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