You Are Not Just a Dentist Tenant!

Does your dental PC or PLC lease its space from someone else? When you signed your lease, did the landlord already have its mortgage financing in place? If so, take this little quiz to learn how you should care about what the lawyers call an SNDA. I’m pleased to provide specialty advice like this as a team member at Prosperity Partners, an organization of professionals committing to helping dentists in business.

Suppose your landlord had mortgaged the building before signing your lease. Now suppose your landlord has financial problems. And that the lender forecloses on the building you occupy. What happens to your lease?

a) Nothing

b) Your lease becomes void and you’re evicted!

c) You may stay in place for the rest of your lease, as long as you pay rent

Unfortunately for you, your practice, and maybe your professional reputation, the correct answer is (b). But how can this be? Wasn’t your lease binding? Yes, your lease was binding. But it was still in second place, or “subordinate”, to the lender’s mortgage. The same would be true for every other tenant that signed a lease after the lender recorded its mortgage.

Could you have protected yourself from this? Yes. You could have obtained a “non-disturbance” agreement” from the lender when you signed your lease. In fact, you should have obtained this as a condition to signing your lease. In a non-disturbance agreement the lender promises that if it forecloses on the building, you may stay so long as you keep paying rent.

The lender will typically ask for two promises in return: 1) you agree that your lease is indeed subordinate, or in second place, to the lender, and 2) upon foreclosure, you will treat the lender as your new landlord. (The lawyers call this second promise an “attornment”, since lawyers rarely use plain English when they can dredge up some crusty old medieval English word no one ever heard of except in law school.)

All of these promises often get rolled up into one document that real estate professionals and lenders call an SNDA: a subordination, non-disturbance, and attornment agreement. All you have to remember is that you want the non-disturbance promise and that you’ll have to subordinate and attorn to get it.

Back to our example. If you had signed an SNDA with the lender when you signed your lease, the answer to the above quiz would change from (b) to (c). That yields a much better result for you and your practice.

What if you had signed your lease before the landlord mortgaged the building? Then you would be in first place; the lender in second. If that lender foreclosed its mortgage, your lease would be unaffected because it has priority over the foreclosing lender.

But the lender always thinks of this when it considers mortgage loans. The lender would want you to subordinate your lease to the mortgage. The lender knows that savvy tenants like you might subordinate, but only if the lender gives you a non-disturbance promise in return.

You need not subordinate, of course, even if the lender offers not to disturb you. In fact, there is no reason why you should, because you are not getting anything in return. So if you are in first position, and the landlord’s lender comes along to ask you for an SNDA, you have all the leverage. Use it to your advantage.

But check your lease first. You may have already agreed in your lease that if such a lender comes along, you promised to subordinate! There goes your leverage. So consider this when negotiating your next lease even if the building is not currently mortgaged.

In summary, here is a path to protect you and your practice:

• Before you sign a lease, ask for current title work. This not only confirms who the true landlord is, it also tells you whether a mortgage is already in place. If it is, negotiate an SNDA with that lender before you sign the lease.

• If you have already signed a lease and you don’t know if a lender is in the picture, order title work to find out. Negotiate an SNDA from any lender with a superior mortgage.

• Check your current lease for language about subordination, non-disturbance, attornment and the like. Did you already promise to subordinate? Is that promise conditioned on receiving a non-disturbance promise in return? Who has the leverage if you need to negotiate (or if the lender forecloses)?

In sum, you should care about an SNDA. Experienced real estate counsel can help you understand your current status. Use that counsel to develop a strategy to protect you and your practice.

Jeffrey S. Ammon can be reached at 616.831.1703 and ammonj@millerjohnson.com and is an attorney with Miller Johnson, devoting a significant portion of his practice to the commercial real estate and construction industries. Mr. Ammon is currently on the Board of Associated Builders and Contractors-West Michigan Chapter and is active in local real estate and other construction trade associations, including the local chapters of CAR, CFMA, ASA and AIA. He currently serves as Chair of the Michigan Chamber of Commerce. He counsels owners, tenants, developers, contractors, subcontractors and design professionals on real estate development, buying, selling and leasing, as well as construction contracts, liens and a range of related business and real estate subjects.