When a property owner and a developer enter into a long-term ground lease, the tenant and its lender will insist that the property owner can't easily end the lease for default. The tenant will have a lot of power. The tenant's lender has cure rights if the tenant doesn't cure. The tenant and its lender should be able to keep the lease. Property owners don't have the ability to end ground leases as much as they want.
There was a recent New York case that differed from this principle. When the tenant stopped paying rent, it began. The landlord gave various notices of the default to the tenant and the lender, but they still didn't pay the rent.
The property owner decided not to proceed under the lease terminated procedure built into the lease, which would have required notice to the lender. The property owner started an action for nonpayment of rent under a New York statute that allowed it. The landlord didn't notify the tenant's lender because the lease and the law didn't require it. The lease was terminated when the tenant didn't pay rent.
The lease stated that the property owner had to offer a new lease to the tenant after the lease was terminated. The lease was terminated through the nonpayment proceeding because the lender couldn't claim a replacement lease.
The lender tried to use a strange New York law to bring a terminated lease back to life by paying everything that was due under the lease. The tenant needs to redeem its lease by a certain date. If the tenant doesn't redeem its lease within that time, then the tenant's lender has the right to do it, but in most cases only on the day after the tenant's redemption deadline expires.
The tenant can waive its redemption rights. The lender in this particular litigation tried to argue that the tenant's waivers didn't apply to them. The court didn't agree. The lender changed its mind and didn't want to exercise any redemption right, but that didn't stop the court from ruling against it. That was the end of the loan.
Lessons can be learned from this case.
Any lease should require the property owner to notify the lender of any nonpayment or other proceeding that may cause the lease to be terminated. It is necessary for the property owner to give the lender notice of their right to end the lease.
If the lease gives the lender rights to cure the tenant's defaults, the lender should not allow the property owner to start toward lease enforcement.
Sometimes the provisions in a lease don't cover everything they should. The property owner was able to find a way to get rid of the lease in a way that didn't involve the lender
If the lender had acted more aggressively, it might have been able to keep its assets.
The case was heard in the New York State Supreme Court.
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