What is a Nondisturbance Agreement?
A bank will typically record a mortgage or deed of trust instrument on real property when a loan is taken by the property owner to purchase or refinance real estate. To secure the bank's interest in the property, the lender records a mortgage instrument in the records of the county where the property is located.
In the event of a borrower default on the mortgage, the lender may elect to foreclose on the property in an attempt to recover some or all of its losses from the unpaid loan balance. The act of foreclosing on the property will cause most other property interests (e.g. easements, assignments of rent, etc.) recorded after the date of the loan to be voidable at the bank's discretion. This means that the bank may choose to keep the property interests in place or it may elect to void the junior interests in the property.
When a lease buyout company purchases your cell site lease or an easement under the cell site on your property, they often pay many years of monthly rent up front. If there is a mortgage on the property, the lease buyout company is concerned that the bank (lender) could foreclose in the event that the property owner (borrower) fails to pay the mortgage. In such instance, a bank would likely elect to void the lease assignment or easement interest purchased by the lease buyout company so that the bank could then begin to receive the cell site rent. Such action by the lender would leave the lease buyout company holding the proverbial empty bag, no longer entitled to receive the monthly rent for which it bargained in the lease buyout transaction.
The Nondisturbance Agreement ("NDA") (sometimes referred to as an "SNDA" or Subordination Nondisturbance and Attornment Agreement) is used to preserve the lease buyout company's interest in the property in the event a lender forecloses on a property. Typically an NDA is signed by the lender, property owner and lease buyout company. It is a contract that provides the bank will agree not to disturb (remove or extinguish) the lease buyout company's interest provided that the lease buyout company is not in default at the time of the foreclosure.
In most lease buyout transactions where there is debt on the property, the lease buyout company will require your lender to sign an NDA. Take the following examples for comparison:
A lease buyout company pays a property owner $250,000 for a thirty year specific easement on "Property A". Property A has a mortgage recorded against it for $1 Million and the property has fair market value of $1.3M. Pursuant to the lease buyout transaction, the property owner now has the benefit of the $250,000 up front payment and the lease buyout company receives the rental revenue from the cell site(s) for the next thirty years. However, in this scenario, the lease buyout company does not record an NDA. Four years after the lease buyout transaction closes, the property owner defaults on the mortgage and the lender commences foreclosure proceedings. At foreclosure, the bank will have the option to extinguish the lease buyout company's interest. Without an NDA recorded on the property, the lease buyout company will likely lose all future rental revenue which it bargained for as part of the lease buyout transaction. Thus, lease buyout companies are not likely to close a transaction in circumstances where there is a high loan to value ratio on the property and/or the bank will not agree to sign an NDA.
Using the same hypothetical above, if the lease buyout company had obtained and recorded an NDA on Property A, the lender would only have the ability to void the easement in limited circumstances as set forth in the NDA. Thus, the lender could still foreclose on the property, however, the bank would leave the lease or specific easement undisturbed and the lease buyout company would retain its rights to the cell site revenue.
Often we find that banks and their counsel do not understand several nuances to the cell site lease (e.g. 30 day termination provisions); rather, banks lump the cell site lease in with commercial or retail leases, which is not an accurate comparison. Bank delays and arbitrary rejections of NDA's can prevent a lease buyout transaction from closing thus leaving you as the property owner unable to benefit from what might be a lucrative transaction. If your lender has questions about the lease buyout transaction or desires to discuss it with attorneys who are well informed on the matter, we are available to assist in such education efforts.
