I’ve mentioned the SNDA in previous posts (Subordination, Non-Disturbance, and  Attornment). The ND portion refers to non-disturbance of the tenant’s right to have its lease  recognized as valid in the event of the foreclosure of a senior trust deed. The S refers to the  Subordination clause and the A refers to the Attornment clause. I’ll discuss the Subordination  and Attornment clauses in separate blog posts. From the Tenant’s standpoint, the non-disturbance clause (“ND”) is most important. 

The use of the Non-Disturbance Agreement depends on the timing of the recording of the trust deed and the recording date of the lease (or the recording of a Short Form Notice of Lease) ,collectively “Notice”. Usually neither the Tenant nor the Landlord want the whole lease recorded. The lease may or may not provide for the recording of a Short Form Notice of Lease. As a Tenant you may want a Notice recorded. Check with your attorney for advice.

Both California and Arizona follow the race-notice theory of recording. [If you'd like more information about how recording of documents works in Arizona, contact Donald Teel at 928.777.8100.]  The first legitimate document recorded has priority over subsequently recorded documents. If a trust deed is signed on January 2, but not immediately recorded, and the lease is signed on January 10 and its Notice is recorded on January 11, while the trust deed has not yet been recorded , the lease would have priority over the trust deed. If the trust deed were subsequently foreclosed, it would NOT have the right to evict the Tenant so long as the Tenant was not in default under the terms of the lease.

However, if the trust deed were RECORDED first the lease would be subject to the priority of the trust deed. If the trust deed were foreclosed, the foreclosing party could evict the Tenant! The reason most Tenants want the ND is that they usually have spent quite a bit of money on leasehold improvements, moving costs would adversely impact their bottom line, they may have spent substantial amounts branding their location, and they may be out of business while moving to a new location. A Non-Disturbance agreement should protect the Tenant in those circumstances.

Before entering into a lease, or when renegotiating a lease, the Tenant should determine whether or not there is a recorded trust deed encumbering the property. If there is, the Tenant should make it a condition of the lease that the Landlord provides a Non-Disturbance agreement signed by the lender. Obtaining a Non-Disturbance Agreement often depends on the negotiating position of the parties. A tenant leasing 1,000 square feet of retail space in a mall probably won’t be able to obtain the lender’s consent to a Non-Disturbance agreement. However, a major Tenant in a development should insist on an ND agreement. Merely having the ND clause in the lease will not protect the Tenant if the lender has not provided the signed agreement. The ND clause may provide that the Landlord will use its best efforts to obtain the lender’s Non-Disturbance Agreement. In the standard lease used by commercial brokers in Carlsbad and the rest of San Diego, the lease ND clause provides that if the landlord doesn’t obtain the ND agreement within 60 days, the Tenant may go directly to the lender to try to obtain the Agreement. Without the lender’s signed agreement, the Tenant is at risk. [Contact Donald Teel to review the lease form used in Prescott and the rest of Arizona.] There are various forms of ND clauses and agreements. Be sure to have the language reviewed by your attorney if you want to protect your rights to retain your lease rights in the event of foreclosure. 

If you have general questions about commercial leases, please send us a note at Lee@leesterling.com

What is the state of the commercial foreclosure market?

Will we see mortgage defaults in the commercial sector? Will the degree of defaults parallel the residential market collapse.

Sand State Foreclosures. Nevada, Arizona, California and Florida, the so-called “sand states” are experiencing the beginning of what can only be described as a plummet (my word).

According to the Las Vegas Sun, April 2, 2009, 25% of Las Vegas commercial real estate is troubled and Commercial properties valued at a whopping $7.885 billion are in trouble in Las Vegas as casinos struggle under the weight of the recession and office buildings and shopping malls lose or are unable to find tenants.

This phenomenon is being replicated in each of the “Sand States” as the federal government’s promised mortgage financing relief continues to be illusive to commercial investors.

On a National Scale: Getting Ugly. “We haven’t yet seen the worst of the effects of the recession on the commercial markets,” said Stuart Saft, a partner at the law firm of Dewey & Leboeuf LLP in New York, who specializes in real estate. “That’s still to come.”

Indeed, according to Real Capital Analytics, “Delinquent loans increased by 43% in the first three month of this year to $US65.9 billion, according to data from New York-based research firm Real Capital Analytics Inc. That’s up from $US46 billion at the end of 2008.”

Worse yet, the decline in commercial real estate values is now at 30% since peaking in 2007 and predicted future declines may add another reduction of 11% in 2009.

According to Deutsche Bank AG’s report on March 25, 2009, the number of commercial repossessions by banks will spike in the next 18 months.

View the full article on WA Today: Defaults Rise, Worst Yet To Come For Commercial Property

The Los Angeles metropolitan area has about $US7.5 billion distressed properties, a 168% jump from December. Las Vegas had a 54% increase, to $US6.1 billion, Real Capital said.

Metropolitan areas with more than $US1 billion of commercial properties in distress more than doubled to 11 from five. Philadelphia, Chicago, San Francisco, Austin and Houston, Texas, and Detroit joined New York, Las Vegas, Miami, Phoenix and Los Angeles.

Manhattan distressed commercial real estate has risen by 36% this year to $US4.2 billion, according to Real Capital.

Real Capital Analytics (RCA) tracks distressed commercial properties and their disposition via its Trouble Asset Radar and reporting tool.

A search of RCA troubled assets for the Southwest United States yielded the following results:

US Southwest U.S. Distressed Commercial Assets











There is no question about the decline of commercial real estate values and with such declines, troubled assets, foreclosures and commercial REOs will become a contemporary reality.

My Advice. Investors-owners should be agressively pursuing alternative financing where needed and/or, releasing properties through strategic sales where seller financing is allowable.

On a positive note here are the most active commercial market in the US according to RCA.