Tenant Considerations in Commercial Real Estate Purchases

Financing non-residential real estate and investment properties that are occupied by tenants create numerous issues and considerations for the Buyer, Seller and Lender. Here is a brief overview of some of the issues and documents that need to be addressed prior to any commercial real estate transaction.

Collateral Assignment of Leases and Rents

Most, if not all, commercial lenders will require the Buyer to executed a Collateral Assignment of Leases and Rents at closing. This document will provide the Lender a security interest in the future rents due from the tenants. The Buyer / Borrower’s rights as the landlord under the leases are assigned to the lender and permit the Lender to step in to collect rents if there is an event of default. This is a customary document in most commercial real estate purchase transactions that are financed.

Estoppel Certificates

Estoppel Certificates are typically requested by a Buyer from Seller that provides a certification concerning the material features and issues of the landlord-tenant relationship. These certificates will confirm the terms of lease, including its term, amount and payment of base and additional rent, and security deposit amounts. It will also confirm that there is no default of, or modification of the lease. The Certificate will also confirm whether the tenant has any claims against the Seller / Landlord. These certificates are crucial since it will confirm the expectations concerning the lease agreement and preclude the tenants from raising unmentioned or unliquidated claims against the new landlord / Buyer.

SNDAs

A subordination, non-disturbance, and attornment agreement, a/k/a/ "SNDA," will define the parties rights between a Lender and the tenants in the event that the Landlord / Buyer defaults on the loan obligations. By providing a lease to a tenant that predates the recording of a mortgage, a landlord creates a leasehold and those interest may take priority to a new lender and mortgagee. So, a lender will request that a tenant subordinate its interest to the mortgage and the Lender will be able to terminate the lease under a power of sale during a foreclosure. The non-disturbance provision provides that if the Lender accepts title to the property at foreclosure, it will not interfere with the tenant’s use and possession (granting a right of quiet enjoyment) so long as the tenant is not in default. Finally, attornment obligates the tenant to recognize the Lender as the new landlord in the event of a foreclosure. This is a customary document that is designed to protect the rights of the Lender in the event of a default.