Ground leases are a crucial - if somewhat uncommon - part of the realty financing industry. Because they normally cover large or commercial properties like Rockefeller Center and The Empire State Building, to name 2, and last a long period of time (99 years and approximately begin) the likelihood of something unexpected or unexpected occurring is high. This likelihood increases considerably if, as highlighted listed below, one or both of the lease celebrations' declare personal bankruptcy. Accordingly, property professionals should keep in mind and make sure when participating in any deal involving a ground lease.

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Ground leases have been around given that the Middle Ages and insolvency laws have actually existed since 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 personal bankruptcy and ground leases. This is especially so since the arrival of the "modern" United States Bankruptcy Act in 1898 and the comprehensive changes 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 specific, Section 365 of the Code supplies unique guidelines for the presumption or rejection of a ground lease-as well as its potential sale and transfer by a debtor to a 3rd party.

Knowing these guidelines is crucial to any real-estate expert. Here are the fundamentals:

A ground lease, in some cases referred to as a "land lease," is a distinct system for the advancement of business genuine estate, delighted in by those charged with developing the Rockefeller Center and the Empire State Building, for instance. The plan permits prolonged lease terms typically as much as 99 years (with the choice of renewal) for the landowner to keep ownership of the land and collect rent while the designer, in theory, might enhance upon the land to its advantage as well. Both historically and currently, this irregular relationship in the property area produces ample 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 the majority of courts, including the Second Circuit, the threshold concern in evaluating the aforementioned possibilities regarding a ground lease in personal bankruptcy court is whether the ground lease in concern is a "real lease" for the function of Section 365. Section 365 uses, making the ground lease eligible for, assumption or rejection, just if it is a "real lease." [2] While just what makes up a "real lease" will differ state by state, it is commonly accepted that "the correct inquiry for a court in determining whether § 365 [] governs an agreement repairing residential or commercial property rights is whether 'the parties planned to impose commitments and give rights significantly various from those developing 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 parties 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 purport to be,'" the economic substance 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 appropriate factor 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 further away those "economic realities" are from the regular landlord/tenant relationship, the less most likely a lease will be considered a "true lease" for the purpose of Section 365. Id. For instance, if residential or commercial property was bought by the lessor specifically for the lessee's use or entirely to secure tax advantages, or for a purchase rate unassociated to the land's worth, it is less likely to be a real lease.

If the ground lease remains in truth determined to be a "real lease" (and based on court approval), the appointed trustee or debtor-in-possession in a personal bankruptcy case may then either presume or turn down the lease as it would any other unexpired lease held by the debtor.

However, exceptions apply. These greatly count on a debtor's "sufficient guarantees" to the staying parties to the arrangements. 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 presumption, the DIP: (i) treatments or offers "appropriate guarantee" that they will in truth "promptly cure [] such default"