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

Today’s real estate tip is brought to you by Rick Smith, a LEED Accredited Professional and member of Bernstein Shur’s Real Estate Practice Group and Green Building Team. Stay tuned for more useful tips for real estate professionals.

For more information on ground leasing, contact Rick at rsmith@bernsteinshur.com or 603 623-8700 ext. 8829 or 207 774-1200.