So, What Does It Take To Make A Lease Financeable? You Asked; We Answer.

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A couple of weeks ago, we Ruminated about leasehold mortgages and why landlords shouldn’t get bent out of shape when a tenant who qualifies for one wants to be able to encumber the tenant’s (not the landlord’s) interest in the lease. We won’t repeat much of that, if you hadn’t seen that blog posting or if it was immediately forgettable, you can visit or revisit it by clicking HERE.

Basically, our take on a leasehold mortgage and how it affects the leasing arrangement between a landlord and its tenant is as follows:

A.        The tenant’s leasehold lender wants the OPTION to take over the tenant-borrower’s interest in the lease, not the obligation.

B.         The tenant’s leasehold lender, if it chooses to “step into the shoes” of its tenant-borrower, wants the same rights that an assignee would have, but not for any that arise after the leasehold lender finds someone to take an assignment of the lease from it.

C.        The tenant’s leasehold lender is willing to obligate itself, to the landlord, to cure the tenant’s curable breaches of the lease if, and only if, it chooses to take over the lease.

D.        If the tenant’s leasehold lender chooses to take the lease over, the landlord has to waive its right to terminate the lease and the landlord can’t exercise any remedy, such as terminating the lease, based on a past, cured default or based on a breach that can’t be cured, such as where, two years ago, the tenant wasn’t carrying the proper insurance.

E.         The tenant’s leasehold lender wants time to effectuate a cure (if it chooses to do so in the first place), but that time has to begin running after the tenant’s time has run out; its deadlines can’t be co-terminus with that of the defaulting tenant.

F.         The tenant’s leasehold lender does not want to be bound by any amendments to the lease that reduce the tenant’s rights, increases the tenant’s burdens or reduces the landlord’s obligations, unless the lender consented to those changes.

G.        The lease can’t be voluntarily terminated without the approval of the tenant’s leasehold lender.

H.        If the tenant rejects the lease in a bankruptcy, or if the lease terminates for any other reason where the leased space will still be available, the tenant’s leasehold lender wants the ability to enter into a new lease, with identical provisions, for what would have been the remainder of the lease’s term.

Basically, these are the requirements that make a lease “financeable.” While we’re at it, they are pretty much like what a franchisor would want for itself so that it can hang on to a particular location and install another operator. There are some differences between what would motivate a leasehold lender to “assume” a lease and what would motivate a franchisor to do the same. A tenant’s leasehold lender sees value only in a lease that can be further “assigned” (read that: “sold”) to another party. That “other” party might be motivated to take the lease over from the leasehold lender because even after paying the leasehold lender for the assignment, the “present value” of the total rental payments it would be making over the lease’s term represents a bargain. Another reason might be that the lender now “owns” valuable improvements to the leased property (such as the building its tenant-borrower constructed on it) or now owns valuable, and not otherwise very salable “stuff” inside the leased premises, such as refrigeration equipment and designed-to-fit store fixtures, and the way to “sell” those items is together with the lease.

A franchisor would usually be less concerned about any “bargain” rent, though its interest in “saving” a particular location might be diminished if the market rent were less than the lease’s stated rent. Basically, if the franchisor can put another operator into what might become a successful location, it will want to take the lease over so that it can “re-deal” it to the next franchisee, even if it has to operate the location itself during an interim period.

Ruminations has gotten many comments to various postings generally expressing the opinion that if there is any money to be made when the market rent exceeds a lease’s stated rent, the “profit” belongs to the landlord, not the tenant (and, by extension, not to a leasehold lender). We respectfully disagree and direct readers to our April 1, 2012 posting (no, not for April Fools Day), accessible by clicking HERE.

So, you ask, “Can you give us a ‘Leasehold Mortgages are permitted’ section for our leases?” Yes, and no. Yes, we can include a “generic” set of provisions; but, no we won’t. There are two main reasons for this. First, what we’ve got is four pages of closely-spaced text and, not only would that make today’s posting our longest ever, but no one is going to read it. Second, since no one is going to read it, just copy it for later pasting into some lease, Ruminations would be aiding and abetting a practice long abjured by Ruminations, the blind use of “form” text.

There are, however, some guidelines Ruminations will share, and here they are, when it comes to making a lease “financeable.” Basically, to do so, the lease should provide for the following:

  • The tenant should be able to pledge, mortgage or encumber the lease and its leasehold estate, at any time, without the need for its landlord’s consent.
  • The landlord shouldn’t have any obligations to other than a qualified lender, which might be defined as an institution or an institutional lender, terms that also need to be defined.
  • The landlord should have no obligation to that qualified lender unless the landlord is given notice of the lender, including its address for the purposes of giving notice.
  • The leasehold lender has to receive all notices of default and all other notices that are a pre-condition to either landlord or tenant terminating the lease.
  • The leasehold lender needs the right, but not any obligation, to cure the tenant’s default on behalf of the tenant (yes, cure the default) and it needs to have an additional notice and a period of time after the tenant has failed to do so in order to make that cure (if the default was a monetary one) or to start to cure other kinds of defaults.
  • If the leasehold lender has to get possession of the leased space to cure a tenant-borrower’s non-monetary default, it needs the time to get that done.
  • The leasehold lender has to be recognized as a successor to the tenant no matter how the leasehold lender gains that role, by assignment from the tenant, by judicial foreclosure or otherwise.
  • If the lease ends for any reason before its “natural” expiration date, the leasehold lender must have the right to require the landlord to sign an essentially identical lease for what would have been the expiring term (other than for reasons such as a condemnation or certain events of destruction).
  • The lease can’t be modified (in a way that would adversely affect the leasehold lender, and that includes shortening the term, changing the payments to be made or terminating it) without the leasehold lender’s consent

Regular readers of these blog postings may be a little disappointed that, today, we’ve avoided the kind of “precision” in our drafting suggestions as they may have become accustomed to see. That’s deliberate. Negotiating leasehold financing rights as between a tenant and its landlord is an “advanced” topic. If today’s posting tantalizes you, then research the topic thoroughly. And, if you don’t understand how leasehold mortgages work, such as by not understanding how a leasehold lender needs to preserve its right in a tenant bankruptcy, then find someone to help. You can be sure that if the tenant expects its lease to be “financeable,” and finds out otherwise when it seeks a loan, it will be pretty upset.


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