Audit Those Leases

Posted on June 23, 2010 by Scott Kadish

The typical co-tenancy clause provides that if occupancy at a shopping center falls below a certain level and/or certain other key tenants close, the tenant gets rent relief and at some point the right to terminate its lease. In the current retail environment, all sophisticated tenants demand some sort of co-tenancy protection.  Landlords have generally accepted the fact that they must agree to some sort of co-tenancy if they are to get the tenants they desire.

However, mortgage lenders need to carefully consider the co-tenancy provisions also because they affect the value of their collateral, and of course if they are foreclosing it is likely that there is a co-tenancy failure. Obviously, a lender prefers no co-tenancy clauses in the leases. However, the challenge is that without them, there is no project in the first instance. But, the lender should carefully review all co-tenancy clauses so at least it knows the risk involved before taking any action.

 
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Another Thought On SNDAs.

Posted on September 16, 2009 by Scott Kadish

When representing a tenant, I always want an SNDA so that if the landlord defaults on its mortgage my client is assured that it can remain in the space as long as there are no tenant defaults. 

When representing a landlord, it is becoming increasingly more difficult to get lenders to make any change to their form subordination non-disturbance agreements ("SNDA").  Lenders are insisting that  tenants give up termination rights, offset rights, right to casualty proceeds and other valuable rights contained in the lease that the landlord was willing to give and which may even be customary provisions in a retail lease in today’s market.

Recently, I encountered the situation  where the lease contained a standard termination clause if a co-tenancy failure could not be cured within a set period of time. The landlord's lender would not agree that the tenant still had that right after a foreclosure.

So, is a tenant better off without an SNDA? If you weigh the probabilities, a tenant may be better of without one. If a lender forecloses, chances are the center is not performing well. If the lender forecloses and terminates the lease because there is no SNDA, how hurt is the tenant? Maybe the tenant would prefer termination. In the co-tenancy situation, the tenant gets the very remedy it was trying to preserve.  Without an SNDA the lender either has to terminate the Lease or accept every provision in it.  In this situation, the Tenant may be better off without the SNDA.

Granted if the tenant is performing well and does not wish to leave, there is some risk. But even in this situation, the only time a lender will terminate the lease is if the landlord wishes to redevelop the center.  A redevelopment, which will cost substantial sums, is highly unlikely in a healthy center. It is more likely that the lender will be doing everything it can to keep a well performing tenant.  Just something to consider – a tenant may very well be better off without an SNDA.

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