A financeable ground lease includes: a recognition / non-disturbance agreement from the fee owner, expanded notice-and-cure rights against any fee-side default , the leasehold-mortgagee right to a new lease on foreclosure (on the same terms), broad assignment / sublet rights without consent on a leasehold-mortgagee foreclosure , and modification consent from the leasehold mortgagee.
The leasehold-mortgagee protection package and what each clause does
Recognition / non-disturbance agreement from the fee owner: confirms that on the leasehold mortgagee's foreclosure of the leasehold estate, the leasehold continues in effect on its existing terms, the fee owner cannot use the foreclosure as a cancellation event. The single most important protection in the package.
Notice-and-cure rights against fee-side default: the fee owner must give the leasehold mortgagee notice of any default by the leasehold tenant and a cure period (typically 30 to 90 days beyond the tenant's cure period) so the leasehold mortgagee can step in and protect its collateral.
New-lease-on-foreclosure: if the ground lease terminates for any reason during the leasehold mortgage term (tenant bankruptcy rejection, tenant default the leasehold mortgagee fails to cure), the leasehold mortgagee has the right to enter into a new lease with the fee owner on the same terms. Critical bankruptcy / Section 365(h) protection.
Assignment / sublet flexibility: the leasehold mortgagee on foreclosure must be able to assign the leasehold to a foreclosure purchaser without fee-owner consent (or with consent not unreasonably withheld). Without this protection the leasehold is functionally unfinanceable on foreclosure.
Modification consent: any amendment to the ground lease while the leasehold mortgage is outstanding requires the leasehold mortgagee's consent. Prevents the fee owner and tenant from materially altering the deal in ways that prejudice the lender.
Insurance / condemnation proceeds protection: leasehold mortgagee right to direct receipt and application of insurance and condemnation proceeds, without this, proceeds flow per the underlying lease (often to the fee owner) and the leasehold mortgagee's collateral value is impaired.
Sources
- Commercial Real Estate Financing Practice: Ground Lease and Leasehold Mortgage Treatise · American Bar Association (ABA), Real Property, Trust and Estate Law Section · current
- Modern Ground Leases and Leasehold Financing: Urban Land Institute Reports · Urban Land Institute (ULI) · 2024