Ground leases are a crucial - if somewhat uncommon - part of the property financing market. Because they generally cover large expensive 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 up to begin) the possibility of something unexpected or unexpected occurring is high. This probability increases significantly if, as highlighted below, one or both of the lease parties' apply for bankruptcy. Accordingly, realty professionals should take note 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 existed given that a minimum of Roman Times. Given this long history, it is not a surprise that a lot of law has established on the interplay of personal bankruptcy and ground leases. This is particularly so given that the arrival of the "contemporary" United States Bankruptcy Act in 1898 and the substantial modifications 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 specific, Section 365 of the Code provides unique rules for the assumption or rejection of a ground lease-as well as its possible sale and transfer by a debtor to a 3rd party.

Knowing these guidelines is critical to any real-estate specialist. Here are the basics:

A ground lease, in some cases referred to as a "land lease," is an unique mechanism for the advancement of business real estate, taken pleasure in by those tasked with developing the Rockefeller Center and the Empire State Building, for instance. The plan permits prolonged lease terms frequently approximately 99 years (with the alternative of renewal) for the landowner to retain ownership of the land and collect lease while the developer, in theory, might enhance upon the land to its advantage also. Both traditionally and presently, this irregular relationship in the realty area creates adequate discussion weighing the structure's benefits and drawbacks, which naturally grow more complicated in the face of a ground lessor or ground lessee's insolvency.

According to the majority of courts, including the Second Circuit, the limit concern in examining the abovementioned possibilities concerning a ground lease in bankruptcy court is whether the ground lease in concern is a "true lease" for the function of Section 365. Section 365 uses, making the ground lease eligible for, assumption or rejection, only if it is a "real lease." [2] While what exactly makes up a "real lease" will differ state by state, it is extensively accepted that "the correct query for a court in identifying whether § 365 [] governs an arrangement repairing residential or commercial property rights is whether 'the celebrations planned to enforce commitments and give rights substantially various from those occurring from the common 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 profess 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 proper element 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 further away those "financial realities" are from the normal landlord/tenant relationship, the less 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 protect tax advantages, or for a purchase cost unrelated to the land's value, it is less most likely to be a real lease.

If the ground lease remains in reality figured out to be a "true lease" (and subject to court approval), the selected trustee or debtor-in-possession in an insolvency case may then either assume or reject the lease as it would any other unexpired lease held by the debtor.

However, exceptions apply. These greatly depend on a debtor's "sufficient assurances" to the remaining parties to the agreements. Section 365 of the Code offers that if there has actually been a default on a debtor's unexpired lease, the DIP might not presume the aforementioned lease unless, at the time of assumption, the DIP: (i) cures or provides "sufficient assurance" that they will in truth "promptly treat [] such default"