When a property proprietor and a developer (or investor) enter right into a long-term floor lease, the tenant and its lenders will insist that the property proprietor can’t simply terminate the bottom lease for default. The tenant could have intensive rights to “treatment” its defaults. If the tenant doesn’t treatment, then the tenant’s lender has further treatment rights. A method or one other, the tenant and its lender ought to be capable of protect the lease. Consequently, property homeowners can nearly by no means terminate floor leases, as a lot as they could like to take action.
One current New York case marked a dramatic variation from this precept. It began when the tenant stopped paying lease. The property proprietor gave the tenant and its lender varied notices of that default, however nonetheless nobody paid the lease.
As the following step, the property proprietor determined to not proceed beneath the lease termination process constructed into the lease, which might have required discover to the lender. As an alternative, the property proprietor began an motion for nonpayment of lease beneath a New York statute that enables such proceedings. The property proprietor didn’t notify the tenant’s lender of this continuing, as a result of neither the lease nor the legislation required such a discover. When the tenant nonetheless didn’t pay the lease, the property proprietor ultimately terminated the lease as the ultimate occasion within the nonpayment continuing.
The lease mentioned that upon any termination of the lease, the property proprietor needed to provide the tenant’s lender a brand new lease to exchange the terminated lease. Apparently the lender didn’t take the property proprietor up on that supply, so the lease terminated via the nonpayment continuing and the lender couldn’t declare a substitute lease.
As a Hail Mary measure to rescue its collateral, the lender tried to depend on a weird New York legislation that enables a tenant and its lender to carry a terminated lease again to life by paying every thing that was due beneath the lease. The tenant has a yr to perform the “redemption” of its lease. If the tenant doesn’t redeem its lease inside that point, then the tenant’s lender has the precise to do it – however usually solely on the day after the tenant’s redemption deadline expires, and solely till 2:00 PM on that day.
This New York legislation additionally says the tenant can waive its redemption rights. Just about each New York lease contains such a waiver, however the lender on this specific litigation tried to argue that the tenant’s waiver didn’t apply to the lender. The courtroom disagreed. At one level the lender introduced it had modified its thoughts and didn’t need to train any redemption proper, however that didn’t cease the courtroom from ruling towards the lender on the difficulty. That was the tip of the lender’s collateral.
Any lender towards a floor lease can study some vital classes from this case.
First, any lease ought to require the property proprietor to inform any lender of any nonpayment or different continuing that seeks to terminate the lease. It isn’t sufficient to require the property proprietor to provide the lender discover of the property proprietor’s train of a contractual proper to terminate the lease.
Second, if the lease offers the lender rights to treatment the tenant’s defaults, the lender ought to train these rights and never let the property proprietor begin down any highway towards lease enforcement.
Third, advanced and thoroughly drafted provisions in a lease (or some other doc) typically don’t cowl each case they must cowl. Right here, the property proprietor was capable of finding a approach across the contractual termination course of constructed into the lease and obtain a termination in a approach that didn’t contain the lender.
If the lender had acted extra aggressively and paid extra consideration, maybe it may have preserved its collateral.
The referenced case is Wells Fargo Financial institution, N.A. v. Joseph E. Marx Co. Inc., New York State Supreme Courtroom 159999/2019.
