Do a tenant and landlord need lender approval to modify a commercial lease?
Most leases in commercial real estate are placed on property encumbered by a deed of trust. The rental stream from these commercial real estate leases is as critical a factor in the lender’s valuation of the property as its underwriting and its security of the loan. It is also the borrower’s source of funds to make monthly payments to the lender. The lender will review the existing leases before choosing to support the loan to determine if they are acceptable. The lender then decides if they want any of the current tenants to subordinate their leases to the new loan and whether they are willing to give the tenant a subordination, non-disturbance, and attornment agreement. It is a three-party agreement among the tenant, landlord, and landlord’s lender.
But SNDAs are usually not only limited to non-disturbance, subordination, and attornment. Lenders will usually want to limit their obligations to the tenant in the case they foreclose and become the landlord. Lenders often require the other parties to ask for approval before any modification of the lease. Lenders also have a right to notice from the tenant of any landlord defaults, along with a tenant covenant to fulfill rent obligations pursuant to rent assignment. Lenders may also want to limit the tenant's rights to end or extend the lease.
A common mistake that is made when amending a lease is forgetting that there is a previously signed SNDA which states whether the landlord and tenant need the lender’s consent for any lease amendment.
Some common examples are:
A tenant's right to extend the lease
A tenant's right of early lease termination
A modification of rental rate, increases, or any deferments
A right to contract or expand the size of the premises
A right to terminate the lease after certain sets of circumstances have occurred
It is recommended that a tenant should negotiate a provision in the SNDA to make sure that the lender's approval is not required to exercise an existing right in the lease (that was previously approved by the lender).
Sometimes when an SNDA provision exists, a tenant and landlord could mistakenly modify the lease without asking for the lender’s consent. This could have negative consequences since the lender may not find the modification effective, and the tenant may not be able to benefit fully from the modification.
A lender's SNDA form will try to void any modifications or amendments of the lease that do not have the lender’s consent. Lenders mainly want protection against any modifications to the material financial obligations and approved terms. Getting the lender's approval for a modification can be a tiresome process. As such, tenants should try to create the consent requirement for non-material modifications.
Another approach would be to consider the modification approved if the lender doesn’t respond to a requested consent in a timely fashion. At least, the tenant will want to make sure that the lender's approval of any modification or amendment to the lease is not conditioned, withheld without reason, or delayed. SNDAs can often be overlooked by tenants at their own cost. It is significant to remember that lenders will usually only ask for SNDA from critical tenants. This is why a tenant should keep in mind that, to a degree, they could be negotiating from a position of power.
Do you have questions about modifying a lease? For more information, you can reach us at info@cbicommercial.com