the terms of the lease.
Survive and Thrive
Learning that the building your business is located in is the subject of a commercial foreclosure can make your blood run cold. Unless you're an expert in real estate law, knowing a tenant's rights during a commercial foreclosure is tricky stuff. As a general rule, getting legal advice from a real estate law expert who knows the state laws is both a safe and a smart move.
Related Resources
- Negotiating a Lease for Commercial Real Estate (FindLaw)
- Commercial Lease Agreement Overview (FindLaw Small Business)
- True Costs of Commercial Property Rentals (FindLaw Business Operations Law)
