Ground leases are a crucial - if rather unusual - part of the realty finance market. Because they typically cover large 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 as much as begin) the probability of something unforeseen or unintended taking place is high. This likelihood increases significantly if, as highlighted below, one or both of the lease parties' files for personal bankruptcy. Accordingly, property experts need to bear in mind and take care when participating in any transaction involving a ground lease.

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Ground leases have been around because the Middle Ages and bankruptcy laws have actually existed because at least Roman Times. Given this long history, it is not a surprise that a great deal of law has established on the interaction of personal bankruptcy and ground leases. This is especially so because the introduction of the "modern" United States Bankruptcy Act in 1898 and the extensive 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 provides special guidelines for the assumption or rejection of a ground lease-as well as its potential sale and transfer by a debtor to a third celebration.

Knowing these rules is critical to any real-estate expert. Here are the fundamentals:

A ground lease, often described as a "land lease," is an unique system for the advancement of business realty, delighted in by those charged with establishing the Rockefeller Center and the Empire State Building, for instance. The arrangement enables prolonged lease terms typically up to 99 years (with the alternative of renewal) for the landowner to maintain ownership of the land and gather rent while the developer, in theory, may enhance upon the land to its advantage too. Both traditionally and presently, this atypical relationship in the property space generates ample discussion weighing the structure's benefits and drawbacks, which inherently grow more complicated 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 concern in evaluating the previously mentioned possibilities relating to a ground lease in insolvency court is whether the ground lease in concern is a "real lease" for the purpose 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 "true lease" will differ state by state, it is extensively accepted that "the correct questions for a court in figuring out whether § 365 [] governs an arrangement fixing residential or commercial property rights is whether 'the parties intended to enforce obligations and provide rights significantly different from those emerging from the regular 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 presumption that a deed and lease ... are what they claim to be,'" the financial compound of the lease is the main determination of whether the lease is thought about "true" or not, and in some states (like California), is the only proper 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 additional away those "financial realities" are from the ordinary landlord/tenant relationship, the less most likely a lease will be thought about a "real lease" for the purpose of Section 365. Id. For example, if residential or commercial property was purchased by the lessor particularly for the lessee's usage or entirely to secure tax advantages, or for a purchase cost unrelated to the land's value, it is less most likely to be a true lease.

If the ground lease remains in fact determined to be a "true lease" (and subject to court approval), the designated trustee or debtor-in-possession in an insolvency case may then either presume or decline the lease as it would any other unexpired lease held by the debtor.

However, exceptions apply. These heavily count on a debtor's "sufficient guarantees" 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 assume the abovementioned lease unless, at the time of assumption, the DIP: (i) remedies or provides "sufficient assurance" that they will in fact "promptly treat [] such default"