I participated in the ICSC (International Conference of Shopping Centers) Law Conference in Phoenix last month along with my GSB law partner, Joseph West, and was impressed with the high quality of the legal presentations and the aggregation of industry talent of the attendees. I anticipated seeing colleagues in private practice with experience representing landlords and tenants, but we were joined by the country’s major retailers and their in-house counsel, as well as shopping center leasing teams. Quite often, the most interesting insights came from interactive seminars in which conference participants as well as presenters could share their own experience and knowledge with the group.
One particularly interesting topic discussed at the Conference was about SNDA’s & Estoppels. (As I write this I acknowledge how odd that would seem to most people who do not obsess about leasing.) We heard from representatives of Nordstrom and other major retailers about how critical SNDA’s (Subordination, Non-disturbance and Attornment Agreements) are in insuring that a retail tenant’s investment in its new store will be protected notwithstanding financial problems of the developer/landlord. Imagine investing many millions in tenant improvements in your new department store. We can assume that the developer’s lender’s deed of trust is recorded prior to construction of the shopping center, and would therefore be superior in priority to any subsequent department store lease on the property. In the absence of any agreement between the lender and the retail tenant, if the lender foreclosed its deed of trust, most sophisticated commercial deeds of trust would give the lender the option to eliminate the store lease through the foreclosure. For the retail tenant, this possible outcome would be unacceptable. To protect against that possibility, good tenants will insist on obtaining the lender’s consent, through a SNDA, that the tenant shall have the right to continue to occupy the leased premises while paying the lease rent and observing other tenant’s lease obligations, notwithstanding any foreclosure by the lender.
Besides the right to continue to continue to occupy the space, a sophisticated tenant will be interested in insuring that in the event of a casualty, that the building would be rebuilt. The loan documents probably would give the lender considerable discretion over whether insurance proceeds could be used to rebuild the shopping center or whether the money would be used to repay the loan. The tenant would look carefully to insure that its investment in its space would be protected by the rebuilding of the center. It would also be interested in insuring that not only would its right to occupy the space for the lease term continue, but that all the various rights negotiated in its lease would be respected by whomever became the new owner after foreclosure of the deed of trust. It may also want certain rights, at its option, to cure any loan defaults by the developer, and to step in to the developer’s shoes. Whether a tenant would be in a position to negotiate these concessions would largely depend on the tenant’s bargaining clout. In these difficult economic times, landing a strong tenant with solid financials could be the difference between a successful shopping center and a failure, so a strong retailer may have considerable sway. My experience is that tenants with such bargaining power are limited only by their imaginations and the lack of good alternative locations in the desired market.
See you at next year’s ICSC Law Conference in Orlando.