Estoppels and SNDAs, explained

Understanding the basics of Estoppels and SNDAs

Estoppel Certificates and Subordination, Non-Disturbance and Attornment Agreements (SNDAs) are an essential part of owning, operating, acquiring, leasing, and financing a property with one or more tenants. Each document serves a key but distinct function. Whereas SNDAs are entered into with respect to a landlord’s financing, estoppels are pertinent to a myriad of real estate transactions, including, acquisitions, dispositions, and financings.

Estoppels – The Basics

An estoppel certificate or letter is a binding document delivered by the signing party (such as a tenant) to the reliance parties named therein (such as a buyer and a buyer’s lender), which summarizes certain terms of an underlying agreement (such as a lease), thereby preventing the signing party from disputing such terms at a later date (i.e., the signing party is bound by the statements made in the estoppel certificate and estopped from disputing the facts as presented therein). The estoppel certificate serves two primary purposes: (1) to confirm matters that the reliance parties can determine by reading the underlying agreement (i.e., during due diligence, the buyer reviews a lease which states that monthly rent is $5,000/month. The buyer will seek a tenant estoppel certificate in which the tenant confirms that the lease amount stated in the lease is correct); and (2) to disclose to the reliance parties any matters which they could not determine simply by reading the underlying agreement (i.e., a buyer of a building may not be able to determine if the landlord has promised a rent abatement to a tenant orally or informally via e-mail, or if the tenant believes the landlord is in default of its lease, so the buyer will want a tenant to affirmatively state no such conditions exist).

Tenant Estoppels

In real estate, an estoppel certificate is most commonly used to verify lease information during a buyer’s due diligence. The “tenant” estoppel certificate requests information from the tenant regarding, among other things, the rental amount (including base rent and any additional rent), lease commencement and expiration date, any defaults by the landlord or the tenant, and any oral agreements with the landlord or amendments to the lease. In this context, tenant estoppel certificates are a significant part of a real estate acquisition because the leases are often the source of income and value of the real estate asset. A tenant estoppel certificate is essential for a buyer to understand what it is buying.

Buyer Considerations

A potential buyer should negotiate (1) a strong form of estoppel certificate that confirms and clarifies many potential points of conflict with a tenant, and (2) a minimum number (often based on a percentage of occupied square footage or net rentable square footage) of tenant estoppel certificates received as a condition precedent to closing. While a seller will typically allow a potential buyer to “ask for the moon” in a tenant estoppel certificate, tenants will often want to limit what information they certify to in a tenant estoppel certificate (as further discussed below). As a result, sellers will often allow buyers to include many items in a tenant estoppel certificate, but the seller will limit which items are necessary for the tenant estoppel certificate to satisfy the condition precedent to closing. These “essential” items are typically limited to (1) confirmation of the lease documents (including any modifications thereto), (2) the lease commencement and expiration date, (3) the rental amount (base rent and additional rent, if any), and (4) whether or not any defaults by landlord or tenant then exist.

The buyer will often negotiate that receipt of tenant estoppel certificates will be a condition precedent to closing. A typical condition precedent would be the receipt of tenant estoppel certificates from (1) all major tenants, and (2) from tenants representing a defined overall percentage of the occupied square footage (or net rentable square footage), in the aggregate. Depending on the buyer’s leverage and the strength of the asset being purchased, the tenant estoppel percentage typically ranges between 65% to 85% of occupied square footage (or net rentable square footage). Below is an example of a tenant estoppel certificate provision that would be included in a purchase agreement:

Seller shall request and use commercially reasonably efforts to obtain from each Tenant of the Property an estoppel certificate for such Tenant in the form attached hereto, or in the form attached to such Tenant’s lease.  Seller shall deliver to Buyer the final versions of any and all such estoppel certificates obtained by Seller promptly following receipt.  It shall be a condition precedent to Buyer’s obligation to close hereunder that (i) Seller deliver the Required Tenant Estoppels and (ii) no such Required Tenant Estoppel reveals either (a) a material adverse inconsistency or modification that is unacceptable to Buyer, in Buyer’s reasonable discretion or (b) represents terms that are materially inconsistent or in conflict when compared against the terms of such Tenant’s Lease, in each case.  “Required Tenant Estoppels” means estoppel certificates in the form required herein from (i) each of the Major Tenants, and (2) Tenants leasing, in the aggregate, not less than seventy percent (70%) of the occupied square footage of the Property.”

In addition to the considerations above, a buyer will want to ensure (1) that any tenant estoppel certificates are not “stale” (usually dated no later than 30-45 days prior to closing), (2) that the buyer includes a broad range of reliance parties, such as its lender, title company, and any of its successors and assigns, so that such parties are permitted to rely on the statements made in the tenant estoppel certificates, and (3) that the seller is obligated to turn over each and every tenant estoppel certificate that it receives, to ensure that it does not intentionally omit any certificate even if it otherwise delivers a sufficient number of certificates to satisfy the negotiated threshold. Failure to include the buyer’s lender can result in issues when the buyer attempts to obtain an acquisition loan, and its lender is not listed as a reliance party. It is best practice to use broad language (such as simply “buyer’s lender” or “buyer’s title company”) rather than the actual lender or title company’s name, so that if such party changes prior to closing, a new tenant estoppel certificate is not needed, and the new lender or title company can rely on the previously executed tenant estoppel certificate.

Seller Considerations

As discussed above, a seller’s primary concerns are (1) to limit what makes a tenant estoppel “non-conforming” or “defective” (and therefore result in a failure of a condition precedent); (2) to limit the required tenant estoppel threshold; and (3) to make clear that the failure to obtain a tenant estoppel certificate is not a default under the purchase agreement (and merely a “no-fault” failure of a condition precedent that allows the buyer to terminate the purchase agreement). In order to limit the buyer’s ability to terminate for a failure to meet the tenant estoppel certificate threshold, a seller may negotiate (1) the ability to deliver a “seller estoppel certificate” in lieu of a tenant estoppel certificate, where the seller certifies to the statements in the estoppel certificate instead of the tenant; and (2) the ability to extend the closing date for a period of time while the seller continues to seek any missing tenant estoppel certificates from the applicable tenants. However, the delivery of a seller estoppel should not be taken lightly, as it opens up the seller to potential liability if the facts contained therein are disputed by the tenant, as the buyer will seek recourse against the seller and not the tenant in such an instance.  Additionally, depending on the asset and the value of the leases, a seller may negotiate for a provision that it will use commercially reasonable efforts to obtain the applicable tenant estoppel certificates, but that the failure to do so will not be a failure of a condition precedent.  This type of provision obligates a seller to attempt to obtain the tenant estoppel certificates, but does not allow a buyer to walk away from the deal if the seller fails to obtain such certificates before closing.

Tenant Considerations

A tenant estoppel certificate, when delivered by a tenant, will bind the tenant and supersede any information to the contrary that existed prior to the tenant’s execution and delivery of a tenant estoppel certificate. Consequently, a tenant needs to thoroughly review each statement in the tenant estoppel certificate and attempt to limit the scope and breadth of the statements made. For example, a tenant may want to qualify some statements to “tenant’s knowledge,” and further hedge on the side of over-inclusion. As noted above, most buyer’s will request a wide range of statements for confirmation from a tenant, but a tenant should review its lease to determine what, if any, statements it is required to deliver in a tenant estoppel certificate. Oftentimes, a lease will state that a tenant is only required to certify to the “essential items” listed above. However, some leases may also include broad language, such as requiring a tenant to include “any information reasonably requested by landlord.” It is essential that a tenant review the estoppel requirements in its lease, and make a determination what – if any – statements it is required to make. Misstating information in a tenant estoppel certificate could result in liability to the tenant, and therefore a tenant should always carefully review the statements made in a tenant estoppel certificate before delivering such certificate.

Estoppel Provisions in Leases and Other Agreements

A lease will typically include a provision that requires a tenant to deliver an estoppel certificate within some period of time after demand by a landlord. Some leases will require that the estoppel include certain information, or even attach a form of estoppel that the tenant must deliver. In such a situation, failure to deliver the estoppel certificate when requested would be a default by the tenant under the lease. The following is an example of an estoppel provision in a lease:

Tenant, at any time and from time to time, within ten (10) days after written request from Landlord, shall execute, acknowledge, and deliver to Landlord, addressed to Landlord and any prospective purchaser, ground or underlying lessor, or mortgagee or beneficiary of any part of the Property, an estoppel certificate in form and substance reasonably acceptable by the Landlord.

Similarly, many development agreements, CC&Rs, condominium documents, and other transactional agreements include estoppel provisions that require each party to such agreement to deliver an estoppel certificate upon request.

Other Estoppels

While tenant estoppel certificates are the most common real estate use of estoppel certificates, there are other instances where an estoppel certificate may be useful. For example, if buying into a condominium, a buyer may want an estoppel certificate from the condominium association confirming the HOA dues and that the condominium owner is not in default under the condominium by laws. Or, if there is a housing association established by CC&Rs in a master planning community, a buyer may request an estoppel certificate from the housing association for a similar purpose. Ultimately, estoppel certificates can be used in any transaction to confirm various matters asincreased security for the reliance parties during due diligence, and understanding how to negotiate estoppel certificates can be a critical component to deal making.

Subordination, Non-Disturbance and Attornment (SNDA) Agreements

When a landlord obtains a loan secured by real property, lenders will often require that the landlord obtains a Subordination, Non-Disturbance, and Attornment (SNDA) Agreement from all or a portion of the tenants occupying the property. The SNDA is primarily an agreement between the landlord’s lender and the tenant that governs the relationship between the two parties in the event that the lender forecloses on the property.

As suggested by its name, an SNDA serves three primary purposes: (1) subordination of the tenant’s lease to the lien created by the lender’s mortgage or deed of trust (such that the lender can terminate the tenant’s lease upon a foreclosure), (2) non-disturbance of the tenant’s rights under its lease in the event that the landlord forecloses on the property (such that the lender agrees not to terminate the tenant’s lease upon a foreclosure) as long as the tenant is not in default under its lease, and (3) attornment by the tenant of the landlord, stating that the tenant will recognize and accept the lender as the landlord if the lender forecloses on the property. Put simply, an SNDA states that, if the landlord defaults on its loan, the lender will step into the landlord’s role under the lease, the tenant will not interfere with the lender exercising its remedies against the landlord, and the lender will not interfere with the tenant’s right to occupy the property.

The parties will often require that SNDAs are recorded against title to the property, although recording is not required for an SNDA to be effective.

Is An SNDA Necessary?

Good question. The answer is: it depends! You have to look at the lease…

If the lease is “silent” on subordination, non-disturbance, and attornment (i.e., the lease does not address these matters), then the lease is “superior” to the lender’s mortgage, and the tenant may not have to attorn to the lender. Therefore, this would be considered beneficial to the tenant, since the lender cannot terminate the tenant’s lease upon a foreclosure. The lender, on the other hand, faces the risk that the tenant terminates its lease without recourse (because the tenant’s lease is superior to the landlord’s interest in the property). In this instance, a lender will often require an SNDA be signed as a condition precedent to closing the loan.

If the lease states that the lease is subordinate to the loan from the landlord’s lender, then the tenant is unprotected if lender forecloses on the property, and faces the risk that the lender may terminate the tenant’s lease upon foreclosure. In this instance, a tenant will definitely want to have an SNDA signed with the lender.

Some leases, however, contain a provision that the lease is subordinate only if the lender delivers a non-disturbance agreement. This essentially protects both the tenant and the lender. On the one hand, such a provision typically requires the tenant to execute and deliver a reasonable subordination and non-disturbance agreement, so the tenant is required to comply with the lender’s request for an SNDA. On the other hand, the tenant is guaranteed non-disturbance as a condition to subordinating its interest, so the tenant has more leverage than if the lease merely stated it was subordinate by its terms. The following is an example of a subordination clause in a lease, where the bracketed language is language would be added to protect the tenant:

This Lease shall be subject and subordinate at all times to: (i) all ground leases or underlying leases that may now exist or hereafter be executed affecting the Property or any portion thereof; (ii) the lien of any mortgage, deed of trust, or other security instrument that may now exist or hereafter be executed in any amount for which the Property or any portion thereof, any ground leases or underlying leases, or Landlord’s interest or estate therein is specified as security; and (iii) all modifications, renewals, supplements, consolidations, and replacements thereof. [Notwithstanding anything to the contrary contained herein, Landlord will, as a condition to the subordination of this Lease, provide Tenant with an executed subordination, non-disturbance, and attornment agreement with Landlord’s lender, on customary and reasonable terms.]

Lastly, it is important to remember that a lease is an agreement between a tenant and a landlord, whereas the SNDA is made among the tenant, the landlord, and the landlord’s lender. Therefore, since we are discussing scenarios where the landlord is out of the picture because the lender has foreclosed on landlord’s interest in the property, and the only two parties remaining are the tenant and the lender, it is often beneficial to have an SNDA regardless of what is in the lease (though, of course, a tenant does want to negotiate an SNDA that is more restrictive than the lease).

Landlord Considerations

As may be clear from the summary above, the landlord is not too concerned about the contents of the SNDA, since it only comes into play once the landlord has defaulted on its loan and forfeited the property to the lender. However, a lender may require that a certain number of SNDAs are delivered prior to the lender making the loan. Therefore, a landlord’s primary concern is to facilitate the execution and delivery of the SNDAs by the tenants so as to avoid a delay in loan closing.

Lender Considerations

As discussed above, the lender is providing the non-disturbance covenant in exchange for the subordination and attornment by the tenant. While obtaining the subordination and attornment are essential, there are other considerations for the lender. Since the SNDA will govern the relationship between the lender and the tenant if the lender becomes the owner of the property, the lender may desire to make certain other terms between the parties more favorable to the lender, such as stating that the lender is not: (1) liable for any landlord defaults that existed prior to the lender’s foreclosure, (2) bound by any amendments to the lease that the landlord may have agreed to without lender’s approval, (3) subject to any offsets, defenses, abatements or other similar rights which the tenant may have had prior to the lender’s foreclosure, or (4) bound to any sublease made without lender’s approval.

Tenant Considerations

As discussed above, the tenant is providing the subordination and attornment in exchange for the non-disturbance language. While obtaining the non-disturbance is essential, there are other considerations for the tenant. Since the SNDA will govern the relationship between the lender and the tenant if the lender becomes the owner of the property, the tenant will want to ensure that the lender will honor all terms of its lease. As noted above, the lender will try to curb its requirements in the SNDA, so it is imperative that the tenant attempt to limit what, if any, concessions it provides to the lender. Ultimately, this is a leverage question – if the tenant is a “credit-tenant” or the largest tenant in the building, it may have more leverage and be able to limit the amount of concessions it provides the lender.

Lastly, as noted above, a tenant may need an SNDA to protect its rights. If the lease provides that the lease is subordinate to the landlord’s lender, and such qualification is not conditioned on the lender delivering a non-disturbance agreement, the tenant may be in the unfortunate position of having its lease cancelled by the lender following a foreclosure. Therefore, it is essential that, when negotiating a lease, a tenant push for the requirement that the landlord’s lender deliver a non-disturbance agreement in order for the lease to be subordinate to the lender’s lien. Absent such a provision, a tenant should push for an SNDA from the landlord’s lender.