Can a lender use a routine closing document to amend a ground lease?

Over the course of a lease, the landlord may obtain mortgage financing, or even sell their position, several times. If the lease is a land lease, the tenant will likely do the same. Each of these transactions involves a lender. Every lender wants to be reassured about the status of the lease.

Almost every lease therefore requires each party to sign so-called estoppel certificates for the other party’s lender. These certificates confirm facts about the lease, such as the absence of defaults, the current rent if it cannot be determined from reading the lease, and whether the required construction work has been completed. In the case of a land lease, the landlord can also agree to sign an agreement with the tenant’s lender to confirm the lender’s protections in the lease.

These certificates and agreements should create absolutely no controversy or comment. But they often do. That’s because lenders often use them as opportunities to do more than reconfirm facts or existing lease terms. Instead, as an unfortunately very common example, a ground lease tenant’s lender might ask the landlord to agree, in a certificate of estoppel, that the provisions of the loan documents on the insurance proceeds and restoration will supersede any inconsistent provisions of the lease. In other words, if the building burns down, the lender wants to have the right to take the insurance proceeds even if the lease stipulated that it was to be used to restore the building.

In a recent transaction handled by the author, the tenant’s lender wanted the landlord to agree in a certificate of estoppel (among other things) to expand the scope of authorized lease lenders; refrain from taking certain steps otherwise permitted in a tenant bankruptcy proceeding; and waive certain claims that the Owner might otherwise have asserted against the Lender if foreclosed. The owner, not in an accommodating mood, refused. The tenant blamed the landlord when the tenant’s financing collapsed.

A recent federal case in Massachusetts examined a similar sequence of events. There, the lease required the landlord to enter into an agreement with the tenant’s lender “accepting all of the terms of this section,” that is, the section of the lease that gave the lender certain protections and rights.

The lease stipulated that any insurance proceeds were to be used to restore the building. But the lender, as so often happens, wanted the landlord to agree that the terms of the insurance proceeds in the loan documents superseded anything inconsistent with the lease. And of course, the loan documents stipulated that the lender could keep the insurance money so that the building would not be restored.

The landlord said no, instead insisting that any inconsistencies should be resolved in favor of the lease. The parties went back and forth but neither the landlord nor the tenant’s lender gave in. In the end, the deadline to close the loan has passed. The tenant lost his lender and sued the landlord.

The court found that the landlord was under no obligation to sign an agreement that gave the lender rights other than those already provided for in the lease. Since the lease required the insurance proceeds to be used to restore, the landlord had no obligation to agree that the lender could keep them. Thus, the landlord did not breach the lease, the tenant lost the litigation, and the tenant had to pay the landlord’s legal fees.

The case reaffirms the rather obvious proposition that where a lease requires a landlord to confirm facts in a certificate of estoppel or to confirm in a separate agreement a lender’s rights and protections under the lease , the landlord is under no obligation to do anything more or change anything in the lease. This was heartening, as it confirmed the position taken by the author’s client in the matter described above.

Conversely, a cautious tenant will not allow himself to be placed in a situation where his financing depends on the owner’s willingness to deviate from what is provided for in the lease. Instead, the tenant will ask their lender to confirm, at the start of the closing process, that the lender approves the lease exactly as is and will not ask for anything more than what the lease requires the landlord to deliver.

Copyright © 2020 Joshua Stein. Published on Forbes.com.

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