STROOCK
SPECIAL BULLETIN
Hotel Subordination, Non-Disturbance
and Attornment Agreements:
The Boilerplate of the Boom Years
Becomes Significant in the Great Recession
Winter 2010
Overview
During the boom years, parties to hotel deals
frequently treated SNDAs as secondary to the other
loan documents. In some transactions, they received
no more consideration than that given to standard
boilerplate terms. However, the significance
of the SNDA in a distressed hotel situation has
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The Basics
Briefly, the basic goals of an SNDA are to:
Subordinate the management agreement to
the loan (subordination).
Allow the manager to operate the hotel postforeclosure, so long as the manager is not in
default under the management agreement
(non-disturbance).
Require a manager to recognize the lender or
other purchaser in foreclosure as the owner, if
the manager is not in default and/or the lender
decides not to terminate it (attornment).
subsidiary owner for interfering with the management contract and breaching the SNDA. The
SNDA expressly provides that the management
agreement remains in place post-foreclosure.
However, the lender asserts that it has the power to
terminate, notwithstanding the terms of the SNDA.
Who prevails? In an actual case from the 1990s
involving these facts, the lender prevailed despite an
SNDA that stated in part as follows:
[s]o long as Hyatt is not in default (beyond
any period given to Hyatt to cure such
default) in the payment of amounts due or
the performance of any of the other
terms, covenants and conditions of the
Management Agreement on Hyatts part to
be performed, the interest of Hyatt created
by the Management Agreement, Hyatts
management of the hotel and all of its other
rights under the Management Agreement
shall remain undisturbed by any foreclosure
or default under the Security Documents
and shall be recognized by Lender and its
permitted successors and assigns (the
Mortgagee) during the term of the
Management Agreement.1
The Court approved of the managers termination despite the express non-disturbance language
in the SNDA, reasoning that such language is not
dispositive.2 Instead, the Court relied upon the fact
that the manager was the owners fiduciary agent.
It accepted the lenders argument that the principles
of agency law permitted the foreclosing lender to
terminate the manager, regardless of the SNDAs
language stating otherwise. The Courts holding
at the time and apparently even in the
current downturn while surprising to some
businesspersons and lawyers, is representative of
long established legal precedent. As the court in
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The accelerating rate of hotel defaults is illustrated by conditions in the California market. Atlas Hospitality Groups
study on distressed hotels found that in 2009 the number
of hotels in default increased 479%, from 53 to 307.
Eighty-one percent of all the hotels in default have loans
that were originated in 2006 and 2007. Approximately
fifty-three percent of all foreclosed hotels in California
filed for bankruptcy.
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