What is a Non-Disturbance and Attornment Agreement?
Non-disturbance agreement is a term of art in commercial real estate law. A non-disturbance and attornment agreement (NDAA) is a legal agreement between a landlord and a tenant whereby any current or future mortgagee, lender, purchaser or transferee of the property agrees not to disturb the existing tenant in the enjoyment of the premises so long as the tenant complies with its obligations under the lease.
The concept of an NDAA evolved from the typical lease provision that allows a tenant to continue to occupy premises after the sale of the property. In a typical sale of real property, the seller and buyer enter into an agreement that makes the sale of the property subject to the existing leases. The agreement usually enables the seller to collect rent payments during the transition and allows the buyer to collect rent in the future. However, these leases did not necessarily survive a foreclosure. Thus, mortgagees are free to foreclose as allowed and terminate existing leases. At the same time, most existing tenants will not stay in their properties if the relationship with their landlord disappears and they are required to pay rent directly to the buyer. For these reasons , non-disturbance agreements often are found in both sales of a property and in financings.
An NDAA addresses the concern that the mortgagee or purchaser’s interest will be subordinated to that of the tenant – with respect to prior or future mortgages – as well as the rights of the purchaser upon the sale of the property. It is generally entered into before the mortgage loan is made or before the sale of the property is completed. If an NDAA has been entered into between the tenant and lender/purchaser, the lender/purchaser will be unable to terminate the lease without cause even if there is a prospective non-disturbance provision in the lease. The NDAA may also fill the void by addressing some or many of the same issues addressed in the prospective non-disturbance provision of the lease.
Parties typically use NDAAs to address the concerns that the seller, buyer or lender’s interests will be junior to the tenant’s leasehold interest even if its lease gives the tenant great rights in the property. Parties use NDAAs in transactions involving mortgages, sales and transfers, easements and rights of first refusals, purchase and sales agreements, deeds and declarations of restrictions and also in ground leases, subleases and assignment and assumption agreements.
Key Elements of the Agreement
Non-disturbance and attornment agreements typically constitute the bulk of a commercial tenant’s lease negotiations, but they are afforded little respect among commentators. This is due in large part to laxer regional research protocols that influence how few new non-disturbance and attornment agreements (NDAs) are recorded (a key consideration for lenders). However, NDAs are becoming increasingly crucial in today’s real estate market; the subscriber has recently seen NDAs used in non-construction operations (e.g., satellite dish operators), and NDAs appear alongside subordination agreements on more and more occasions.
There are three fundamental components to an NDA – non-disturbance, attornment, and subordination. A non-disturbance provision grants tenants the right to uninterrupted possession and use of their leased property, unless a lease breach occurs. Attornment clauses ensure that the new property owner cannot disturb the leaseholder’s possession of the property; rather, the property owner will "attorn", or yield, to the leaseholder. Finally, a subordination provision will subordinate the tenant’s leasehold rights over any existing or future lien on the commercial property.
For commercial property owners, NDAs serve as security provisions because they grant tenants the right to uninterrupted use and possession of real property, often even if the owner defaults on or breaches a mortgage agreement with another lender; in essence, the lessor cannot be disturbed unless the tenant is in breach. Lenders similarly appreciate the value that NDAs provide to the real estate investing community, as they protect the leases from alteration or termination in the event of a sale or a new mortgage arises on the property. In essence, NDAs provide increasing stability for a property owner.
Benefits for Tenants and Lenders
For tenants and lenders, non-disturbance and attornment agreements provide a certain level of security for tenants who might otherwise be concerned about the potential impact of a foreclosure on their lease.
Without non-disturbance and attornment agreements, tenants could find themselves displaced from their premises as a result of a mortgage foreclosure leading to the eviction of the existing landlord. Alternatively, the tenant could be placed in a difficult situation with its lender as a result of a prospective purchaser acquiring title to the leased premises and displacing the existing lender. The situation becomes even more difficult where the landlord’s lender has financed the improvements on the leased premises, raising the stakes for both lenders and tenants.
Non-disturbance and attornment agreements provide some certainty when it comes to protecting the security of tenure for tenants. A tenant acting prudently will insist upon a non-disturbance and attornment agreement from the lender not only in the case of a foreclosure of the landlord’s mortgage but also in the event there is a receiver appointed under the Mortgage Act. A well-drafted non-disturbance and attornment agreement goes further, confirming that the lender will not dislodge the tenant from its premises or dictate the terms of the lease.
For the lender, non-disturbance and attornment agreements protect its ability to recover, upon foreclosure, the cost of capital improvements financed by a construction facility. Without a non-disturbance and attornment agreement, a tenant is within its rights to void the lease following the existing landlord’s default under the mortgage and therefore the lender’s ability to complete loan recovery may be placed in jeopardy.
To protect its interests, a lender will insist upon a non-disturbance and attornment agreement with the tenant as part of its loan facility. A well-structured non-disturbance and attornment agreement will help the lender to recover its debt secured by its charge on the land and improvements on the land which the tenant occupies.
Negotiations of the Agreement
Like all negotiations, bargaining over the terms of a non-disturbance and attornment agreement is a process. The best strategy when approaching a discussion about these kinds of agreements is to consider exactly what each side requires out of the arrangement and then weighing those needs against the other party’s requirements. The parties should then look for a beneficial compromise. For tenants, the idea is to have a streamlined experience if the need arises for one rider or the other. Creditworthy tenants may be able to avoid having to make any compromise at all, but it never hurts to prepare for some give and take. Lenders traditionally have a more straightforward approach: they require non-disturbance and attornment agreements as a matter of course, and offer favorable terms to those tenants who have been good regarding making their rent payments .
The sticking point that sometimes necessitates compromise that favors the lender is the issue of coordination. The lender may insist that all non-disturbance and attornment agreements be entered into only upon written request by the lender, so any funds that the tenant is required to return at the end of the lease term won’t be released until after the outstanding balance meets or exceeds the amount that must now be paid. In that situation, the tenant will be reluctant to return the extra funds, but it is understandable that the lender would want to avoid any shortcut. There is a possibility that all parties can walk away happy, but the coordination does require that some compromises be made.
Legal Considerations and Best Practices
A non-disturbance and attornment agreement can serve as an effective protection for both landlords and tenants during the tender-offer phase of a transaction. However, careful consideration of the legal implications of enforcing, drafting, or breaching these agreements is critical.
As a general judicial principle, a transaction is not enforceable until there was a "meeting of the minds" — i.e. an agreement as to material terms has been made. In other words, any exception from such principle must be supported by appropriate consideration.
Generally, under the law of contracts, consideration is the bargain that each party makes in exchange for the promise of the other. Diary Queen International, Inc. v. New England Co. (In re Dairy Queen), 68 F.2d 469 (2d Cir. 1933). A defense based on adequacy of consideration is disqualified on its face. Id.; see also Siegel v. Sanders, 247 N.Y. 287, 160 N.E. 1072 (1928) (Where there is any valid consideration, the adequacy of the same will not be inquired into.). However, a contract may be found unenforceable because it is not supported by consideration applicable to the particular facts and circumstances. Diary Queen, 68 F.2d at 470-71. To support an exception to such rule, the consideration must be sufficient and of structural integrity for the term of the contract. See La Salle Nat’l Bank of Chicago v. Manson Trust Co., 36 N.Y.2d 100, 103-104, 365 N.Y.S.2d 280, 325 N.E.2d 569 (1975) (holding that fees charged for servicing mortgages do not constitute valid consideration).
Similarly, the "Mortgage Deregulation Law" codified at New York Real Property Actions and Proceedings Law § 254 does not require that the non-disturbance provision be supported by consideration. Section 254 expressly states that rent should be paid by tenants to the grantee of the property whether or not such rent is secured by mortgage. New York courts have prescribed the rule for determining whether a lease may be affected by a mortgage: [A] lease of real property falls within the reach of a mortgagee, upon a foreclosure, when title in fee is acquired by the grantee of the mortgage who accepts its burdens as well as its benefits; while the mortgage debt remains unpaid and beyond the terms and conditions of the lease, the mortgagee is deemed a landlord so far as third persons are concerned (see, e.g., Wanata Realty Corp. v Young, 309 NY 290, 290 NYS2d 964; Luyties v Campbell, 133 NY 194, [12 N.E. 614]; Dreicer v Weissman, 171 AD2d 249, 565 N.Y.S.2d 663).
Whereby the tenant’s right of possession is to be extinguished, the non-disturbance and attornment agreement may only require that the tenant not be disturbed in its possession so long as the tenant is not in default beyond any applicable cure periods. Accordingly, the tenant may not be considered as having a vested leasehold interest entitling it to a right of possession in the event of the tenant’s default. This is consistent with other New York Statutes. For example, under § 254 of the New York Real Property Actions and Proceedings Law, the tenant has no vested interest in the property so long as the tenant timely pays rent due to the grantee.
As a best practice, tenants should maintain such agreements as a part of their company-wide policy because they document the willingness of landlord and tenant to go beyond the statute in recognizing the mutually dependent interests of the parties. This also enables tenants to anticipate how their rights may alert during a foreclosure on the property or if they may alter or renegotiate their agreement during an actual foreclosure.
Misconceptions and Frequently Asked Questions
Given their importance, it’s essential to clear up any misconceptions or unclear aspects surrounding these agreements.
1. Non-Disturbance Agreements are Just for the Lessee
While often associated with lessees, non-disturbance agreements also protect the lessor. In case of lease transfers, defaults, or foreclosure, safeguards ensure that their agreement continues to be enforceable.
2. Non-Disturbance and Attornment Agreements are the Same Thing
While they are related, there is a distinct difference:
• Non-Disturbance Agreement-A non-disturbance agreement in a lease specifies that a lessor cannot terminate a lease in the event the property is sold through foreclosure.
• Attornment Agreement-In a real estate lease, an attornment agreement requires the lessee to acknowledge the new owner as the landlord. The process of attornment protects the new owner from any existing disputes between the lessor and lessee.
3. A Non-Disturbance Agreement is Only Necessary for Commercial Properties
These agreements are not exclusive to Commercial Real Estate . Non-disturbance agreements can be put into the context of any type of real estate lease such as within the residential real estate market.
4. Attornment Agreements Don’t Offer Any Value to the Lessor
These agreements offer many benefits to the lessor including:
• A clearer record of the matters of record affecting the subject property.
• Improvement of the marketability of property being sold.
• Clearer records of the lessor’s rents and other charges.
5. A Non-Disturbance and Attornment Agreement Can Be Implied
Non-Disturbance and Attornment Agreements are always best created in writing. However several state laws define them by what is fair.
It’s important to keep in mind that a Non-Disturbance and Attornment Agreement has legal ramifications; therefore all parties should seek the counsel of their attorneys.
Your attorney can also ensure that the existing leases are protected as to the new owner upon the eventual foreclosure of the mortgage being satisfied. In addition, these attorneys can advise you as to the scope of the protections available through the use of the agreement.