Real Estate Tip – Ground Leasing Part 3: Default May Lead to Tenant Losing Building


In parts 1 and  2 of our ground lease series, we discussed the basics of ground leases, including by-agreement and sales-based rent adjustments. Today, we look at another lease issue that becomes more critical in the ground lease context: defaults.

Unlike a space lease, defaulting on a ground lease is likely to lead to the tenant losing a building that the tenant constructed, even if it’s the ground lessor that defaults. If a ground lessor defaults by failing to pay its own mortgage or income taxes, has a trustee in bankruptcy reject the lease, or loses its interest to the ground tenant’s lender under a subordination agreement, it leaves the tenant with a suit for damages and no business income.

Ground tenants can obtain protection against a ground lessor’s default by:

  • Carefully structuring the leasehold mortgage transactions
  • Insisting on agreements with the ground lessor’s lender
  • Negotiating notice and cure provisions for potential landlord defaults

Topics:  Default, Foreclosure, Ground Leases, Landlords, Mortgages, Rent, Tenants

Published In: Bankruptcy Updates, General Business Updates, Commercial Real Estate Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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