A Funny Thing Happened to my Ground Lease In Bankruptcy Court (#1) · Issues · Valorie Skipper / riserealbali

A Funny Thing Happened to my Ground Lease In Bankruptcy Court

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Ground leases are an important - if somewhat unusual - part of the real estate finance industry. Because they normally cover big pricey 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 up to begin) the likelihood of something unanticipated or unintended happening is high. This likelihood increases dramatically if, as highlighted listed below, one or both of the lease celebrations' apply for bankruptcy. Accordingly, real estate experts must take note and take care when entering into any deal including a ground lease.

* * * *

Ground leases have actually been around since 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 lot of law has actually developed on the interaction of bankruptcy and ground leases. This is especially so given that the introduction of the "contemporary" United States Bankruptcy Act in 1898 and the comprehensive modifications 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 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 professional. Here are the essentials:

A ground lease, often referred to as a "land lease," is a distinct system for the advancement of industrial real estate, enjoyed by those entrusted with developing the Rockefeller Center and the Empire State Building, for example. The arrangement permits extended lease terms frequently approximately 99 years (with the option of renewal) for the landowner to maintain ownership of the land and collect lease while the designer, in theory, might surpass the land to its advantage as well. Both historically and presently, this irregular relationship in the property area produces ample discussion weighing the structure's benefits and drawbacks, which naturally grow more complicated in the face of a ground lessor or ground lessee's personal bankruptcy.

According to the majority of courts, consisting of the Second Circuit, the threshold question in examining the previously mentioned possibilities relating to a ground lease in insolvency court is whether the ground lease in question is a "true 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 just what makes up a "true lease" will differ state by state, it is extensively accepted that "the appropriate query for a court in figuring out whether § 365 [] governs an arrangement fixing residential or commercial property rights is whether 'the parties planned to impose commitments and confer rights significantly various 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 identified 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 presumption that a deed and lease ... are what they profess to be,'" the financial substance of the lease is the main decision of whether the lease is considered "true" or not, and in some states (like California), is the only appropriate element 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 "economic truths" are from the ordinary landlord/tenant relationship, the less most likely a lease will be considered a "true lease" for the function of Section 365. Id. For instance, if residential or commercial property was purchased by the lessor specifically for the lessee's use or entirely to protect tax benefits, or for a purchase price unrelated to the land's worth, it is less most likely to be a real lease.

If the ground lease remains in truth figured out to be a "true lease" (and subject to court approval), the designated trustee or debtor-in-possession in a personal bankruptcy case might then either presume or decline the lease as it would any other unexpired lease held by the debtor.

However, exceptions use. These heavily depend on a debtor's "appropriate assurances" 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 might not presume the abovementioned lease unless, at the time of assumption, the DIP: (i) remedies or supplies "appropriate guarantee" that they will in truth "immediately cure [] such default"; (ii) compensates or provides "adequate assurance" that they will "without delay compensate" parties to the agreements (aside from the debtor) for any budgeting loss emerging from such default; and (iii) offers "appropriate guarantee" of their future efficiency under that lease. See 11 U.S.C. § 365(b).

Unrelated to "sufficient guarantee" are the exceptions that further bar task or assumption of leases in case relevant law excuses a party from accepting performance from a party aside from the DIP and they opt to work out such right, see 11 U.S.C. § 365(c)( 1 ); the agreement's function is to create a loan or financing to the debtor, see 11 U.S.C. § 365(c)( 2 ); or the lease at concern is of nonresidential real residential or commercial property and has actually been ended under other (non-bankruptcy) law prior to the order for relief, see 11 U.S.C. § 365(c)( 3 ).

If, on the other hand, a DIP does not want to presume or appoint the lease, it can reject any existing unexpired arrangements held by the debtor. The most generally cited provision governing rejection of a lease affected by a personal bankruptcy case is Section 365(d)( 4 ), which provides:

"If the [DIP] does not assume or decline an unexpired lease of nonresidential genuine residential or commercial property under which the debtor is the lessee within [sixty] 60 days after the date of the order for relief ... then such lease is deemed rejected, and the [DIP] will right away surrender such nonresidential genuine residential or commercial property to the lessor." See 11 U.S.C. § 365(d)( 4 ). [3]
Courts have actually just recently held that this "has the exact same effect as a contract breach outside bankruptcy," providing the counterparty a claim for damages, "while leaving intact the rights the counterparty has received under the contract." Mission Product Holdings, Inc. v. Tempnology, LLC, 587 U.S. ___ (2019 ). While this "breach-by-rejection" (a term coined by the courts) will typically result in the contract's termination, it is necessary to note that rejection alone will not terminate the duties enforced by the lease.

Real residential or commercial property is idiosyncratic, and likewise, property funding choices are countless and change daily as the marketplace changes. Ground leases are all unique.

As can easily be acknowledged from the summary above, handling a specific ground lease in the context of a Chapter 11 personal bankruptcy can be legally and factually made complex. Therefore, when preparing or amending ground leases, property owners, leasehold financiers, and mortgagees must consult experienced legal counsel and business property experts who understand and can discuss what can take place to a particular lease in a Chapter 11 case.

To find out more, contact Christopher F. Graham, Partner at grahamc@whiteandwilliams.com or 212.714.3066; or Morgan A. Goldstein, Associate at goldsteinm@whiteandwilliams.com or 475.977.8302. Or you might connect to another member of our Financial Restructuring and Bankruptcy Practice.

[1] "Apart from particular special arrangements, the Bankruptcy Code usually leaves the determination of residential or commercial property rights in the possessions of an insolvent's estate to state law." See Butner v. United States, 440 U.S. 48 (1979 ).

[2] If the lease examined is not a "real lease," it will be considered a "finance lease," in which the trustee or debtor-in-possession ("DIP") owns the land and the property owner is treated as the loan provider.

[3] Generally, "... a debtor in ownership shall have all the rights ... and powers and shall perform all the functions and tasks ... of a trustee serving in a case under this chapter." See 11 U.S. Code § 1107(a).
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[watsonproperty.co.nz](http://www.watsonproperty.co.nz/latest_news.php?news_id=58&oscsid=9408e2ac4bb5ff2b83b4c6aeff567253) Ground leases are an important - if somewhat unusual - part of the real estate finance industry. Because they normally cover big pricey 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 up to begin) the likelihood of something unanticipated or unintended happening is high. This [likelihood](https://topdom.rs) increases [dramatically](https://www.redmarkrealty.com) if, as [highlighted listed](https://inmobiliariasantander.com.mx) below, one or both of the lease celebrations' apply for bankruptcy. Accordingly, real estate experts must take note and take care when entering into any [deal including](https://sherwoodhomesomaha.com) a ground lease. 
 * * * * 
 Ground leases have actually been around since 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 lot of law has actually [developed](https://jsons.ae) on the interaction of bankruptcy and ground leases. This is especially so given that the [introduction](https://inmocosta.com) of the "contemporary" United States Bankruptcy Act in 1898 and the comprehensive modifications 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 offers special guidelines for the assumption or rejection of a ground lease-as well as its prospective sale and [transfer](https://pl-property.com) by a debtor to a 3rd party. 
 Knowing these rules is vital to any real-estate professional. Here are the essentials: 
 A ground lease, often referred to as a "land lease," is a distinct system for the advancement of industrial real estate, enjoyed by those entrusted with developing the Rockefeller Center and the Empire State Building, for example. The arrangement permits extended lease terms frequently approximately 99 years (with the option of renewal) for the landowner to maintain ownership of the land and collect lease while the designer, in theory, might surpass the land to its advantage as well. Both historically and presently, this irregular relationship in the property area produces ample discussion weighing the structure's benefits and drawbacks, which naturally grow more complicated in the face of a ground lessor or ground lessee's personal bankruptcy. 
 According to the majority of courts, consisting of the Second Circuit, the threshold question in examining the previously mentioned possibilities relating to a [ground lease](https://millerltr.com) in insolvency court is whether the ground lease in question is a "true 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 just what makes up a "true lease" will differ state by state, it is extensively accepted that "the appropriate query for a court in figuring out whether § 365 [] governs an arrangement fixing residential or commercial property rights is whether 'the parties planned to impose commitments and confer rights significantly various 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 identified 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 presumption that a deed and lease ... are what they profess to be,'" the financial substance of the lease is the main decision of whether the lease is considered "true" or not, and in some states (like California), is the only appropriate element 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 "economic truths" are from the [ordinary](https://basha-vara.com) landlord/tenant relationship, the less most likely a lease will be considered a "true lease" for the function of Section 365. Id. For instance, if residential or commercial property was purchased by the lessor specifically for the lessee's use or entirely to protect tax benefits, or for a purchase price unrelated to the land's worth, it is less most likely to be a real lease. 
 If the ground lease remains in truth figured out to be a "true lease" (and subject to court approval), the designated trustee or debtor-in-possession in a personal bankruptcy case might then either presume or decline the lease as it would any other unexpired lease held by the debtor. 
 However, exceptions use. These heavily depend on a debtor's "appropriate assurances" 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 might not presume the abovementioned lease unless, at the time of assumption, the DIP: (i) remedies or [supplies](https://proflexuae.com) "appropriate guarantee" that they will in truth "immediately cure [] such default"; (ii) compensates or provides "adequate assurance" that they will "without delay compensate" parties to the agreements (aside from the debtor) for any budgeting loss emerging from such default; and (iii) offers "appropriate guarantee" of their future efficiency under that lease. See 11 U.S.C. § 365(b). 
 Unrelated to "sufficient guarantee" are the exceptions that further bar task or assumption of leases in case relevant law excuses a party from accepting performance from a party aside from the DIP and they opt to work out such right, see 11 U.S.C. § 365(c)( 1 ); the agreement's function is to create a loan or financing to the debtor, see 11 U.S.C. § 365(c)( 2 ); or the lease at [concern](https://tsiligirisrealestate.gr) is of nonresidential real residential or commercial property and has actually been ended under other (non-bankruptcy) law prior to the order for relief, see 11 U.S.C. § 365(c)( 3 ). 
 If, on the other hand, a DIP does not want to presume or appoint the lease, it can reject any existing unexpired arrangements held by the debtor. The most generally cited provision governing rejection of a lease affected by a personal bankruptcy case is Section 365(d)( 4 ), which provides: 
 "If the [DIP] does not assume or decline an unexpired lease of nonresidential genuine residential or commercial property under which the debtor is the lessee within [sixty] 60 days after the date of the order for relief ... then such lease is deemed rejected, and the [DIP] will right away surrender such nonresidential genuine residential or commercial property to the lessor." See 11 U.S.C. § 365(d)( 4 ). [3]
 Courts have actually just recently held that this "has the exact same effect as a contract breach outside bankruptcy," providing the counterparty a claim for damages, "while leaving intact the rights the counterparty has received under the contract." Mission Product Holdings, Inc. v. Tempnology, LLC, 587 U.S. ___ (2019 ). While this "breach-by-rejection" (a term coined by the courts) will typically result in the contract's termination, it is necessary to note that rejection alone will not terminate the duties enforced by the lease. 
 Real residential or commercial property is idiosyncratic, and likewise, property funding choices are countless and change daily as the marketplace changes. Ground leases are all unique. 
 As can easily be acknowledged from the summary above, handling a specific ground lease in the [context](https://www.masercondosales.com) of a Chapter 11 personal bankruptcy can be legally and factually made complex. Therefore, when preparing or amending ground leases, property owners, leasehold financiers, and mortgagees must consult experienced legal counsel and business property experts who understand and can discuss what can take place to a particular lease in a Chapter 11 case. 
 To find out more, contact Christopher F. Graham, Partner at grahamc@whiteandwilliams.com or 212.714.3066; or Morgan A. Goldstein, Associate at goldsteinm@whiteandwilliams.com or 475.977.8302. Or you might connect to another member of our Financial Restructuring and [Bankruptcy Practice](https://starzijproperties.ng). 
 [1] "Apart from particular special arrangements, the Bankruptcy Code usually leaves the determination of residential or commercial property rights in the possessions of an insolvent's estate to state law." See Butner v. United States, 440 U.S. 48 (1979 ). 
 [2] If the lease examined is not a "real lease," it will be considered a "finance lease," in which the trustee or debtor-in-possession ("DIP") owns the land and the property owner is treated as the loan provider. 
 [3] Generally, "... a debtor in ownership shall have all the rights ... and powers and shall perform all the functions and tasks ... of a trustee serving in a case under this chapter." See 11 U.S. Code § 1107(a). [virtualrealty.co.nz](http://www.virtualrealty.co.nz/tools.html)