Q&A WITH CHRIS GRISWOLD
Upfront agreements can protect, continue commercial tenants’ business operations
Q: What is a subordination, non-disturbance and attornment agreement?
A: It’s an agreement entered into by and between the tenant and landlord’s lender that basically allows the tenant to remain operating in their leased premises should their landlord become insolvent. In return for the lender’s agreement not to disturb the tenant’s operations, the tenant agrees to “attorn” to the lender as its new landlord. Lastly, the tenant agrees to subordinate (i.e., subject) their leasehold estate interest to the lender’s security interest in the leased premises thus making the lender’s securitization in the leased premises superior to tenant’s leasehold interest in the leased premises.
Q: What’s the main benefit of having such an agreement in place for a commercial tenant?
A: It will ensure that the commercial tenant’s business operations won’t be negatively affected by a landlord’s financial distress.
Q: Do subordination, non-disturbance and attornment agreements change the nature of the new landlord/tenant relationship existing between tenant and lender?
A: Probably so. Such agreements usually have certain “carve-outs” in place that will either diminish the obligations and/or enhance the rights of the lender under this new landlord/tenant relationship — depending upon the relative bargaining power of the parties. For example, if the lender is in a stronger bargaining position than the tenant, the lender will have additional time (on top of that granted to the original landlord under the lease) to cure certain defaults of the original landlord. Furthermore, if the lender has the stronger bargaining position, the agreement usually will contain language that lender won’t be responsible for certain defaults of the original landlord which occurred during the original landlord’s march toward bankruptcy. The document also may limit the repairs and maintenance that lender is required to perform (as compared to the repairs and maintenance that the original landlord had to perform under the lease). The document also could attempt to diminish the lender’s liability to the tenant as relating to property casualties and personal injuries which occur on the demised premises or the shopping center. Accordingly, it’s always a good idea to consult counsel prior to entering into a subordination agreement.
Q: When should a commercial tenant think about entering into the agreement with the landlord’s lender?
A: Remember, a subordination, non-disturbance and attornment agreement is only useful if it’s entered into before your landlord’s insolvency — you can’t enter into one after landlord’s insolvency and backdate its effectiveness to an earlier point in time. Accordingly, the agreement issue is one to address, if at all possible, upfront during the negotiations that precede the execution of the lease. Otherwise, the sooner the better.