July 2015
Issue #42



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Hello,

Many leases are subject and subordinate to underlying superior ground leases, although too often tenants do not perform the proper due diligence to understand and properly assess the risks associated with such ground leases.

In today's newsletter, we look at six issues to cover when your lease is subject to a ground lease.

Sincerely,

Alan Katz
Mintz & Gold LLP 

 

Ground Lease Regalia

 

It is spring time and families all over the country are celebrating their graduating students, from nursery school right up to college.

I am not making this up, but at the Senatobia, Mississippi High School graduation this year, three different people were arrested for cheering for their family members.

One man had yelled out "You did it, baby!" to his sister. A mother was charged with acting against "the peace and dignity of the State of Mississippi."

I will now do my best to not let my warped New Yorker view of the world jump all over that.

The superintendent said he was trying to address a real problem at all graduations where the cheering can drown out the names of other students being called.

Sounds like a bit of Taliban style justice, but the superintendent indicated that the defendants should have known since there was a warning in the program.

This is worse than I originally thought. These family members were getting arrested based on the "boilerplate" in the program.

No self-respecting mullah would ever stoop so low. The superintendent must be (gulp) a lawyer!

Tenants also often show too little concern to the so-called boilerplate in their commercial leases and a good example is the treatment of underlying ground leases.

Many properties are subject to long term ground leases. Ground leases are generally financing vehicles for the construction of a property, and are often included as part of larger projects with governmental participation (think Brookfield Place, where the land is owned by Battery Park City Authority).

The ground lessor owns the land but leases it for a long period of time (e.g., 99 years) to a ground lessee. The ground lessor gets a steady and secured return on its investment and the ground lessee avoids the need to purchase the land.

If the property is subject to a ground lease, the space leases at that property will no doubt provide that they are subject and subordinate to the terms of that ground lease.

If you are a tenant subject and subordinate to a ground lease (or any other superior documents), you need to learn what that entails.

Yes, I know. More lawyer blather about something that will never happen and who wants to pay a lawyer to read through ground leases that often run 200-300 pages long. There are plenty of other tenants at the property and they do not seem to have an issue and what really could go wrong?

Often that is true, but you do not want to someday discover that you have a "You did it baby!" problem on your hands.

Ground leases will often contain specific requirements, in particular as to permitted uses, assignment and subletting, casualty and condemnation, etc., all of which can have a direct impact on your lease.

We recently represented a company taking office space in a fully leased mixed-use office and retail center. It was not until we reviewed the ground lease that we determined that the project contemplated a particular (and mostly retail) use which our client narrowly met based on the peculiar nature of its business, but which could greatly limit its future ability to assign or sublet.

That client needed to understand the risk in order to properly assess whether to accept or attempt to address the risk, or to find a different space.

Be sure to take the following six steps if your lease is subject to a ground lease:
  • Evaluate the ground lease. The best way to do this is to require a copy (with financial terms redacted) and review the ground lease. Some landlords will resist, but most will gladly bury you in paper, expecting you will not take the time and expense to understand the document.
  • Require landlord representations. Landlords generally do not like to make representations, but the following should not be controversial and are necessary; that (a) landlord has delivered to you a true and complete copy of the ground lease and all amendments, (b) there are no other ground leases encumbering the building and (c) the term of the ground lease expires after the term of your lease (including all renewal options for your lease).
  • Seek compliance comfort. Your lease should indicate, as a representation or warranty of your landlord, that the terms of your lease do not violate the terms of the ground lease and that compliance with the terms of your lease will mean compliance with the terms of the ground lease.
  • Limit amendments. Your landlord should covenant in your lease not to amend or modify the terms of the ground lease in a manner that would have an adverse effect on your tenancy.
  • Require an snda or recognition agreement. As with a superior mortgage, you should require a subordination, non-disturbance and attornment agreement or recognition agreement from the holder of the ground lease. This is an agreement among you, your landlord and the holder of the ground lease indicating that if the ground lease terminates for any reason (e.g., after your landlord defaults), the ground lessor will recognize and not disturb your tenancy and rights to possession. As with a superior mortgage, your ability to obtain an snda will often depend on the size of your lease.
  • Seek cure rights. As a space tenant subject to an underlying ground lease, you are in a position similar to a subtenant and should attempt to obtain the right to cure defaults by your landlord under the ground lease, either directly or in the name of your landlord. Again, obtaining this right will require a lease of a certain size.
I love Conan O'Brien's commencement speech at Dartmouth in 2011 in which he talked openly about growing stronger from his failure to get what he wanted (host of the Tonight Show). Of course he was also very funny, advising that "life is not fair" since he was getting the same degree for just showing up for which the graduates worked tirelessly for four years. Ground leases are also not always fair, so be sure to follow the points above to protect your lease position and then we can yell out "You did it, baby!".

About Us

 

Mintz & Gold prides itself on providing the highest quality legal representation often associated with large law firms with the attention and reasonable costs of a smaller law firm.  Mintz & Gold's Real Estate Department has a national practice specializing in a broad range of commercial real estate law, with a particular focus on commercial leasing. We have extensive experience with respect to office, retail and shopping center leasing, and have represented major Manhattan landlords, national and multinational institutional tenants and national retail chains. Most of our attorneys practiced for many years at large institutional law firms before joining Mintz & Gold.

For more information regarding Mintz & Gold's real estate practice, click here.

For a list of representative transactions of Mintz & Gold's real estate group, click here.

For Mintz & Gold's website, click here.

Contact:
Alan Katz
katz@mintzandgold.com
Telephone: (212) 696-4848
Fax: (212) 696-1231



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This newsletter has been prepared for general information purposes only, and is provided with the understanding and subject to the user's agreement that it does not constitute the rendering of legal advice or other professional advice by Mintz & Gold LLP, and does not create any attorney-client or other special relationship. The content of this newsletter may be considered advertising under the ethical rules of certain jurisdictions and prior results do not guarantee a similar outcome. You should not rely upon this newsletter without seeking legal advice from an attorney licensed in the relevant jurisdiction(s). THE CONTENT OF THIS NEWSLETTER IS PROVIDED AS-IS WITH NO REPRESENTATIONS OR WARRANTIES, EITHER EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NONINFRINGEMENT. Additionally, the information contained in this newsletter does not constitute tax advice. Any discussion of tax matters contained in this newsletter is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code or promoting, marketing or recommending to another party any transaction or matter.

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