Ground leases are an important - if rather unusual - part of the property financing market. Because they normally cover big costly residential or commercial properties like Rockefeller Center and The Empire State Building, to call 2, and last a long period of time (99 years and approximately start) the possibility of something unanticipated or unexpected happening is high. This likelihood increases considerably if, as highlighted below, one or both of the lease parties' apply for bankruptcy. Accordingly, realty experts should bear in mind and take care when getting in into any deal involving a ground lease.
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Ground leases have actually been around given that the Middle Ages and personal bankruptcy laws have actually existed since a minimum of Roman Times. Given this long history, it is not a surprise that a great deal of law has developed on the interaction of bankruptcy and ground leases. This is particularly so considering that the advent of the "modern" United States Bankruptcy Act in 1898 and the comprehensive changes to title 11 of the United States Code implemented to it in 1978, when Chapter 11 of the United States Bankruptcy Code (the "Code") was enacted. [1] In particular, Section 365 of the Code offers special guidelines for the presumption or rejection of a ground lease-as well as its potential sale and transfer by a debtor to a 3rd celebration.

Knowing these rules is crucial to any real-estate expert. Here are the essentials:

A ground lease, in some cases referred to as a "land lease," is a distinct system for the development of business realty, delighted in by those entrusted with developing the Rockefeller Center and the Empire State Building, for instance. The arrangement permits extended lease terms frequently up to 99 years (with the choice of renewal) for the landowner to keep ownership of the land and collect lease while the developer, in theory, might surpass the land to its advantage as well. Both historically and presently, this irregular relationship in the realty space creates sufficient discussion weighing the structure's advantages and disadvantages, which naturally grow more made complex in the face of a ground lessor or ground lessee's insolvency.

According to the majority of courts, consisting of the Second Circuit, the threshold concern in examining the abovementioned possibilities regarding a ground lease in bankruptcy court is whether the ground lease in question is a "true lease" for the purpose of Section 365. Section 365 applies, making the ground lease eligible for, presumption or rejection, only if it is a "true lease." [2] While exactly what makes up a "true lease" will vary state by state, it is commonly accepted that "the correct questions for a court in identifying whether § 365 [] governs an arrangement repairing residential or commercial property rights is whether 'the parties planned to enforce responsibilities and give rights substantially different from those emerging from the normal landlord/tenant relationship.'" Intl. Trade Ad. v. Rensselaer Polytechnic, 936 F. 2d 744 (2d Cir. 1991). This "intent" is figured out based upon that of the celebrations at the time of the lease's execution. In re Big Buck Brewery Steakhouse, Bkrptcy No. 04-56761-SWR, Case No. 05-CV-74866 (E.D. Mich. Mar. 9, 2006). Despite there being "a 'strong anticipation that a deed and lease ... are what they claim to be,'" the financial compound of the lease is the primary decision of whether the lease is considered "real" or not, and in some states (like California), is the only suitable factor to weigh. Liona Corp., N.V. v. PCH Associates (In re PCH Associates), 804 F. 2d 193 (2d Cir. 1986) mentioning Fox v. Peck Iron & Metal Co., 25 Bankr. 674, 688 (Bankr. S.D. Cal. 1982). Generally, the more away those "financial truths" are from the regular landlord/tenant relationship, the less likely a lease will be thought about a "real lease" for the function of Section 365. Id. For example, if residential or commercial property was acquired by the lessor specifically for the lessee's use or exclusively to protect tax benefits, or for a purchase cost unrelated to the land's worth, it is less most likely to be a true lease.

If the ground lease is in fact determined to be a "real lease" (and based on court approval), the selected trustee or debtor-in-possession in an insolvency case may then either assume or turn down the lease as it would any other unexpired lease held by the debtor.

However, exceptions use. These greatly depend on a debtor's "appropriate guarantees" to the remaining parties to the contracts. Section 365 of the Code offers that if there has been a default on a debtor's unexpired lease, the DIP might not presume the abovementioned lease unless, at the time of presumption, the DIP: (i) cures or supplies "appropriate assurance" that they will in reality "without delay cure [] such default"