Ground leases are an important - if somewhat unusual - part of the realty finance industry. Because they generally cover large costly residential or commercial properties like Rockefeller Center and The Empire State Building, to name 2, and last a long period of time (99 years and as much as begin) the likelihood of something unforeseen or unexpected taking place is high. This probability increases dramatically if, as highlighted below, one or both of the lease celebrations' files for personal bankruptcy. Accordingly, realty experts need to bear in mind and make sure when entering into any deal including a ground lease.

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Ground leases have been around considering that the Middle Ages and bankruptcy laws have actually existed given that at least Roman Times. Given this long history, it is not a surprise that a great deal of law has actually developed on the interaction of insolvency and ground leases. This is especially so considering that the development of the "modern-day" United States Bankruptcy Act in 1898 and the substantial modifications to title 11 of the United States Code carried out 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 provides unique guidelines for the presumption or rejection of a ground lease-as well as its possible sale and transfer by a debtor to a 3rd party.

Knowing these rules is critical to any real-estate specialist. Here are the essentials:

A ground lease, sometimes described as a "land lease," is a distinct mechanism for the development of business realty, delighted in by those tasked with establishing the Rockefeller Center and the Empire State Building, for example. The arrangement permits extended lease terms often as much as 99 years (with the option of renewal) for the landowner to retain ownership of the land and gather rent while the developer, in theory, may surpass the land to its advantage also. Both historically and currently, this atypical relationship in the genuine estate area creates sufficient discussion weighing the structure's pros and cons, which inherently grow more complicated in the face of a ground lessor or ground lessee's personal bankruptcy.
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According to many courts, including the Second Circuit, the threshold concern in analyzing the abovementioned possibilities regarding a ground lease in insolvency court is whether the ground lease in question is a "real lease" for the purpose of Section 365. Section 365 applies, making the ground lease eligible for, presumption or rejection, just if it is a "real lease." [2] While just what constitutes a "real lease" will vary state by state, it is commonly accepted that "the correct inquiry for a court in identifying whether § 365 [] governs an agreement fixing residential or commercial property rights is whether 'the parties meant to impose obligations and confer rights substantially different from those developing from the ordinary 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 economic substance of the lease is the main decision of whether the lease is thought about "true" or not, and in some states (like California), is the only suitable aspect to weigh. Liona Corp., N.V. v. PCH Associates (In re PCH Associates), 804 F. 2d 193 (2d Cir. 1986) pointing out 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 ordinary landlord/tenant relationship, the less likely a lease will be considered a "real lease" for the purpose of Section 365. Id. For instance, if residential or commercial property was purchased by the lessor particularly for the lessee's use or exclusively to secure tax benefits, or for a purchase cost unassociated to the land's worth, it is less most likely to be a real lease.

If the ground lease is in reality figured out to be a "true lease" (and subject to court approval), the selected trustee or debtor-in-possession in a bankruptcy case might then either assume or turn down the lease as it would any other unexpired lease held by the debtor.

However, exceptions apply. These greatly rely on a debtor's "adequate assurances" to the remaining celebrations to the agreements. Section 365 of the Code provides that if there has been a default on a debtor's unexpired lease, the DIP might not assume the abovementioned lease unless, at the time of assumption, the DIP: (i) cures or provides "adequate guarantee" that they will in reality "immediately treat [] such default"