Include Five Lender Protections in Lease

When lenders make a loan secured by a mortgage or deed of trust against income-producing commercial real estate, they typically review lease forms and reserve the right to approve new leases to make certain that the owner will be able to service the debt and that the tenant mix will maintain or improve the value of the property. Additionally, lenders tend to make certain the terms and conditions include legal protections for them.

Loan agreements and related loan documents restrict the rights of the landlord as borrower and impose certain obligations on it, but they establish no direct obligations on the tenants. Accordingly, it is important to most lenders that leases include provisions obligating the tenant to the lender even prior to a foreclosure, at which time the lender assumes the landlord’s position under the lease.

To protect the lender’s interests, you can get Subordination, Nondisturbance, and Attornment agreements (SNDAs) from your tenants. (An SNDA is an agreement whereby the tenant agrees that its lease is subordinate to the lender’s mortgage/deed of trust, the tenant agrees to attorn—or formally make or acknowledge a transfer of its lease—to the lender in the event of foreclosure or deed in lieu of foreclosure, and the lender agrees that as long as the tenant is not in default of the lease, its rights under the lease shall not be disturbed.)

Ask your attorney about including the following five lender protections in your leases:

·         Make indemnity and insurance benefit the lender;

·         Ensure there is no future agreement to subordinate by the tenant;

·         Specify that there is a right to termination for a casualty;

·         Provide notice to the lender of default and opportunity to cure; and

·         Make consent to amendment and termination at the will of the lender.

For Model Language to include in your leases, see “Draft a Lease Your Lender Will Approve," available to subscribers here.