What Is an Attornment Agreement?
An attornment agreement is an agreement through which a tenant acknowledges a new owner of the property as his new landlord. The term “attornment” is generally used in real estate laws and is intended to acknowledge the relationship between parties to a particular transaction. Attornment in a commercial lease is used to signify that a tenant acknowledges a new owner of the property as the new landlord.
In commercial leases, this generally forms a part of a Subordination, Non-Disturbance and Attornment Agreement (SNDA). This agreement is created between a tenant and landlord, and it describes the specific rights of the tenant, landlord, and other third parties such as the landlord’s lender or a buyer of the property. There are three parts to this agreement: the subordination clause, the non – disturbance clause and the attornment clause. The agreement essentially lays down that the landlord’s lender has the greatest claim to the property and not the tenant.
Most commercial leases have a clause that states the tenant will execute an SNDA when required. This helps to clarify the relationship between all the parties interested in a particular leased property.
People Involved in an Attornment Agreement
The people involved in an attornment agreement are the landlord who rents out the property and the tenant who rents the property from such landlord.
This agreement can be made enforceable against the lender if it is signed by the lender.
Purpose of an Attornment Agreement
The purpose of an attornment agreement is to obligate the tenant to recognize any new owner of the property as his landlord whether the new owner acquires the property through a regular sale or following a foreclosure. This is to make sure that the tenant continues paying rent to the new landlord until the end of the lease term, even if the property is foreclosed or sold.
Usually, there is no interaction between a tenant and a lender. However, in case there is a default of the loan by the owner of the property or the landlord, it will have an adverse consequence on the lender and the tenant and may even lead to termination of the tenancy. This can be avoided by an SNDA. The attornment agreement makes sure that a tenancy continues even when the ownership of the property has changed hands and that there is no need for the creation of a new lease.
This agreement also helps clarify the interests of the parties involved in a mortgaged leased property. Through an SNDA, the security interest of a third party lender gets higher priority than the lease of the tenant. In exchange for this, the tenant gets the right to non – disturbance of his lease even if the property gets sold or foreclosed.
As long as the tenant continues paying his rent, the lender can agree to honour the terms of the lease even if the landlord defaults on the mortgage.
Contents of an Attornment Agreement
An attornment agreement contains the following important clauses:
- A subordination clause: Through this clause, the tenant agrees to subordinate his lease to the lender’s security interest. Hence even if the lease is already in existence at the time of recording of security interest by the lender, the lender’s interest will get priority over the lease. During foreclosure proceedings, the title that is obtained by the purchaser will be superior to the pre-existing lease. This clause in the agreement is very important from a lender’s perspective.
- A non – disturbance clause: In exchange for subordinating his lease to the lender’s interest, the tenant should ask for a strong non – disturbance clause in the agreement. This clause basically means that the tenant can continue to occupy the leased property even after the property has been sold or foreclosed. The lender or the purchaser will recognize the tenant’s lease and not disturb the tenant’s possession, as long as the tenant is not in default. The tenancy shall continue as if the sale or foreclosure has not occurred. This clause is beneficial to the tenant as he is assured that his tenancy will not be dissolved even if the property is sold off or foreclosed.
- An attornment clause: arbitration Through this clause, the tenant agrees to acknowledge the new owner of the property as his new landlord. The objective of this clause is to make sure that the tenant continues to make his rental payments until the end of the lease term.
- Many agreements also may have a clause whereby the tenant has to notify the lender of any defaults on the part of the landlord under the lease and allow the lender a specified period of time to remedy the default before the tenant can exercise the remedies available to him.
How to Draft an Attornment Agreement
Below are the steps to follow while drafting the agreement:
- The clauses of the agreement must be negotiated thoroughly between both the parties. Care must be taken to see that the agreement is balanced. For eg., if the lender can evict the tenant for non-payment of rent, then the tenant should not be required to complete the term of his lease if either the landlord or lender breaches certain clauses of the agreement.
- Negotiating the agreement can be a little tricky as the interests of the tenant, and the lender has to be protected. The subordination and the non – disturbance agreement are the most important clauses.
- The agreement must be drafted in such a way that all the important and requisite details are included, and the clauses of the agreement should give effect to the intention of the parties.
- Once the agreement has been drafted, it must be reviewed thoroughly by both parties to ensure that their rights are protected under the agreement.
- The basic negotiation strategy is to ensure that the agreement is fair to both parties and that their interests are protected. Negotiating an attornment agreement is tricky in that the conflicting interests of the lender and the tenant must be balanced.
- It must be negotiated such an agreement is fair and balanced and benefits both parties.
Benefits and Drawbacks of an Attornment Agreement
The following are the benefits and drawbacks of having an attornment agreement:
- This agreement is beneficial to the tenant in that even if his landlord loses the leased property through foreclosure or the property is sold off to a third party, the tenancy will not be dissolved as long as the tenant is not in default.
- This agreement also benefits the lender as he is assured of rent payments by the tenant until the end of the term of the lease.
- If the agreement is not in place, there could be many post-foreclosure disputes between the tenant and lender involving tenant improvements, deposits, and future liabilities and other issues. Entering into this agreement is a practical decision that will save time and money for both parties.
- Without an SNDA, the rights and obligations of the tenant and the lender in foreclosure will depend on the terms of the lease agreement and whether the mortgage or the lease has priority.
- If there is no SNDA in place, any lease that was created after the mortgage will be automatically terminated. This is a very undesirable event for any tenant.
What Happens When You Violate an Attornment Agreement
Generally, attornment agreements have a clause that talks about the actions to be taken when a party to the agreement breaches the clauses of the said agreement. When such a breach takes place, generally the non-breaching party can serve a notice on the breaching party asking them to remedy the breach within a certain specified time period. If the breaching party ignores the notice and does not remedy the breach, the non-breaching party can choose to take certain steps that will be provided for in the agreement itself. An arbitration clause is seen in most agreements and states, and f a clause of an agreement is breached or any dispute arises w.r.t the agreement terms, the issue will be resolved by arbitration. The clause defines where the arbitration proceedings will take place such as the seat of arbitration, the language in which the proceedings shall be conducted, and the manner in which the arbitrators shall be appointed.
Alternatively, any other form of dispute resolution such as mediation or negotiation may also be mentioned in the agreement.
The agreement can also mention that all disputes arising out of the agreement will be subject to the exclusive jurisdiction of a specified court.
In conclusion, this agreement is needed to clarify the relationship between a lender and a tenant. A tenant recognizes a new owner of the property as his new landlord through this agreement. It also helps in setting out the priority of interests of various parties in a mortgaged leased property.
The terms of this agreement benefits both the lender and the tenant of the leased property. The lender gets a higher priority for his security interest during foreclosure, and the tenant’s possession of the property is not disturbed. Hence the agreement is a practical way to manage the conflicting interests of both parties and make it mutually beneficial to all parties involved. In the absence of such an agreement, the lease agreement will take precedence, and there will be a dispute as to whether the lease or mortgage should get priority.