What Is a Non-Disturbance Agreement?
A non-disturbance agreement is a binding contract between a tenant and lender/owner that, if properly executed, will protect the tenant from being disturbed in its use and enjoyment of the property if the lender/owner forecloses on the landlord’s mortgage or the landlord conveys the property under threat of foreclosure.
From a tenant’s perspective, one of the main things to keep in mind when negotiating a lease is to understand what would happen in the event that property ownership changes . This is often accomplished by asking your landlord to obtain a non-disturbance agreement from its lender(s) which would protect you from being disturbed in any future event of foreclosure. A CD-42 Request for Non-Disturbance and Attornment, commonly known as a "certificate and request", is the form used by the RIAR Standard Forms Committee.
Attornment Agreements: What They Are and Why They Matter
Non-disturbance and attornment agreements are standard elements in commercial lease negotiations. They build a framework for the lease that encompasses changes in the property’s ownership.
An attornment agreement – which document may be drafted as part of a non-disturbance agreement or separately – is an acknowledgement that the new property owner is the landlord under the lease between the original landlord and tenant. It is a continuation of the tenant’s obligations and rights under the lease.
Attornment is derived from the old French, atourner, meaning to turn toward, i.e., to respond. (Harvey on Real Property page 604). It occurs when a new person steps into the shoes of a previous person.
Attornment allows assignment of the rights and responsibilities under a lease to a new owner. Tenants are asked to expressly attorn upon a sale of the property. A tenant will not be bound by attornment in the absence of notice of a sale or other circumstances constituting attornment.
The covenant not to disturb is a lease provision that may only be applicable to the current owner. The covenant may also be triggered by a foreclosure of a mortgage that contains a due-on-sale clause. In this case, the tenant must attorn under the covenant upon the transfer of title, and there is no covenant not to disturb.
Essential Clauses for NDAs in Real Estate
A typical non-disturbance and attornment agreement will include the following components, among others: the names of the parties (the lender and the tenant); a definition section that may define what master lease is being attorned to, how agreements are defined, and what a notice is; a description of what documents are attached or incorporated by reference; agreement to keep and perform the obligations of the lessee; an attornment clause, usually with the phrase "attorns to the Lender"; a release of the lender from all covenants and agreements made by the lessor and an acknowledgment that the lender is not liable for any acts or omissions of the lessor; a substitute new term provision without any further dues; a priority clause that makes the agreement controlling over any lease; a waiver of all rights of the tenant that would come about if the lessor defaults on the lease; and a surviving agreement provision so that the agreement survives any termination or expiration of the lease.
Advantages for Tenants and Lenders
Both tenants and lenders generally benefit from NDAs, provided they are helpful to landlords, as well. Without NDAs, the lease is in jeopardy of being terminated in the event of foreclosure, and without safeguards, commercial landlords have little protection against tenants that refuse to honour NDAs with their successors in title.
For tenants, NDAs ensure they will be permitted to stay in the property for the remainder of the term despite the landlord’s mortgage default and foreclosure. In addition, landlords are advised to promise not to disturb their tenant’s possession to ensure its right to peaceful enjoyment under the lease. NDAs also encourage tenants to pay rent to the foreclosing lender and not anyone else. NDAs can help tenants feel a sense of security, knowing the lease will not be terminated, unless tenants elect to terminate it themselves, regardless of who owns the property and in whose name the rental payments are made.
For lenders, NDAs assist lenders from losing all of the bargaining chips to tenants in the face of foreclosure, which could result in significant losses. NDAs also encourage payment to the legal owner of the property as opposed to the original landlord.
Common Problems and Solutions
One possible challenge in connection with a non-disturbance and attornment agreement is that the issuing lender may desire for that lender’s leasehold mortgagee to sign as a pre-condition of finalizing the loan. An alternative to having a tenant’s leasehold mortgagee sign is to provide that any advance notice of default shall be provided to the tenant. If such notice is served, the tenant then has an option to deliver a "cure" notice under the lease. Having the tenant given the opportunity to cure will likely subvert the lender’s desire to have the leasehold mortgagee sign an attornment in order to reduce the risk that the lease will terminate on default. Assuming that the lease is still not terminated , it is also possible that the lenders will then have an incentive to forbear the tenant from any future default under the lease.
Another possible challenge to a tenant in effecting a non-disturbance and attornment agreement is that a tenant will object to a proposed rent increase in the case where a predecessor in interest landlord is in default, or a sale of the mortgaged property to a third party. A solution to addressing a fear of a substantial rent increase may be an agreement for a capped increase in rent so that if the default (or foreclosure) occurs, and the lease is assigned by a bankruptcy court to the new owner, the new owner can only collect a capped rent for the remainder of the lease term. Negotiating the value of the cap in a way where all parties understand that a single value will apply will likely lead to a non-disturbance and attornment agreement that is acceptable to all parties.
Signing NDAs: What You Need to Know
Before signing a non-disturbance and attornment agreement (NDA), also commonly referred to as a non-interference agreement, the Tenant should consult with legal counsel to ensure that all of the Tenant’s interests are addressed in the NDA. Rarely is an NDA presented to a Tenant at the time that a Landlord is requesting the Tenant to sign the NDA, nor does the Landlord indicate to the Tenant that it is of any importance to the Tenant for the Tenant to sign the NDA. The Tenant should not make the mistake of blindly signing the NDA without making sure that the NDA meets the Tenant’s expectations. If the Tenant wants to avoid being disturbed in the event of a Foreclosure, the Tenant should consider some of the following issues:
- Additional Fees. Will the Tenant be asked to pay additional fees to the receiver/foreclosing party in addition to the Tenant’s other rental obligations under the lease?
- Broker Commissions. Is the Tenant’s broker entitled to any commissions from the foreclosing party? This should be addressed in a separate, private agreement between the Tenant and its broker.
- Rent Payment. To whom should the Tenant make its rent payments if there is a Foreclosure? Often, the NDA will, in some form, provide that the Tenant must pay its rent to the Landlord or to the Foreclosing Party, at the Landlord’s discretion. The NDA should also address the issue of where to make rent payments in the event the property is sold or conveyed to a new party.
- Disclaimer of Warranties. Does the NDA require the Tenant to disclaim any warranties made by the previous Landlord?
- Liability Cap. Does the NDA limit the liability of the receiver/foreclosing party for acts or omissions by the Landlord or other parties? This can be particularly troubling if the Tenant’s security deposit, personal property, or fixtures located at the property are lost due to a negligent act by another. Perhaps the Tenant will even want commercial general liability insurance coverage for the receiver/foreclosing party before the Tenant will agree to continue paying rent/make attornment.
- Closed Sales. Does the NDA allow the Tenant to continue to operate in the space in the normal course of business, or does it restrict the Tenant from business hours until the close of the sale? Significant business disruption can result from a poorly constructed NDA that requires the Tenant to not conduct business during certain hours.
- Relocation. Will the NDA improve the Tenant’s relocation rights if the Tenant is forced to relocate pursuant to the lease?
- Future Rights. Will the NDA extend rights to the Tenant if it purchases or is in any way affiliated with the purchaser of the property at a Foreclosure sale?
NDAs in Real Estate Deals
The impact of NDAs on the sale of a property and leasing arrangements for a property can be significant. From a buyer’s perspective, the comfort provided by a non-disturbance and attornment agreement from a tenant will influence their willingness to absorb the risks associated with a property and the pricing that they are willing to pay.
Buyers of properties have the option to purchase subject to existing leases or "take out" a tenant through lease termination or other means. NDAs provide buyers with assurances that if they do not choose to terminate the existing lease, the lease will continue to exist and the new owner will be (i) entitled to the benefit of the terms of the lease, and (ii) subject to the obligations under the lease in the event the purchaser becomes the landlord. Buyers (and lenders) prefer the certainty provided by NDAs to the risk of poorer collections , tenant defaults, and the need to pursue litigation if the tenant chooses to disturb the new landlord. Contingent upon certain conditions being met by the tenant (such as paying an annual fee), interim occupancy rights are afforded to the tenant to continue to occupy the premises until a different arrangement is negotiated. Without the protection of an NDA in place, buyers will not generally assume an existing lease. Where there is no NDA in place, the buyer may choose to "take out" a tenant by renegotiating lease terms or terminating the lease, all of which impact the value of the property. Conversely, lessors may be hesitant to execute NDAs without receiving compensation for the assumption of these risks.