HOSPITALITY INDUSTRY PRACTICE GROUP

STROOCK
SPECIAL BULLETIN
Hotel Subordination, Non-Disturbance
and Attornment Agreements:
The Boilerplate of the Boom Years
Becomes Significant in the Great Recession
Winter 2010

Strategies for dealing with distressed hotel assets

do not fit neatly into the conventional wisdom of
how to work out a distressed real estate loan. Hotel
workouts are complicated by the fact that there is a
third party to the transaction, typically a branded
management company. That branded management
company operates the hotel pursuant to a series of
complex documents, including the hotel management agreement and a subordination, non-disturbance and attornment agreement (SNDA). The
focus of this Special Bulletin is on the SNDA and its
impact on the restructuring of troubled hotel assets.

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

become clear during the most recent downturn in

the lodging market. As the economy has declined
and owners and lenders turn their attention to a
review of SNDAs, many are surprised by the seeming lack of flexibility that they have with respect to
certain hotel assets. When a lender perceives that
part or all of the problem with a distressed asset
results from the management of an operator who it
wishes to terminate, the lender must evaluate
express SNDA terms that at times, on their face,
assure a brand manager long-term management.
On the other hand, managers must evaluate the
actual viability of SNDAs as the recession
increasingly propels hotel assets into foreclosure
and bankruptcy.
Recently, there has been a substantial amount of
confusion and misinformation about the impact of
SNDAs. The confusion revolves around the issue
of whether or not an SNDA is essentially a guarantee of a brand managers long-term management,
regardless of foreclosure or bankruptcy.

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hospitality industry practice group special bulletin

require the lender, in the event of the termination

of a management agreement in bankruptcy as an
executory contract, to execute a new management
agreement directly with the manager. The new
management agreement with the lender must be on
substantially the same terms as the terminated management agreement. At the same time, some relatively recent subordination and non-disturbance
agreements lack attornment. In other words, in
those agreements, the lenders have agreed to allow
managers to operate undisturbed post-foreclosure,
while essentially obtaining no attornment rights.
Rather, these agreements allow the manager, for
example, to elect to terminate a management agreement, if in its unilateral reasonable discretion, the
reputation of the brand manager is adversely
affected by the owners default. In those circumstances, if a distressed property might benefit from a
flag and the manager refuses to operate the hotel
post-foreclosure, the lack of an attornment agreement limits the lenders options. As a result, a
lender must deal with a managers exit from an asset
at a potentially difficult time.

The purpose of this Stroock Special Bulletin is to

explore the respective leverage that owners, managers and lenders have in a distressed hotel situation
based upon the terms of the applicable SNDA. We
begin with a review of the basics of SNDAs and the
controlling law that emerged from the downturn of
the 1990s, followed by an assessment of future issues
and options.

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).

The Effectiveness of Challenges to SNDAs

During the Last Downturn

From the hotel lenders perspective, the ideal

subordination agreement provides that the management agreement is expressly subordinate to any
mortgage, and that upon foreclosure (or deed in
lieu), the management agreement will simply
terminate. While a number of non-branded management companies have been willing to enter into
this ideal agreement, branded managers have
typically resisted.
SNDAs with brand managers have become
more stringent in their pro-manager non-disturbance requirements, especially in the CMBS
lending market. Among other protections, some
branded managers have attempted to use the SNDA
to obtain bankruptcy protection. Those managers

In this economic downturn, lenders and owners

involved in restructuring hotel assets are increasingly compelled to determine whether they have any
leverage to change a brand or whether an SNDA is
an absolute bar. Well established precedent from
the 1990s provides guidance.
Is an SNDA an absolute bar to reflagging a
distressed hotel property? Assume the following set
of facts. A lender forecloses on a hotel and enters
into a consent judgment in federal court that
provides that its subsidiary will take title to the
hotel. Shortly before obtaining title, the lender
sends a notice of termination to the manager.
The manager then sues the parent lender and the
2

hospitality industry practice group special bulletin

Government Guarantee Fund of the Republic of Finland

v. Hyatt noted, relevant hotel transactional agreements
do not create non-terminable relationships, even if the
agreements state that they do.3 In other words, the nondisturbance provisions of an SNDA cannot trump the
fact that an owner, pursuant to the law of agency, can
terminate a management agreement.
Government Guarantee Funds sweeping endorsement of the application of agency principles to
override an SNDA established the legal benchmark
for the evaluation of SNDAs in the context of termination issues. Other cases from the 1990s challenging non-disturbance provisions proceeded on a
more limited basis, focusing on interpretations of
the contractual language rather than taking the position that the managers agency duties arising outside
of the terms of the management contract controlled.
For example, in Marriott Intl, Inc. v. Mitsui Trust
& Banking Co., Ltd.,4 the Court agreed with the
foreclosing hotel lender that a third party
purchaser would not be bound by the management
agreement. There, the relevant non-disturbance
clause provided that:

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

If a mortgagee comes into possession of the

Hotel by virtue of a foreclosure on its
Mortgage or an assignment of the Ground
Lease in lieu of foreclosure, the
Management Company shall not be disturbed in its rights to peaceably occupy the
Hotel in accordance with the Management
Agreement.

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

The Court adopted Mitsuis interpretation that it

was required to permit Marriott to remain as
manager only as long as Mitsui possessed the hotel
but not if it sold the asset to a third party.
The above precedent demonstrates the need for
a careful review of both agency law and specific
contract terms in interpreting the impact of an

hospitality industry practice group special bulletin

significant. Absent such an assessment, an owner or

a foreclosing lender in a down cycle may be left
with a property that is difficult to rebrand or to sell.
However, difficulty should not be confused with
impossibility when evaluating options. As the
actions of the foreclosing lender in Government
Guarantee Fund established, non-disturbance provisions are not an absolute bar to the termination of a
management agreement.

SNDA. To do otherwise will likely result in an

owner and/or a lender failing to assess their options
accurately in a restructuring.

Looking Ahead: Issues and Options

As the pace of hotel loan defaults has accelerated,5
so has the debate in the industry over whether the
unprecedented events of the past year will force a
lasting reevaluation of the SNDA. During the
boom in the hotel market from the early part of the
decade until 2007, some SNDAs were executed
with no more forethought than one would expect
to be given to routine boilerplate language.
Presumably, recent events will encourage a more
detailed analysis of these documents. The issue of
when to negotiate the SNDA in relation to the loan
documents and the management agreement is
likely to be revisited. Often relegated to last place
after the loan documents and management agreement are finalized, recent events underscore the
need to negotiate the SNDA at an earlier point in
the transaction.
A more fundamental issue facing the marketplace for hotel deals is whether SNDAs will be
negotiated and executed at all. Anecdotally, a number of hotel lenders have indicated that they are
reevaluating the use of SNDAs. For those owners
and lenders who entered into SNDAs, not as an
afterthought, but based upon a strategic calculation
that a long-term brand was of a greater benefit than
flexibility, the economy has forced a recalculation.
Before agreeing to non-disturbance, lenders and
owners must understand the precise risks and benefits in a proposed management agreement. If, for
example, a management agreement lacks realistic
performance standards, territorial non-competition
provisions and exit strategies, the impact of a longterm brand affiliation on the assets value may be

By Cecelia L. Fanelli (cfanelli@stroock.com,

212.806.6158), a Partner in the Hospitality
Industry Practice Group of Stroock & Stroock &
Lavan LLP, which Ms. Fanelli heads.
The Group represents industry leaders from
across the hospitality spectrum from owners,
investors, managers and lenders to franchisors
and franchisees. Ms. Fanelli has extensive experience in representing both domestic and international lenders, owners and managers in hotel
workouts, foreclosures, receiverships, bankruptcies and arbitrations.
_______________________

1.

The excerpt of this SNDA appears in Govt Guarantee

Fund of the Republic of Finland v. Hyatt Corp., 960 F.Supp
931, 939 (D.C.V.I. 1997). The author of this Stroock
Special Bulletin represented the prevailing lender in its challenge to the SNDA.

2.

Govt Guarantee Fund of the Republic of Finland v. Hyatt

Corp., 95 F.3d 291, 307 (3d Cir. 1997).

3.

See footnote 2 above.

4.

Marriott Intl, Inc. v. Mitsui Trust & Banking Co., Ltd, 13

F.Supp.2d 1059 (D. Hawaii 1998).

5.

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.

hospitality industry practice group special bulletin

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