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Drafting a Ground Lease When the Underlying Tenant Will Be a Single-Use Entity
Commercial real estate professionals often draft ground leases for those situations in which a tenant (the “Ground Lessee/Sublessor”) leases land from a fee owner (the “Ground Lessor”) to be developed into a shopping center or some other development with a mix of retail or other commercial tenants. Numerous occasions arise, however, in which a ground lease is needed because the Ground Lessee/Sublessor intends to sublease the parcel to a single-use tenant entity (the “Tenant”). When drafting the sublease for this Tenant, the real estate practitioner must tailor the ground lease to take into account the specific requirements of the Tenant's sublease.
The attorney representing the Ground Lessee/Sublessor should follow certain key principles: compatibility, flexibility, and “financibility.” Specifically, the terms of the ground lease must work in concert with the Tenant's sublease and be compatible so that the Ground Lessee/Sublessor is adequately protected.
The principles of flexibility and compatibility refer simply to the need of the Ground Lessee/Sublessor to ensure maximum freedom to react to decisions made by the Tenant and to give the Tenant the flexibility it expects or demands during the term of the Tenant's sublease. Most importantly, the ground lease must be drafted in such a way that it remains financible. By adhering to these principles, the drafter will be in a better position to ensure that the ground lease meets the needs of both the Ground Lessee/Sublessor and the Tenant.
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