In the Spotlight: Ground Lessee/Sublessor Attorney Should Address the 'Financibility' Factor

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. As the article discussed, the attorney representing the Ground Lessee/Sublessor should follow certain key principles: compatibility, flexibility, and financibility. Below is a suggested clause addressing the financibility factor.

Leasehold Mortgagee

Ground Lessee/Sublessor and [Tenant] may, without the prior consent of Ground Lessor, mortgage all or any part of their respective interest in the Premises, upon the condition that all rights acquired under such Leasehold Mortgage shall be subject to each and every term, covenant and condition of this Lease, and to all rights and interests of Ground Lessor. None of said terms, covenants or conditions is or shall be waived by Ground Lessor by reason of the right to mortgage such interest in the Premises.

Notwithstanding anything contained herein to the contrary, while such Leasehold Mortgage remains unsatisfied, if any default shall occur which, pursuant to this Lease, entitles Ground Lessor to terminate this Lease, and if, before the expiration of thirty (30) days from the date of service of notice of termination upon Leasehold Mortgagee, Leasehold Mortgagee shall (A) notify Ground Lessor of its desire to nullify such termination; (B) pay Ground Lessor all of the Minimum Annual Rent and other payments due hereunder and then in default; and (C) comply or commence to comply with all other terms, covenants and conditions of this Lease, then Ground Lessor shall not be entitled to terminate this Lease and any notice of termination theretofore given shall be deemed void and of no effect.

Except as otherwise set forth herein, in the event of termination of this Lease by reason of any default by Ground Lessee/Sublessor (other than for nonpayment of the Minimum Annual Rent or any other payment due hereunder), Ground Lessor shall enter into a new lease of the Premises with Leasehold Mortgagee for the remainder of the Term, effective as of the date of such termination, upon the same terms, covenants and conditions contained herein, including, without limitation, the Minimum Annual Rent, and subject to the Permitted Exceptions, and to the rights, if any, of any parties then in possession of all or any part of the Premises; provided that … [insert desired conditions].

Any insurance proceeds or condemnation awards may be held by Leasehold Mortgagee and distributed pursuant to this Lease, and Leasehold Mortgagee may apply all or any part of Ground Lessee/Sublessor's share of such insurance proceeds and condemnation awards to the indebtedness secured by the Leasehold Mortgage, or to Ground Lessee/ Sublessor to rebuild, repair, or restore the Premises.

Commercial real estate professionals often draft ground leases where the Ground Lessee/Sublessor intends to sublease the parcel to a single-use tenant entity (the “Tenant”). (See Weinberg, Scott “Issues to Address When Drafting a Ground Lease for a Single-Use Tenant,” Commercial Leasing Law & Strategy, June 2004.)

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. As the article discussed, the attorney representing the Ground Lessee/Sublessor should follow certain key principles: compatibility, flexibility, and financibility. Below is a suggested clause addressing the financibility factor.

Leasehold Mortgagee

Ground Lessee/Sublessor and [Tenant] may, without the prior consent of Ground Lessor, mortgage all or any part of their respective interest in the Premises, upon the condition that all rights acquired under such Leasehold Mortgage shall be subject to each and every term, covenant and condition of this Lease, and to all rights and interests of Ground Lessor. None of said terms, covenants or conditions is or shall be waived by Ground Lessor by reason of the right to mortgage such interest in the Premises.

Notwithstanding anything contained herein to the contrary, while such Leasehold Mortgage remains unsatisfied, if any default shall occur which, pursuant to this Lease, entitles Ground Lessor to terminate this Lease, and if, before the expiration of thirty (30) days from the date of service of notice of termination upon Leasehold Mortgagee, Leasehold Mortgagee shall (A) notify Ground Lessor of its desire to nullify such termination; (B) pay Ground Lessor all of the Minimum Annual Rent and other payments due hereunder and then in default; and (C) comply or commence to comply with all other terms, covenants and conditions of this Lease, then Ground Lessor shall not be entitled to terminate this Lease and any notice of termination theretofore given shall be deemed void and of no effect.

Except as otherwise set forth herein, in the event of termination of this Lease by reason of any default by Ground Lessee/Sublessor (other than for nonpayment of the Minimum Annual Rent or any other payment due hereunder), Ground Lessor shall enter into a new lease of the Premises with Leasehold Mortgagee for the remainder of the Term, effective as of the date of such termination, upon the same terms, covenants and conditions contained herein, including, without limitation, the Minimum Annual Rent, and subject to the Permitted Exceptions, and to the rights, if any, of any parties then in possession of all or any part of the Premises; provided that … [insert desired conditions].

Any insurance proceeds or condemnation awards may be held by Leasehold Mortgagee and distributed pursuant to this Lease, and Leasehold Mortgagee may apply all or any part of Ground Lessee/Sublessor's share of such insurance proceeds and condemnation awards to the indebtedness secured by the Leasehold Mortgage, or to Ground Lessee/ Sublessor to rebuild, repair, or restore the Premises.