Mindy W. Saffer
Mindy W. Saffer, LEED AP, is a managing principal at Cresa, a commercial real estate company in Washington, DC.
Associations that lease their office space should be aware of the situations that can arise if their building owner defaults on their loan. Here’s how to get in front of and address common concerns.
The landscape of commercial real estate is fraught with potential economic tremors, one of which is the foreclosure of a property due to the owner's loan default.
The stability of your association’s office space can be vulnerable in these circumstances, leading to operational disruptions and financial complications. To mitigate these risks, understanding your lease's intricacies and the implication of foreclosure is paramount. This article will look at the essential role of “Subordination, Non-Disturbance, and Attornment” (SNDA) agreements, while also addressing common concerns related to the foreclosure process.
Review your lease agreement. An SNDA is a critical component that affects a tenant's security in foreclosure scenarios. It serves three main functions:
The benefit of an SNDA is that it creates a safety net for tenants, ensuring continuity of their lease terms regardless of ownership changes. However, securing an SNDA can vary in difficulty. In a strong market where tenants have leverage, landlords may be more amenable to include SNDAs to attract and retain tenants. However, in a landlord's market, or when dealing with lenders with stringent policies, it can be more challenging. Your real estate consultant must introduce this language in the Letter of intent while your legal counsel is indispensable in negotiating these terms effectively within a lease. Legal expertise can also illuminate your rights and obligations, especially in understanding the complexities of SNDAs and how they function within the broader scope of tenant-landlord laws.
If your office property is transferred to a lender, change is likely. Here’s how to best navigate those circumstances:
To understand your risk, ask your real estate consultant to check if you are currently paying above or below market. If you are paying below market, you are at a higher risk. Also, ask your real estate consultant to tell you the vacancy of the building. If you are one of the only tenants left in the building, you are also at risk because the building may be sold to a redeveloper changing the use from office to residential/educational/hotel or other.
To avoid potential issues, be proactive and take the following steps:
In addition, keep in mind these longer-term strategies:
Navigating a building owner's foreclosure requires a nuanced understanding of lease agreements, particularly the protective mechanisms of SNDAs and the ability to proactively engage with lenders. No matter where your association is located, keeping abreast of market and foreclosure trends can inform strategic decisions. Commercial office tenants must remain vigilant, informed, and ready to act to ensure their business's resilience in the face of property ownership instability. Legal counsel remains an invaluable ally in these situations, providing clarity and advocacy to safeguard tenants' rights and interests.