Ground leases are an important - if rather uncommon - part of the realty financing industry. Because they normally cover big expensive residential or commercial properties like Rockefeller Center and The Empire State Building, to call 2, and last a long time (99 years and up to start) the likelihood of something unforeseen or unintentional occurring is high. This possibility increases dramatically if, as highlighted listed below, one or both of the lease celebrations' declare personal bankruptcy. Accordingly, property professionals must remember 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 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 interplay of personal bankruptcy and ground leases. This is especially so considering that the introduction of the "modern" United States Bankruptcy Act in 1898 and the substantial modifications 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 particular, Section 365 of the Code offers unique rules for the presumption or rejection of a ground lease-as well as its prospective sale and transfer by a debtor to a third celebration.

Knowing these rules is important to any real-estate professional. Here are the essentials:

A ground lease, often referred to as a "land lease," is a distinctive system for the advancement of commercial property, enjoyed by those tasked with developing the Rockefeller Center and the Empire State Building, for instance. The plan enables extended lease terms typically approximately 99 years (with the choice of renewal) for the landowner to maintain ownership of the land and gather lease while the developer, in theory, might improve upon the land to its benefit as well. Both traditionally and presently, this atypical relationship in the property space produces sufficient conversation weighing the structure's pros and cons, which naturally grow more complicated in the face of a ground lessor or ground lessee's insolvency.

According to many courts, including the Second Circuit, the threshold concern in examining the aforementioned possibilities regarding a ground lease in 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, presumption or rejection, only if it is a "real lease." [2] While exactly what makes up a "real lease" will vary state by state, it is widely accepted that "the proper query for a court in determining whether § 365 [] governs an arrangement fixing residential or commercial property rights is whether 'the parties meant to enforce responsibilities and confer rights considerably various from those occurring 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 economic substance of the lease is the primary decision of whether the lease is thought about "real" 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 further away those "economic realities" are from the regular landlord/tenant relationship, the less likely a lease will be considered a "true lease" for the purpose of Section 365. Id. For instance, 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 rate unassociated to the land's worth, it is less likely to be a .

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

However, exceptions apply. These greatly rely on a debtor's "sufficient assurances" to the staying celebrations to the contracts. Section 365 of the Code supplies that if there has actually 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) cures or supplies "sufficient assurance" that they will in reality "promptly treat [] such default"