Assignment Of Lease As Collateral Security Saskatchewan

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January 29, 2014

Leasehold Mortgage vs. Collateral Assignment of Lease

by Starfield & Smith

If loan proceeds are to be used to finance existing or new improvements on a leased interest in land, the SOP 50 10 5(F) contains rather specific requirements as to the clauses that need to appear in the borrower’s ground lease. In most instances, a tenant/borrower under a long-term ground lease that intends to secure financing for construction or major renovations to the leased premises will be cognizant that its long-term ground lease has to be financeable, and that the ground lease must therefore contain certain provisions to protect the interests of any leasehold mortgagee. In a ground lease situation, where the tenant/borrower is developing the land with significant improvements (such as ground-up construction of a new building), its landlord should also understand from the start (i) that an encumbrance or lien on tenant’s/borrower’s interest in the ground lease will be conveyed to a lender as collateral for a loan to the tenant/borrower and (ii) that a leasehold mortgage or deed of trust will be required to allow the tenant/borrower to develop the improvements to the leased premises without spending all of its available assets. If the parties to a ground lease are aware that tenant/borrower intends to secure financing for construction or major renovations, commercial ground leases will typically include a provision that specifically allows the tenant/borrower to encumber all or any portion of its interest in the lease and the leasehold estate by mortgage, deed of trust or other security instrument upon obtaining the prior written consent of the landlord. Consequently, in the context of a tenant/borrower developed property under a ground lease, it is appropriate and much more likely that a lender can obtain a ground lease that meets the requirements of the SOP 50 10 5(F) and secure the loan with a leasehold mortgage.

In direct contrast to the ground lease situation, there are many instances where loan proceeds are to be used to finance existing or new improvements on a leased interest in a commercial property that is already improved (or will be improved) with a building or buildings that have been (or will be) constructed by a landlord with the intent of leasing out the building or buildings to one or more commercial tenants. In this situation, where the financing is typically for less significant improvements that fall with in a narrower scope of tenant’s/borrower’s fit out work for its unique use of the leased premises, it most likely not appropriate or possible for a leasehold mortgage to be placed on commercial property that has been already been (or will be) developed by a landlord. In the context of a landlord developed property, most likely neither tenant/borrower, nor its landlord will have anticipated that tenant’s leasehold interest will be encumbered with a leasehold mortgage and, consequently, a lease for a landlord developed property will not likely contain any provisions that protect the interests of a leasehold mortgagee. In fact, more likely than not, tenant/borrower in this context will be prohibited from encumbering its leasehold interest with any lien or any other encumbrance. To go back after the fact and try to get such protections in the lease for the benefit of a leasehold mortgagee can be difficulty, if not impossible, to obtain. The lender will have higher likelihood of success if, in the connect of a landlord developed property, it obtains a collateral assignment of the tenant’s/borrower’s lease and a waiver of landlord’s statutory lien on tenant’s trade fixtures, furnishings and equipment. Landlord’s waiver will allow the lender to enter the leased premises in the event of a tenant/borrower default under its loan in order to repossess tenant’s trade fixtures, furnishings and equipment. When coupled with a collateral assignment of lease, the lender will also have the right to occupy the leased premises and to subsequently assign tenant’s/borrower’s leasehold interest to a new tenant.

For more information regarding leasehold mortgages, please contact Joe at (215) 542-7070 or jernst@starfieldsmith.com.

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