Key Commercial Lease Provisions and SNDAs That Concern Lenders in Mortgage and Leasehold Financing

Transcription

1 Presenting a live 90-minute webinar with interactive Q&A Key Commercial Lease Provisions and SNDAs That Concern Lenders in Mortgage and Leasehold Financing Identifying and Correcting Red Flags That Negatively Impact the Lender's Collateral Package THURSDAY, DECEMBER 17, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Iryna Lomaga Carey, Partner, Kurzman Eisenberg Corbin & Lever, White Plains, N.Y. Ren R. Hayhurst, Partner, Bryan Cave, Irvine, Calif. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 10.

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5 Legal and Practical Commercial Leasing Issues For Real Estate Lenders Ren R Hayhurst ren.hayhurst@bryancave.com Iryna Lomaga Carey icarey@kelaw.com

6 Overview of Commercial Leasing Issues Commercial Leases Distinctions Between Credit Tenant Leases vs. Other Commercial Leases Process of What to Review and Focus on with Standard Commercial Leases Ground Leases Pad or Parcel Ground Leases Between Borrower and Ground Tenant Borrower as Ground Tenant Distinction Between Ground Lease Assignment and Leasehold Mortgage 6

7 Key Distinctions In Property Types Commercial Retail vs. Multi-Family Loans Owner-Occupied vs. Single Tenant Buildings Multi-Tenant Issues Major vs. Minor Leases Insurance Provisions SNDAs vs. Super Estoppels Financial Covenants Relating to Recourse Issues Ground Tenants vs. Retail/Commercial Tenants Key Lease Review Issues 7

8 Key Lender Underwriting Concerns A lender is granted a lien or deed of trust on real property. Underlying leasing distinctions for multi-family vs. commercial deals SNDAs and estoppels; Major vs. Other Leases (approval issues) Owner-Occupied Property. Two entities involved (owner entity vs. occupant entity under identical ownership) vs. single entity as owner and occupant Single Tenant Property. Key Issues Include Insurance provisions; replacement of single tenant; re-purposing of property for multiple tenants Multi-Tenant Property Key Issues Include Special tenant rights - such as purchase or expansion option, go dark rights, exclusivity, incentive payments, etc.; tenant mix power center vs. anchor tenant and small shops 8

9 Approach to Reviewing Commercial Leases Key Commercial Lease Provisions for Lenders Payment of Rent Rent Abatement Rent Subsidy Free Rent Period(s) Security Deposits Lease Term Any renewal or extension options during loan term Go Dark Provisions Purchase Option or ROFO Leased Premises Expansion Rights Future Lease Incentive or Other Partial Refund Payments by the Owner to the Tenant 9

10 Approach to Reviewing Commercial Leases Part 2 Funding for Construction of Tenant Improvements Payment by Owner with Reimbursement Obligations of Tenant Payment by Tenant with Reimbursement Obligations of Owner Development, Leasing or Below Market Rent Restrictions Development Agreement Requirements Fair Housing Requirements Letter of Credit for Infrastructure Improvements 10

11 Introduction to Ground Leases Ground Lease Subordinated Or Not? Elements of Standard Ground Lease Arrangement Acknowledge Leasehold Mortgage No Lien on Fee If So, Must Accept Terms of Mortgage Notice and Cure Rights For Lender (No Termination; Curable or Not) Foreclosure Rights Related to Cure Bankruptcy/Termination New Lease/Direct Relationship No Acceptance Of Rejection or Termination Of Lease Application of Insurance or Condemnation Proceeds Ground Lease Mortgagee Protection Provisions How should Lender address its requirements if they are essentially included in the lease e.g., what type of privity agreement is required, if any? 11

12 Approach to Reviewing Ground Leases Is Borrower Ground Tenant or is Borrower the Fee Owner and Ground Lessor? If Borrower is Ground Tenant Reasons for Using Leasehold DOT vs. Lease Assignment Reasons for Ground Lessor Consent and Estoppel Elements of Ground Lessor Consent and Estoppel Approval of Leasehold DOT and Agreement for Mortgagee Protections Including Notice and Cure Rights; Time to Foreclose if Necessary for Cure Termination Issues, Both Pre- and Post-Bankruptcy These are Legal Rights Which Cannot be Waived, so Must be Addressed to Permit Continuation of Lease Between Lender and Ground Lessor Rights Regarding Lien Against Fee Interest Prohibition or Requirement for Acknowledgment to Consent and Estoppel by Fee Lender 12

13 Approach to Reviewing Ground Leases Part 2 If Borrower is the Fee Owner and Ground Lessor Reasons for ARNDA vs. SNDA ARNDA Creates a More Interactive Relationship to Preserve the Ground Lease, Which Often is the Key to Property Success Elements of ARNDA Contains Standard SNDA Provisions Addresses Broader Tax Obligations, Insurance Obligations and Other Construction or Quasi-Ownership Rights Inherent in Ground Lease Includes Additional Ground Tenant Protections, Including Bankruptcy Related Protections Similar to Ground Lessor Consent and Estoppel, Development and Construction Obligations, etc. 13

14 Introduction to SNDAs and Estoppels Lease/Mortgage Subordination Generally The first-in-time, first-in-right rule Lease Subordination Clauses Automatic, unconditional subordination Subordination conditioned on non-disturbance protection The SNDA Agreement Subordination Non-Disturbance Attornment Lender Protections Notice and opportunity to cure lease defaults Lender exculpation Lease modifications require lender consent 14

15 SNDAs and Estoppels Practical Considerations Practical Considerations Offering non-disturbance protection to future tenants and/or tenants that are affiliated with the borrower Recorded memo of lease: Does it always require a recorded SNDA? Cost-benefit analysis of obtaining/requiring SNDA Use of expanded estoppel (i.e., the unrecorded super estoppel ) General distinctions between SNDA for Commercial Lease and Ground Lease Acknowledgment of Underlying Commercial Sublease in Ground Lease Arrangement Treatment of Lease Guaranties Lease Guarantor Acknowledgment and Consent 15

16 Lease Subordination Issues Overview Subordination, Non-Disturbance and Attornment ( SNDA ) SNDA provisions usually control the rights and remedies of the foreclosing lender (new landlord) and the tenants. Subordination: If a mortgage or deed of trust predates a lease, then the lease would be terminated upon foreclosure. In most jurisdictions, if the lease is prior in time to the mortgage or deed of trust, there would not be termination upon foreclosure. SNDAs can alter the priorities. Sometimes a lease contains a subordination provision which entitles foreclosing lender to terminate at its election upon foreclosure. These are often contained in loans were the originating lender required it as a condition for a loan. SNDAs signed by tenants often contain subordination provisions. Inadequate because it does not typically address all issues, but also does not create a privity relationship between Lender and Tenant 16

17 Lease Subordination Issues Overview (cont.) Attornment v. Non-Disturbance Attornment provisions provide a benefit to the foreclosing lender (new landlord). Requires tenant to abide by lease to the benefit of the foreclosing lender. Non-Disturbance provisions are obligations imposed on the foreclosing lender in which the lender agrees that it will not terminate lease upon foreclosure. Law usually requires that the lender actually sign and not binding on lender is just signed by borrower and tenant. 17

18 Lease Subordination Issues Part 2 Lease Subordinations or SNDA Subordination is the Least Important Element of an SNDA Really do not Want a True Subordination Because the Purpose of the Agreement is to Preserve the Lease, Not Wipe it Out Non-Disturbance and Attornment Provisions are the Key Elements Frame of Mind View SNDA as Addressing Three Relationships Between the Lender and the Tenant Pre-Default Relationship (Both Lease or Loan) Post-Default Relationship (Both Lease or Loan) Post-Foreclosure or Deed-in-Lieu Relationship 18

19 Lease Subordination Issues Part 3 SNDA - Pre-Default Relationship (Both Lease or Loan) No Assignment or Subleasing Beyond Lease Terms No Obligations for Lender Until Assumption of Ownership Respective Obligations for Insurance and Application of Proceeds SNDA - Post-Default Relationship (Both Lease or Loan) Limitations on Lease Modifications Limitations on Pre-Paid Rents Exculpation for Environmental and Construction Obligations No Liens on Property Permitted; No Obligation to Finance Construction Notice and Cure Rights SNDA - Post-Foreclosure or Deed-in-Lieu Relationship Limitation for Lessee Against Lender to Lender s Rights in the Property No Personal Recourse Express Release of Liability After Transfer of Title Limitations for Trailing Liability Only Responsible for Matters for Which Lender Received Prior Notice and Cure Opportunity 19

20 Lease Subordination Issues Part 4 Schoolcraft Issues for Insurance and Condemnation Proceeds Must Apply Proceeds to Restoration Regardless of Loan Document Requirements Non-Negotiable Issues Exculpation from Special Obligations Unique Payment Refunds Environmental Responsibilities Construction and Expansion Obligations Restrictions on Option and ROFO Rights in Favor of Tenants Only Exercise Upon Repayment of Loan and not Triggered by Foreclosure or Deed-in-Lieu Termination of Lender s Liability After Post-Foreclosure Transfer 20

21 Acquisition Phase Special Use Permits/Requirements; Maintenance and Management Agreements; CC&Rs and Trailing Security Interests Need to determine if notices of termination or continuation are required, length of any notice periods, exercising rights under assignments and pledge agreements, etc. Explore means of securing/obtaining rights to additional pledged collateral, such as LCs for tenants, deposits, bond proceeds, reserve accounts, tax refunds, etc. Investigate any potential property or use violations under local ordinances and have corrected, if possible, prior to transition. Receivership Transition Lender can Control Terms of Receivership and Selection of Receiver This is Key Decision Which Will Either Create or Avoid Problems During Receivership Pending Foreclosure Problems can arise if a Receiver consents to a lease extension or modification during the term of the receivership. Lender should closely monitor leasing activity during receivership and raise objections to the court if needed. Courts and Title Companies Still Hesitant to Grant Receiver Right to Sell Property Prior to Foreclosure Usually will Require Borrower Consent 21

22 Summary; Final Thoughts Commercial Leases are Key to Success or Failure of Project Critical to Understand Lease Terms and How They Relate to Lender s Rights and Obligations Under Loan Documents Many Provisions of Ground Lease or Commercial Lease Can Be Treated by Negotiation in ARNDA or SNDA Remember the Non-Negotiable Items, Which are not Numerous Pending and Following Foreclosure, the SNDA and ARNDA Will Continue to Control Relationship Between Lender and Tenant 22