Ground leases are an important - if rather uncommon - part of the realty finance market. Because they generally 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 start) the possibility of something unanticipated or unintentional occurring is high. This probability increases drastically if, as highlighted listed below, one or both of the lease parties' apply for bankruptcy. Accordingly, real estate specialists should take note and take care when participating in any deal including a ground lease.

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have actually been around given that the Middle Ages and bankruptcy laws have existed considering that at least Roman Times. Given this long history, it is not a surprise that a lot of law has actually established on the interaction of bankruptcy and ground leases. This is particularly so considering that the advent of the "modern-day" United States Bankruptcy Act in 1898 and the substantial 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 supplies unique rules for the presumption or rejection of a ground lease-as well as its potential sale and transfer by a debtor to a 3rd party.

Knowing these rules is crucial to any real-estate specialist. Here are the essentials:

A ground lease, in some cases referred to as a "land lease," is a distinctive system for the development of business realty, taken pleasure in by those charged with developing the Rockefeller Center and the Empire State Building, for example. The plan permits prolonged lease terms typically as much as 99 years (with the option of renewal) for the landowner to retain ownership of the land and collect lease while the designer, in theory, may enhance upon the land to its benefit also. Both historically and presently, this irregular relationship in the real estate space generates sufficient discussion weighing the structure's pros and cons, which inherently grow more made complex in the face of a ground lessor or ground lessee's bankruptcy.

According to the majority of courts, consisting of the Second Circuit, the threshold question in evaluating the previously mentioned possibilities relating to a ground lease in insolvency court is whether the ground lease in question is a "real lease" for the purpose of Section 365. Section 365 uses, making the ground lease eligible for, presumption or rejection, only if it is a "true lease." [2] While what precisely constitutes a "real lease" will vary state by state, it is extensively accepted that "the proper query for a court in figuring out whether § 365 [] governs an arrangement fixing residential or commercial property rights is whether 'the celebrations planned to impose responsibilities and confer rights considerably various from those developing from the normal 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 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 compound 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 factor 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 realities" are from the regular landlord/tenant relationship, the less likely a lease will be thought about a "real lease" for the purpose of Section 365. Id. For instance, if residential or commercial property was bought by the lessor particularly for the lessee's use or solely to secure tax benefits, or for a purchase cost unrelated to the land's worth, it is less most likely to be a true lease.

If the ground lease is in reality identified to be a "real lease" (and based on court approval), the designated trustee or debtor-in-possession in a personal bankruptcy case may then either assume or turn down the lease as it would any other unexpired lease held by the debtor.

However, exceptions apply. These heavily count on a debtor's "appropriate assurances" to the staying parties to the contracts. 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 previously mentioned lease unless, at the time of presumption, the DIP: (i) remedies or offers "appropriate guarantee" that they will in fact "quickly treat [] such default"