Casualty and Condemnation Terms in Loans and Leases: Balancing Interests of Lenders, Borrowers, and Tenants

Description

Casualty and condemnation provisions in mortgage loan documents typically give the lender some degree of control over the proceeds and how to apply the proceeds toward repair or restoration of improvements. But such provisions require negotiation between the parties, and underlying leases or ground leases may contain conflicting rights to address in the loan documents or an accompanying subordination, non-disturbance, and attornment agreement (SNDA).

Existing leases often require the landlord to rebuild the leased premises within a specific time frame or tenants are entitled to terminate. Anchor or big-box leases may even give the tenant control of the proceeds and the rebuilding process. Counsel will need to balance the borrower's desire to comply with existing leases against the lender's preference to protect its collateral. A lender might share the borrower's interest in keeping such tenants in place but will likely want some level of control over a tenant rebuild and borrower's continued payment of the loan.

Materiality is also a primary concern. Documents typically include a percentage threshold below which the lender will permit the borrower to keep the proceeds so long as they are applied to rebuild the premises. Loan documents may also include a second threshold where the lender holds the proceeds but agrees to make them available for a rebuild of the premises and the third threshold above which the lender will accelerate the loan and apply the proceeds to pay down the loan. The appropriate limits may vary between portfolio and CMBS lenders.

Ground leases present the particular risk that a lease could be terminated and the loan wiped out in the event of condemnation and, in some instances, casualty. There are conflicting views as to what is "market" with ground lease financing when the parties attempt to address the relative rights of the mortgage lender and the ground lessor to casualty and condemnation proceeds. The ground lease may contain a formula for allocating proceeds with which the lender will need to abide.

Listen as our authoritative panel discusses the current thinking on casualty and condemnation provisions in commercial mortgages and how different lease and ground lease scenarios can impact these provisions.