Estoppels and SNDAs – What Are They and Why Do You Need Them?

Estoppels and SNDAs are a vital component of the relationship between property owner and tenant in the world of commercial real estate. Understanding exactly how they protect both parties is important, as is ensuring that these documents are executed in a timely manner, given that lenders commonly require these documents to complete their closing process. 

What are estoppels and SNDAs? 

The definition of estoppel is: “A legal bar to alleging or denying a fact because of one’s own previous actions or words to the contrary.” While there are several types of estoppels, the one used in commercial real estate is commonly referred to as a tenant estoppel, estoppel letter, or estoppel certificate. A tenant estoppel confirms in writing that a lease exists and outlines the conditions and terms of that lease. 

SNDA stands for Subordination, Non-Disturbance and Attornment Agreement. This is an agreement between a tenant and a lender that spells out important rights for each party. From the lender’s perspective, an SNDA provides the lender with written assurance that its deed of trust holds a higher priority than the tenant’s leases, and that the tenants will recognize the lender as the new landlord and continue to pay rent should the lender foreclose on the property.  From the tenant’s perspective, the non-disturbance portion of an SNDA provides the tenant with the assurance that the lender will recognize and not disturb their tenancy, and that the tenant’s lease will remain fully valid and enforceable in the event of a lender foreclosing on the property.  

Why are they necessary?  

Estoppel certificates provide specific facts and details of the property owner’s lease agreement with a particular tenant, providing a third-party such as a lender assurance of what the property’s cash flow will look like during the life of the lease. Common items addressed in an estoppel include contact information for the parties involved, rental rates, the length of the lease term and its expiration date, renewal/extension options, whether any parties to the lease are in default, and any modifications that have been previously made to the lease.  Estoppels also provide third-party verification that the details of the lease aren’t being modified in any way to make the property’s performance look better to a lender than it actually is. This protects both the lender and the property owner by ensuring that the property owner is being truthful, and the lender is guaranteed a return on investment while also ensuring that the tenant won’t back out on the lease. 

SNDAs protect both the lender and tenant. SNDAs play an important role in providing both parties with assurance that the terms of the original lease between tenant and landlord will remain intact should there be a downside scenario such as a foreclosure where the lender steps in to take ownership of the property.

The subordination section makes it clear that the tenant won’t do anything that affects the lender’s collateral, such as suing the property owner or placing a lien on the property. In this case, the tenant agrees that their lease is subordinate to the loan’s deed of trust. The tenant agrees that the lender has the right to make all decisions regarding the loan and the interests of the lender as they pertain to the property. In case of foreclosure, the non-disturbance section protects the tenant’s lease by making sure the lender will uphold and honor any conditions of the lease for the remainder of the tenancy. Without it, the lender would be within their rights to terminate the lease and re-rent those spaces at a higher rate, either to the same tenant or to new tenants. The third section, attornment, protects the lender by stating that the tenant won’t break the lease during the subsequent changing of hands from the property owner to the lender in the foreclosure process.

Both estoppels and SNDAs serve a crucial function in commercial real estate financings. Estoppels provide concise and objective information about a property’s leases, giving a third-party (such as a lender) more assurance to the validity of their underwriting of a property’s cash flow, which may affect the property’s ability to cover its debt service down the road. SNDAs provide a crucial direct link between a tenant and a lender, protecting both sides’ rights in the case of foreclosure.

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