Subordination, Non-Disturbance and Attornment Agreements for Wind-Energy Projects - Recommendations for Wind-Energy Developers and Agricultural Lenders
By: KATIE L. COLE
A key step in establishing site control for a wind-energy project is obtaining third-party consents to the wind-energy easement (or lease) agreements. If a mortgage encumbers any of the project property, a “Subordination, Non-Disturbance and Attornment Agreement” (SNDA) must be obtained from the lender to ensure that the easement will not be terminated. This article discusses the reasons SNDAs must be obtained for wind-energy projects, their key provisions, and recommendations for wind-energy developers and agricultural lenders for the efficient review and execution of SNDAs.
Why is an SNDA necessary for a wind-energy project?
In the event a landowner defaults on a mortgage that is recorded against a property before a wind-energy easement, a lender would be entitled to foreclose on its property interest and terminate the easement. Because hundreds of millions of dollars are invested in wind-energy projects, loss of site control on a parcel within a project footprint could result in catastrophic losses for the project (resulting from interruptions in transmission lines, or in the free flow of wind, or from the removal or relocation of wind facilities). An SNDA within a project must be obtained from lenders to eliminate this risk. It provides that the lender will not disturb the easement rights in the case of foreclosure. An SNDA may be necessary also because many mortgage documents prohibit a landowner from creating additional encumbrances against the property without lender consent.
What are key provisions of an SNDA?
- The Subordination section may benefit either developer or lender and determines whether the mortgage or the wind-energy easement has priority. This is not a critical provision from the project’s perspective, so long as the SNDA includes non-disturbance language (below). Many lenders are hesitant to sign a document that subordinates their mortgage to an easement, or to sign a document with the word “subordination” in it, even if the provision favors them. Thus it is often acceptable to use a “Non-Disturbance and Attornment Agreement” (NDA) form to eliminate this issue. However, the owner of the wind project may sometimes require that the mortgage be subordinate to the easement (a utility may have language in its indenture prohibiting real estate ownership in a second position).
- The Non-Disturbance section benefits the wind project and is the key reason for obtaining an SNDA. It provides that, upon foreclosure, the lender or the foreclosure purchaser will not terminate the wind-energy easement and will be bound by the terms of the easement.
- The Attornment section benefits the lender by providing that, upon foreclosure, the developer will recognize the lender or the foreclosure purchaser as the owner of the property.
What other provisions may be included in an SNDA?
In addition to the above, the following may also be included; each are addressed from each the lender and developer perspectives:
- Limitations on amendments to wind-energy easement
- Lender: Lender may request that no easement amendments/modifications be effective/binding upon the lender without lender consent, or at least until written notice of those amendments/modifications has been given.
- Developer: To maintain flexibility, developer may request that amendments/modifications to the easement be effective/binding upon lender without notice or consent.
- Extended cure
- Lender: Lender may require that the developer notify lender of any default of landowner under the easement, and that lender shall subsequently be permitted a period to cure landowner’s default. Cure period would be shorter for a monetary default and longer for a default requiring lender to obtain possession of the property in order to cure.
- Developer: Developer will attempt to exclude an extended cure period that benefits lender.
- Pledge of wind-energy easement proceeds
- Lender: Lender may require that the amounts payable to the landowner under the easement be pledged to lender in the SNDA and that, upon receipt of notice that lender is exercising its rights upon land owner default, developer must make payments directly to lender otherwise due to landowner.
- Developer: If lender includes the above provision, developer should include a provision stating that landowner waives all claims against developer for failure to pay any process due to landowner under the easement.
- Post-termination relationship
- Lender: Lender may seek to include a provision on the post-termination relationship of lender and developer (if a lender becomes owner of property through foreclosure, etc.). This could include provision that lender will not be obligated to fulfill landowner’s affirmative easement obligations.
- Developer: Developer will attempt to exclude language establishing a special post-termination relationship with lender, with preference for easement terms to control.
Why should a lender agree to sign an SNDA?
Allowing landowner to enter into a wind-energy-easement agreement provides landowner a new source of income, thus decreasing likelihood of default under the mortgage, and—in the event of foreclosure—lender or buyer would be recipient of the income stream. And, so long as its terms are reasonable, the easement may increase property value. In addition, if lender refuses to consider signing an SNDA, landowner may seek financing for the property from a bank lender that would allow participation in the project.
Recommendations for Agricultural Lenders
Because the wind-energy industry is new in many areas, some lenders do not have a process to efficiently review and sign a wind-energy easement SNDA. In addition, some federal lenders (such as USDA) have not yet established criteria for review/execution of these documents. The following recommendations could be implemented by a lender to efficiently work through the review/execution of SNDAs:
- Educate the authorized reviewer(s). A lender should establish a person/department authorized to review/approve project SNDAs. They should be familiar with key provisions of easement SNDAs and generally familiar with key provisions of wind-energy-easement agreements (e.g., see Site Considerations and Control presentation).
- Understand the overall project. Upon receipt of approval request for a wind-energy SNDA, the lender and developer should discuss the overall project. The following back-up documentation list could be requested by lender:
- Map of project footprint
- List of landowners/mortgages within the project footprint
- Wind-energy easement form
- SNDA form
- Review the SNDA form and the easement form. Lender should review the SNDA form, request necessary changes, and review the underlying easement to confirm absence of fatal flaws (since lender will become party to the easement after foreclosure). When final form of SNDA has been agreed upon, individual SNDAs should be executed and returned to the project for recording as quickly as possible.
Recommendations for Developers
The following recommendations may help a developer navigate and clear the lender SNDA process:
- Allow enough time to complete the process. Many lenders are unprepared to efficiently review/execute wind-energy-easement SNDAs. The timeline should be realistic (weeks or months, not days).
- Be organized. Prepare lists organized by lenders from whom an SNDA will be required, landowners, properties, and loan numbers. Present organized information to each lender, including a map of the project footprint, SNDA form, and wind-energy easement form. Do not submit individual SNDAs until the SNDA form has been agreed upon. Once the form is approved by each lender, obtain necessary landowners’ and lenders’ signatures on the SNDA forms, and obtain other information/signatures from landowners as required by lender. It is preferable to send all SNDAs for a particular lender in one package.
- Determine/follow lender’s procedures. Some lenders will have an established process for the submission of SNDA requests and may have a list of documents that must be submitted with the SNDAs (such as Wells Fargo Bank and U.S. Bank, which require that an application be submitted together with certain back-up documentation). Also, some lenders (such as Agstar) will have their own versions of a wind-energy easement SNDA form that they require.
At first, the review and execution of wind-energy easement SNDAs may appear overwhelming, from both wind-energy developer’s and agricultural lender’s perspectives. However, with an understanding of reasons SNDAs are required and what provisions they should contain, the above recommendations should help to make the process efficient for all parties involved.