A Funny Thing Happened to my Ground Lease In Bankruptcy Court
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Ground leases are an essential - if rather unusual - part of the property finance market. Because they normally cover large pricey 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 probability of something unexpected or unintended occurring is high. This likelihood increases considerably if, as highlighted listed below, one or both of the lease celebrations' apply for personal bankruptcy. Accordingly, property professionals ought to remember and make sure when getting in into any deal including a ground lease.

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Ground leases have been around since the Middle Ages and personal bankruptcy 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 developed on the interaction of insolvency and ground leases. This is particularly so since the arrival of the "modern-day" United States Bankruptcy Act in 1898 and the extensive 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 specific, Section 365 of the Code provides special guidelines for the presumption or rejection of a ground lease-as well as its prospective sale and transfer by a debtor to a third party.

Knowing these guidelines is vital to any real-estate specialist. Here are the essentials:

A ground lease, sometimes described as a "land lease," is a distinctive mechanism for the advancement of commercial property, enjoyed by those charged with developing the Rockefeller Center and the Empire State Building, for example. The plan enables extended lease terms often approximately 99 years (with the option of renewal) for the landowner to retain ownership of the land and collect rent while the developer, in theory, might surpass the land to its benefit as well. Both historically and currently, this atypical relationship in the property space produces adequate discussion weighing the structure's pros and cons, which naturally grow more made complex in the face of a ground lessor or ground lessee's insolvency.

According to a lot of courts, consisting of the Second Circuit, the threshold question in examining the aforementioned possibilities relating to a ground lease in bankruptcy 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, assumption or rejection, only if it is a "true 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 celebrations intended to enforce 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 determined 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 presumption that a deed and lease ... are what they claim to be,'" the economic compound of the lease is the main decision of whether the lease is thought about "real" or not, and in some states (like California), is the only proper 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 additional away those "economic truths" are from the regular landlord/tenant relationship, the less likely a lease will be considered 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 usage or solely to protect tax advantages, or for a purchase cost unrelated to the land's value, it is less likely to be a real lease.

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

However, exceptions use. These greatly rely on a debtor's "sufficient guarantees" to the staying parties to the agreements. Section 365 of the Code provides that if there has been a default on a debtor's unexpired lease, the DIP may not presume the previously mentioned lease unless, at the time of presumption, the DIP: (i) treatments or provides "adequate guarantee" that they will in truth "immediately cure [] such default"