Few propositions are as much of a win-win for both the holders of mortgages and the developers of renewable energy projects as non-disturbance and attornment agreements.
First, let’s review why a non-disturbance agreement is necessary. A lot of work goes into the design and layout of a renewable energy project, including studies and tests conducted to determine the feasibility of the land. Once the land is deemed viable for a renewable energy project, the ultimate site plan and design of the project become a puzzle that must be put together before the placement of the project’s infrastructure can be finalized. Some of the key puzzle pieces include locations of utilities’ infrastructure (e.g., collection lines and pipelines), property lines, environmental impact areas, habitats of various species, and elevation of the land. Therefore, once the design and layout of a project have been determined, it is difficult to move project infrastructure without causing a ripple effect to the rest of the design and layout of the project.
This means that if a bank had the ability to foreclose on land participating in the project and terminate the renewable energy project lease (forcing a relocation of project infrastructure), it would pose a problem to the entire project layout – not just the foreclosed land. If a bank holds a mortgage with rights superior to the renewable energy projects lease, it may have the ability to do just that.
While mortgages show up as encumbrances on title commitments often, obtaining a title policy that is satisfactory to lenders and investors means the title company must receive an assurance from the mortgagor bank to insure over such an encumbrance. Such an assurance typically comes in the form of a non-disturbance and attornment agreement, also known as an NDA. An NDA ensures that project infrastructure will not require relocation or removal in the event of a foreclosure on the underlying land. Oftentimes, banks are hesitant, or refuse, to sign NDAs. This can often be resolved by educating both sides on what an NDA is and is not.
What is an NDA?
A non-disturbance and attornment agreement is an agreement between the renewable energy project, as the tenant, and the mortgagor bank, as the lender, whereby the lender agrees not to disturb the renewable energy project’s lease in the event of a foreclosure. It provides the renewable energy project with assurances that its rights to the land will be preserved even if the landlord/landowner doesn’t fulfill its duty to make mortgage payments to the lender.
The “attornment” piece of an NDA is the act by which tenants acknowledge a new owner of the property as their new landlord. Here, it would obligate the renewable energy project to accept a new owner, the bank, as its landlord, regardless of whether the new owner acquires the property in a normal sale or following a foreclosure. In the event ownership of the property is transferred, the bank essentially replaces the original landowner in the lease, assuming all the former owner’s rights and responsibilities. Most importantly for the bank, attornment requires the renewable energy project to continue to pay rent, and any other payments due under the lease, to the bank as the new owner.
What is an NDA not?
A non-disturbance and attornment agreement is not an agreement where the renewable energy project obtains the right to supersede a lender’s mortgage. NDAs, as opposed to subordination, non-disturbance, and attornment agreements (or SNDAs), do not contain subordination clauses. The lender is not asked to allow its interest in the property to become junior to the renewable energy project’s interest in the property.
What happens in the event of a foreclosure?
In the event the mortgaged property is foreclosed on, the lender’s rights are unaffected. The lender can still sell the property. The renewable energy project’s lease continues in full force and effect for the remainder of its term, including any extensions provided therein. The attornment clause in the NDA kicks in and the renewable energy project acknowledges the lender as the new lessor under the lease and the lender accepts the role of the lessor. The lender then receives all future payments due under the lease.
Does an NDA benefit the lender?
Yes, NDAs benefit lenders. Renewable energy projects provide landowners with an additional income stream. The additional income can then be passed on to the lenders in the form of mortgage payments and make a landowner default less likely.
What if the lender will not sign an NDA?
As discussed above, renewable energy projects need to obtain title insurance covering the entire project footprint and all its infrastructure. If land is encumbered by a priority mortgage and an NDA is not secured, the renewable energy project is at risk of having to remove and relocate project infrastructure in the event of a foreclosure. Not only will the renewable energy project incur the expense of such relocation, but the project will be out of operation for the duration of the relocation work.
Rather than risk the possibility of having to relocate project infrastructure, renewable energy projects will often opt to change the design and layout of the project infrastructure prior to construction. All project infrastructure will be moved off the land encumbered by a priority mortgage. This forces the landowners, the bank’s customers, to miss out on significant rental income. Rather than lose out on participating in the renewable energy project, some landowners decide to refinance with another lender that will agree to sign an NDA.
For questions on negotiating NDAs with lenders, please contact a member of our Energy and Natural Resources Team.