Ground leases are an important - if rather unusual - part of the property financing industry. Because they usually cover large costly residential or commercial properties like Rockefeller Center and The Empire State Building, to name 2, and last a very long time (99 years and approximately begin) the likelihood of something unexpected or unintentional occurring is high. This likelihood increases dramatically if, as highlighted below, one or both of the lease parties' declare bankruptcy. Accordingly, realty specialists ought to take note and make sure when getting in into any deal involving a ground lease.

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Ground leases have been around because the Middle Ages and insolvency laws have existed considering that at least Roman Times. Given this long history, it is not a surprise that a great deal of law has actually established on the interaction of personal bankruptcy and ground leases. This is especially so given that the development of the "modern" United States Bankruptcy Act in 1898 and the substantial changes to title 11 of the United States Code executed 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 assumption or rejection of a ground lease-as well as its prospective sale and transfer by a debtor to a 3rd party.

Knowing these rules is vital to any real-estate expert. Here are the fundamentals:
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A ground lease, in some cases described as a "land lease," is an unique system for the advancement of industrial realty, delighted in by those entrusted with establishing the Rockefeller Center and the Empire State Building, for instance. The plan permits for extended lease terms often approximately 99 years (with the choice of renewal) for the landowner to retain ownership of the land and collect lease while the developer, in theory, may surpass the land to its benefit also. Both historically and currently, this irregular relationship in the realty space produces sufficient discussion weighing the structure's pros and cons, which naturally grow more complicated in the face of a ground lessor or ground lessee's bankruptcy.

According to most courts, consisting of the Second Circuit, the threshold concern in evaluating the abovementioned possibilities regarding a ground lease in personal bankruptcy court is whether the ground lease in question is a "real lease" for the function of Section 365. Section 365 applies, making the ground lease eligible for, assumption or rejection, just if it is a "real lease." [2] While exactly what constitutes a "true lease" will differ state by state, it is extensively accepted that "the appropriate inquiry for a court in identifying whether § 365 [] governs a contract fixing residential or commercial property rights is whether 'the parties meant to enforce obligations and give rights considerably different from those arising from the common landlord/tenant relationship.'" Intl. Trade Ad. v. Rensselaer Polytechnic, 936 F. 2d 744 (2d Cir. 1991). This "intent" is determined 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 profess to be,'" the economic compound of the lease is the primary decision of whether the lease is thought about "real" 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 "economic truths" are from the regular landlord/tenant relationship, the less most likely a lease will be thought about a "real lease" for the function of Section 365. Id. For instance, if residential or commercial property was acquired by the lessor particularly for the lessee's use or entirely to secure tax benefits, or for a purchase price unrelated to the land's worth, it is less likely to be a true lease.

If the ground lease remains in truth figured out to be a "true lease" (and based on court approval), the designated trustee or debtor-in-possession in a bankruptcy 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 rely on a debtor's "appropriate assurances" to the staying celebrations to the agreements. Section 365 of the Code supplies that if there has been a default on a debtor's unexpired lease, the DIP might not presume the previously mentioned lease unless, at the time of presumption, the DIP: (i) remedies or supplies "sufficient assurance" that they will in reality "promptly treat [] such default"