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By Addressing Third-Party Concerns Early On in Your Lease Negotiations, You Will Minimize Delays By John R. Blake, Jr., Esq.

Friday, June 24, 2005 - By: John R. Blake, Jr.

By John R. Blake, Jr., Esq.

When negotiating a lease, due consideration must be given to a prospective lender's and purchaser's objectives regarding the lease. Whether the lease is for retail, office or industrial space, at some point during the course of financing the property, or upon the ultimate disposition of the property, a third-party will want to hear from your lessee. Framing how and when the lessee responds is an important part of the lease negotiation process.

In the course of selling a property, subject to existing leases, a buyer needs to know the details and status of the leases in a format that is binding on the lessees. A tenant estoppel certificate is a direct certification from the lessee to either the purchaser (or as discussed below, the lender) confirming the basic details of the lease. In the tenant estoppel, the lessee usually confirms the term, base rent, additional rent, options, floor area, security deposit, prepaid rent, and any other key base data. In addition, the lessee certifies in the tenant estoppel whether there is or has been any default on the part of either the lessee or the lessor.

The timely delivery of the tenant estoppel is critical, as a sale transaction will usually be contingent on the seller delivering a satisfactory tenant estoppel prior to closing. The lease should require that the lessee deliver a duly completed and signed estoppel certificate, certifying as to such information as may be requested by the buyer or its lender, within a specified time period after being presented to the lessee. The lease must also provide that the failure by the lessee to timely complete and delivery the estoppel is a default under the lease. In addition, the lease should include a provision whereby the lessor is appointed the lessee's attorney-in-fact for the purposes of completing and delivering the estoppel certificate on the lessee's behalf, if the lessee fails to so provide one.

In a loan transaction, a lender has substantially the same interest as the buyer in obtaining a tenant estoppel certificate, particularly where the lease is the sole or major source of repayment of the loan. Additionally, lenders typically require that the lease be subordinate to the mortgage. The lease should contain a self-operative subordination clause, making it automatically subject to existing and future mortgages. A lessee will typically resist such a clause, unless subordination is conditioned upon the lessee receiving an acceptable (to the lessee) non-disturbance agreement (usually referred to as a "SNDA"), which provides that in the event of a foreclosure, the lender, or purchaser at foreclosure sale, will recognize the lessee's rights under the lease, and the lessee's possession will not be interrupted provided the lessee fulfills its obligations under the lease. Conversely, the SNDA requires the lessee to recognize the lender or the purchaser at foreclosure as the successor landlord. The SNDA will also confirm subordination of the lease to the mortgage in addition to such language contained in the lease.

Each lender has its own form of SNDA, with its own particular terms. The process of negotiating the terms of the SNDA, to the point where the lessee is agreeable to signing it, can be a drag on the closing process. One method to avoid such an entanglement is to require in the lease that the SNDA be on customary and usual terms and conditions. The better approach to eliminating protracted negotiations is to attach to the lease the actual form of SNDA which contains the minimum terms required by the Lessee to be deemed satisfactory.

The goal of negotiating the form and delivery of the tenant estoppel certificate and SNDA in the lease is to minimize future negotiations with the lessee, which could delay a transaction. By addressing such issues in the lease negotiation process, delays can be minimized, or at least the lessor will be aware of the lessee's concerns at the inception of the lease, and can plan accordingly.