S Does Not Stand For Superman

Posted by Lee Sterling | Posted in Economics, Landlord-Tenant, Legal | Posted on 10-09-2009

green-shopping-centerIn the past I’ve written about the SNDA clauses typically found in commercial leases: Subordination, Non-Disclosure, and Attornment.  I’ve described the importance of the Non-Disclosure clause.  The terms of the Subordination clause and the Attornment clause are equally important. Today, I’m just going to discuss the “S” of the SNDA, the Subordination clause. I’ll save the Attornment clause for another blog post.

If a lease is recorded or a tenant takes possession of property before a lender records its lien, the lease will have priority.  A Subordination Agreement changes that priority.  Landlords typically will include a subordination clause in the lease because they know that their lender will not lend them money unless tenants are junior to the lien of the lender’s trust deed.  Often the Subordination language imposes subordination not only for existing loans, but future loans and for modifications, extensions, increases, renewals, and modifications etc. of those loans (for ease of reference, let’s call these the “mortgage”).

The lender’s subordination agreement may provide that your lease is subject to the terms of the mortgage.  You definitely don’t want that!  You don’t know the terms of the mortgage, and don’t want to be bound by what you don’t know. You can agree to be subordinate to the lien of the mortgage.

A tenant has to be concerned about the terms of the Subordination Agreement because it may give rights to the lender without corresponding obligations.  For example, if the landlord had agreed to pay for certain tenant improvements prior to a foreclosure, and the Subordination Agreement is silent on the obligations of the foreclosing purchaser, the foreclosing party may not be obligated to pay for those improvements.  The Subordination Agreement should give you the right to terminate the lease if such obligations are not met.

In the event of insurable damage or condemnation prior to a lender’s foreclosure there may be a dispute as to who is entitled to proceeds resulting from those events.  That’s another issue that should be covered in the Subordination Agreement.

We’ve covered just a few of the issues to be considered in reviewing a Subordination clause and the lender’s Subordination Agreement. Be sure you have the right advisor helping you review the lease terms.

The Subordination clause has to be considered in conjunction with the Non-Disturbance and Attornment clauses of the lease.  The terms of the SNDA are often overlooked by anxious tenants, and often accepted without negotiation by the unsophisticated.  Don’t fall into that trap.  There’s interesting California case law pertaining to SNDA Agreements, and you don’t want to become known by being cited in appellate cases!  For questions about these issues always see your counsel before signing a lease.