collateral assignment of tenant's interest in lease

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5 elements to include in collateral assignment of lease/landlord’s waiver.

06/20/2012 | by Gary D. Buchman

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Landlords of commercial properties are often asked to sign a collateral assignment of lease and a waiver of the landlord’s lien on a tenant’s trade fixtures and equipment in favor of the tenant’s equipment lender or franchisor.  The usual form presented permits the lender/franchisor to enter the leased premises in the event of a tenant default under its equipment loan or franchise agreement, in order to repossess equipment and trade fixtures.  This may occur notwithstanding that such a default of tenant’s loan arrangements is not a default under the lease.  When coupled with a collateral assignment of lease, the lender/franchisor will have a right to occupy the premises and to subsequently assign tenant’s leasehold to a new tenant/franchisee.

From a landlord’s perspective, there are several key elements to incorporate into these documents:

• The obligation of the lender/franchisor to remove the equipment and trade fixtures at, or promptly after, expiration of the lease;
• The obligation of the lender/franchisor to pay rent and other charges during its possession of the premises;
• The obligation of the lender/franchisor to restore any damage to the premises resulting from removal of equipment and trade fixtures;
• The right of the landlord to approve any future tenant that lender/franchisor may wish to take the place of the existing tenant; and
• The continuing obligation of the existing tenant, notwithstanding the collateral assignment of the lease and any subsequent repossession or assignment of the lease by the lender/franchisor.

Gary D. Buchman – Partner

Gary D. Buchman is a partner in the firm’s Real Estate Department.

• Gary D. Buchman

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News & events, when a tenant’s lender wants a waiver.

Key ingredients for many businesses are a lease and some sort of financing. That financing may be in the form of a loan secured by the tenant’s personal property, or it may be in the form of an equipment lease. (The issues discussed below apply equally to both loans and equipment leases, so for simplicity, we will refer only to lenders, loans and collateral.)

In connection with the financing, because the collateral may be located within the tenant’s leased premises, the lender will often want to enter into an agreement with the landlord. The goal of this agreement, from the lender’s perspective, is to:

• be sure its lien on the collateral is superior to any lien of the landlord, and
• have the right to enter the premises to remove the collateral in case the tenant defaults on its loan.

The form of this agreement often has the landlord waiving its lien rights against the collateral and consenting to the lender’s rights to enter the premises and remove the collateral. The tension, from the landlord’s perspective, is that if the tenant has defaulted under its loan (creating the need for the lender to enter the premises), then the tenant may also have defaulted on the landlord’s lease.

There is no statutory landlord’s lien in Colorado, nor is there a concept of distraint or distress. Therefore, this article relates only to consensual liens (obtained pursuant to the Uniform Commercial Code) or judgment liens (obtained after a successful lawsuit). Other states have landlord’s liens or similar rights in favor of landlords, and additional consideration may need to be given to these agreements in those states.

When presented with this type of agreement, here are some considerations for landlords:

• Subordinate, Don’t Waive: Many lenders ask the landlord to completely waive any right to a lien on the collateral. If possible, landlords should try to subordinate their lien rights rather than completely waive them.
• Notice of Default: It may be difficult for landlords to track an obligation to notify a third party, so try to limit the landlord’s obligation to give notices of default to the lender. If the landlord has to give notice, it is worth including the lender’s contact information in the notice provisions of the lease itself.
• If serial numbers or some other specific list is available, it should be used.
• Leasehold improvements that have been permanently installed in the premises. The lease may already provide that these are the landlord’s property upon installation, so it would be helpful to clarify that in the subordination.
• The tenant’s interest in the lease itself. (See below on collateral assignments of the lease.)
• The landlord should try to limit the time that the lender can be in the space, such as 30 or 60 days after the tenant’s default.
• Carrying liability insurance;
• Indemnifying the landlord for injuries or damage occurring during the removal process; and
• Paying rent. On this point, also consider whether the lender has to cure any then-existing tenant default, especially for unpaid rent.
• Try to limit the landlord’s exposure for damage to the collateral in connection with its removal from the premises.
• Avoid Auctions: While a private sale in the premises may be acceptable, try to not permit auctions or other public sales.
• Tenant and Guarantors Sign: The tenant and any guarantors should execute the agreement, as well. This will bind the tenant to any obligations in the agreement. Having the guarantors sign will limit the guarantors’ ability to argue that their obligations were negatively affected by the agreement and any concessions the landlord may have made.

Property Deemed Abandoned: If the lender does not remove the collateral within a stated time, it should be deemed abandoned, permitting the landlord to remove it to make way for a replacement tenant.

There is no statutory landlord’s lien in Colorado, nor is there a concept of distraint or distress. Therefore, this article relates only to consensual liens (obtained pursuant to the Uniform Commercial Code) or judgment liens (obtained after a successful lawsuit).

Sometimes, these agreements contemplate that the tenant has collaterally assigned its interest in the lease to the lender. (Tenants should note that this type of assignment, even if the lender has not requested a direct agreement with the landlord, may require the landlord’s consent under the assignment provisions of the lease.) While a collateral assignment of the tenant’s interest is security for the lender’s loan, it has a different enforcement mechanism than the security interest in equipment or physical personal property. If the lender exercises its rights under a collateral assignment, it then becomes the tenant. Significant considerations for the landlord in this situation are:

• How much latitude does the lender have to subsequently assign the tenant’s interest in the lease to another operator or tenant? Ideally, this would be the same as is available to the original tenant under the lease’s assignment provisions.
• Upon such a subsequent assignment, will the lender be released from further liability under the lease? Keeping the lender “on the hook” will protect the landlord if the replacement tenant is inexperienced and/or has modest financial strength.

In addition to the tenant’s lender, the landlord likely has its own financing. The landlord should be careful not to grant or waive any rights or benefits that it has granted to its lender or that the landlord is prohibited from granting or waiving under its loan documents. Also, when drafting its loan documents, the landlord’s lender may want to consider that this type of waiver is possible.

These agreements seeking a landlord’s waiver or subordination and its consent come in many different forms. However, trying to incorporate the concepts above will help to protect the landlord in case the tenant defaults and the lender needs to enter the premises to remove its collateral. 

Otten Johnson attorneys have substantial experience helping clients negotiate leases. For more information on this Client Alert or for help evaluating your current situation, contact one of our attorneys. For a listing, please click here .

To read the original alert please  click here .

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Protecting an Interest in a Ground Lease – A Lender’s Perspective

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Lenders are often asked to provide financing secured by a leasehold interest in land evidenced by a ground lease. A ground lease is an agreement between the fee owner of real estate (the ground lessor or landlord) and its tenant (the ground lessee) in which the fee owner leases the land to the tenant. Ground leases are typically for a longer term than a basic space lease and allow the tenant to construct improvements on the land and operate the improvements during the term of the ground lease. Because the collateral for leasehold financing typically consists only of the leasehold rights of its borrower under the ground lease, lenders should carefully review the terms of the ground lease to ensure that it contains certain minimum lender protections.

An astute drafter of a ground lease will consider a future mortgage of the ground lease in its initial preparation of the lease, but often, critical lender protections are not included, and this is especially true of older ground leases. While a landlord is generally not interested in amending the terms of the ground lease to satisfy the requirements of a lender providing leasehold financing, a landlord should understand that the tenant’s interest in the ground lease must be financeable.

In addition to the protections in a lender’s leasehold deed of trust, a lender will often need to request that a ground lease be amended or that a separate agreement regarding ground lease be executed to address any lender protections that may have been omitted from the initial ground lease. Below is an overview of the minimum protections that a lender should consider when financing a loan secured by a ground lease.

• Basic Terms. The term of the ground lease should extend well past the maturity of the loan and should specifically address the tenant’s right to mortgage, sublease and assign the lease. A broad list of permitted uses of the property is preferred to give the tenant, the lender and foreclosure sale purchasers the flexibility to change the use of the property should the initial concept fail. To protect the tenant’s interest in the ground lease and put a third party on notice, the ground lease should be evidenced by a short form memorandum thereof recorded in the real estate records.
• Casualty/Condemnation. A key provision of any ground lease is the use of any casualty or condemnation proceeds relating to the property. Since the improvements located on the land generally belong to and have been constructed by the tenant, the ground lease should provide that any insurance proceeds relating to the destruction of any improvements be paid to the tenant. The lender should require that it be named as the “mortgagee” and “lender’s loss payable” on any insurance covering the improvements and the loan documents should require that such proceeds be paid directly to the lender. Similarly, condemnation proceeds attributable to the leasehold estate and the taking of the improvements should be paid directly to the lender. In addition, the lender should have the ability to participate in any condemnation proceedings to sufficiently protect its rights.
• Notice and Right to Cure. The lender should have the ability to cure any tenant defaults under the ground lease after receiving notice from the landlord. This cure period should be in addition to the time allotted to the tenant since the lender may have to foreclose or appoint a receiver prior to curing the default.
• Acquisition by Lender; Entrance into New Lease . Upon the lender’s foreclosure of its leasehold mortgage or taking of a deed-in-lieu of foreclosure, the lender or any party taking title through the lender should have the right to become the tenant under the ground lease without any further consent by landlord. Similarly, if the bankruptcy of the tenant results in a termination of the ground lease, the lender should have the right to compel the landlord to enter into an identical lease with the lender or successor owner as the new tenant.
• Liability . If the lender or another party taking title through the lender takes title to the leasehold interest, such party should only be liable for those obligations of the tenant from the time that the lender or successor owner takes title to the property. The ground lease should also provide that the landlord cannot seek recovery of any losses from the lender beyond its interest in the property. Finally, following an assignment of the ground lease by the lender to a successor owner, the lender should be released from all obligations and liability under the ground lease.
• Amendments; Fee Mortgages . The ground lease should acknowledge that the ground lease may not be amended, modified or terminated without the prior written consent of any leasehold lender that has notified the landlord of its interest. In addition, the ground lease should prohibit the landlord from mortgaging its fee simple interest in the property without the prior written consent of the leasehold lender or, in the alternative, without first getting a non-disturbance agreement in favor of the leasehold lender from the mortgagee of the fee simple interest.
• Waiver/Subordination of Liens . The ground lease should provide that any liens that the landlord has or may acquire against the property during the term of the loan will either be waived or subordinated to the lien of the leasehold lender.
• Repurchase Rights; Rights of First Refusal . Repurchase rights and rights of first refusal in favor of the landlord should be subordinated to the lien of the leasehold mortgage and specifically identified as inapplicable to a foreclosure of the leasehold interest or taking of a deed-in-lieu of foreclosure. Such a clause is helpful in avoiding the impairment or delay of a leasehold lender’s exercise of its rights and remedies following a loan default.
• Environmental Concerns . A lender should treat the financing of the leasehold estate in land like the financing of a fee simple estate for purposes of environmental due diligence. Any environmental reports and questionnaires required by a lender when financing a fee simple interest in property should similarly be required when financing a ground lease. If environmental issues do exist on the property, the ground lease should clearly address the responsibilities of both the landlord and tenant.

In the event that some or all of these provisions are not contained in the ground lease, a leasehold lender should request that either the ground lease be amended to include them or that the landlord execute and record an agreement in favor of the leasehold lender in which the landlord grants the lender with these rights. In addition, it is good practice to have such agreement incorporate, or have the landlord provide an estoppel certificate as of closing, which confirms that (i) the ground lease has not been amended or modified, (ii) the tenant is not then in default under the ground lease, (iii) all agreements between landlord and tenant are contained in the ground lease, (iv) the landlord is not aware of any prior assignment of the tenant’s interest in the ground lease, and (v) that the landlord has no current right to terminate the ground lease. The lender should have the right to request an estoppel certificate from time to time to confirm that the tenant remains in compliance with the ground lease during the term of the loan.

A tenant’s leasehold interest in land can serve as a valuable piece of collateral, but leasehold lenders must carefully review the ground lease and take the necessary steps to ensure that certain protections are included in the ground lease or in a separately negotiated agreement between the landlord and lender.

Assignment and Consent Standards in Commercial Leases

Mar 6, 2020

Assignment provisions in commercial leases are heavily negotiated and very important to both landlords and tenants. This article presents a brief overview of the assignment provision in commercial leases, both office and retail.

Assignment provisions in commercial leases are heavily negotiated and very important to both landlords and tenants. When a tenant’s interest in a lease is assigned, the tenant is transferring its entire leasehold interest and 100% of the leased premises to a third party for the entire remaining term of the lease. For the tenant, the assignment provision represents a potential exit strategy, dependent of course on the local market, and increased flexibility for future needs. For the landlord, the assignment offers greater security for its revenue stream and hopefully the avoidance of a tenant bankruptcy or default while keeping its building occupied. The tenant’s desire for flexibility and the landlord’s need for control is where the negotiations are focused. This article presents a brief overview of the assignment provision in commercial leases, both office and retail, with particular attention on the laws of Maryland, Virginia and the District of Columbia. The landlord’s standard for providing consent to a request to an assignment will be reviewed, and we will conclude by offering suggested language.

What If The Lease Does Not Contain An Assignment Provision?

The law traditionally favors the free alienation of property. Therefore, under the laws of almost every state, if the lease is silent on whether the landlord’s consent to an assignment is required, then the commercial tenant has the right to assign its interest. This is true in Maryland, Virginia and the District of Columbia. Given this baseline, almost every lease form will have a detailed provision setting forth the assignment process. Note also, however, that in most states it is also enforceable for a commercial lease to have an outright prohibition against assignments. Such a provision would likely be a non-starting deal point for most sophisticated tenants.

What Does Reasonable Mean?

If a lease simply provides that the tenant requires landlord’s consent to an assignment, but does not include the standard for giving or withholding that consent, then in many states the implied standard is that the landlord’s consent may not be unreasonably withheld. Historically this was the minority view, with the historical rule allowing the landlord to withhold consent for any reason. The implied duty of reasonableness is now more the norm as more states adopt this position when presented with the issue. There is express case law establishing this rule in Maryland, and most courts in Virginia and Washington, DC will imply such a covenant of good faith and fair dealing. Most states, though, do allow a landlord the sole right to grant or withhold its consent if the lease clearly expressly provides, and in Maryland the lease must specifically state that the landlord’s consent may be granted or withheld in the sole and absolute subjective discretion of the landlord. Again though, a sophisticated tenant with any leverage should never agree to such a provision.

Most negotiated leases will instead contain a provision requiring that landlord’s consent to an assignment is required, but such consent will not be unreasonably withheld. The tenant will likely also try to include landlord’s obligation to not unreasonably delay or condition its consent. A short clause without further defining what constitutes “reasonableness” generally favors the tenant, and landlords typically prefer including specific standards as to the criteria it can consider when reasonably deciding whether or not to consent to an assignment. Without such specificity, defining “reasonable” is difficult as the landlord and tenant clearly will have differing viewpoints and it may be left as a factual question to be decided in litigation. The typical definition (set forth in the Restatement (Second) of Property) would be that of a reasonably prudent person in the landlord’s position exercising reasonable commercial responsibility.

Absent a detailed provision listing the criteria a landlord can consider when reasonably reviewing a request to assign, a landlord is typically found to be considered reasonable if it considers certain general broad factors. First, the landlord reviews the assignee’s proposed use. In a retail setting, the landlord will be concerned whether the proposed use fits with the existing center and/or violates any existing exclusives or insurance requirements. In an office setting, the landlord might review the expected traffic and wear and tear on the building. Second, the landlord will consider the creditworthiness of the assignee. The landlord (and the assignor) will want to be confident that the assignee is capable of performing tenant’s obligations under the lease and a large creditworthy tenant increases the value of the asset. The assignor might argue that a strict financial test (such as a minimum net worth, for example) is unfair since the assignor is likely not being released upon the assignment and the landlord can still pursue the assignor in the event of a default. Third, the landlord will review the experience and history of the assignor. As mentioned above, landlords instead prefer a detailed list setting forth the many factors that they can include as part of reasonably reviewing a request for a lease assignment.

Without further establishing the criteria, the landlord puts itself at risk of a challenge by the tenant that a denial of a consent is unreasonable.

In defining “reasonable,” courts typically do not allow a landlord to deny or condition consent to an assignment based purely on economic reasons where the landlord results in substantially increasing what it was entitled to under the lease. In Washington, DC, there is well established case law holding that it is unreasonable for a landlord to withhold consent solely to extract an economic concession or improve its economic position. For example, a court would not consider it reasonable for a landlord to condition its consent on the assignee paying a greatly increased rent. Instead, as discussed below, landlords should look to protect their interests in a market of increasing rents by providing for either the sharing of excess rentals or a right to recapture.

What Are Typical Provisions In an Assignment Clause?

As discussed above, tenants generally prefer a short assignment provision simply requiring the landlord to not unreasonably withhold, condition or delay its consent to an assignment. But most leases are drafted by landlords, and over the years the assignment provisions have evolved to contain many typical provisions in addition to further defining “reasonableness,” including the following below.

• Sharing of Excess Rents. Since many states do not permit a landlord to condition its consent on improving its economic position (e. g. , by increasing the rent), most leases instead contain a provision where the landlord is entitled to all or a portion of the profits. The profits may mean increased rent, or it may even be construed more broadly to consider the value of the location in a sale of the tenant’s business. The landlord’s argument is that it doesn’t want the tenants competing in the real estate market. The tenant should push back here, and certainly try to lower the percentage shared, carve out any consideration received in the sale of tenant’s business, and only share profits after all of the tenant’s reasonable costs incurred in connection with the assignment were first deducted.
• Corporate Transfers. Since a purchase of the entity constituting tenant is likely not deemed an assignment under the law, most leases make clear that any such corporate sale, including the sale of either a controlling interest in the stock or substantially all of the assets of the tenant, is deemed an assignment for purposes of the lease. The tenant should carve out permitted transfers for typical mergers and acquisitions under certain conditions, and also carve out routine transfers of stock (or other ownership interests) between existing partners or for estate planning purposes. The landlord will likely accept a permitted transfer concept provided they receive adequate notice and the successor entity succeeds to all of the assets of the original tenant with an acceptable net worth.
• Assignment Review Fee. Most landlords include in their form lease the requirement that the tenant reimburse them for legal and administrative expenses incurred in reviewing the request for consent and preparing the assignment. The tenant clearly wants to keep these fees reasonable and in keeping with the local market.
• Recapture Rights. Landlords like to include the express right to recapture the premises in the event the tenant comes to it to request a consent for an assignment. A recapture clause allows the landlord to terminate the lease if market rents have increased or if it needs the space for another use. Sophisticated tenants should push back here as much as leverage allows, try to limit the time periods, and if nothing else try for the right to nullify the recapture by rescinding its request for the consent.
• Tenant’s Remedy. To protect themselves from claims for damages from the tenant if the landlord withholds its consent to a requested assignment, landlords often include a provision where the tenant waives its rights to monetary damages in such a situation and can only seek injunctive relief. The tenant should try to delete this provision, or at least, if leverage permits, provide for the right to seek damages if the landlord is subsequently found to have acted in bad faith.

Assignment provisions are heavily negotiated and both the commercial landlord and tenant need to be advised to the applicable local law and know the market for a comparable transaction. ( Note: The author represents office and retail landlords and tenants throughout Virginia, Maryland and the District of Columbia.) Sample reasonableness provisions for both office and retail uses are copied below for reference.

Retail Lease

Landlord and Tenant agree, by way of example and without limitation, that it shall be reasonable for Landlord to withhold its consent if any of the following situations exist or may exist: (i) In Landlord’s reasonable business judgment, the proposed assignee lacks sufficient business experience to operate a business of the type permitted under this Lease and to a quality required under this Lease; (ii) The present net worth of the proposed assignee is lower than that of Tenant’s as of either the date of the proposed assignment or the date of this Lease; (iii) The proposed assignment would require alterations to the Premises affecting the Building’s systems or structure; (iv) The proposed assignment would require modification to the terms of this Lease, or would breach any covenant of Landlord in any other lease, insurance policy, financing agreement or other agreement relating to the Shopping Center, including, without limitation, covenants respecting radius, location, use and/or exclusivity; (v) The proposed assignment would conflict with the primary use of any existing tenant in the Shopping Center or any recorded instrument to which the Shopping Center is bound; and/or (vi) The proposed assignment or subletting would result in a reduction in the Rent collected by Landlord during any portion of the term of this Lease.

Office Lease

Without limitation as to other reasonable grounds for withholding consent, the parties hereby agree that it shall be reasonable under this Lease and under any applicable law for Landlord to withhold consent to any proposed Transfer where one or more of the following apply: (i) The Transferee is of a character or reputation or engaged in a business which is not consistent with the quality of the Building; (ii) The Transferee intends to use the Premises for purposes which are not permitted under this Lease; (iii) The Transferee is a governmental agency; (iv) The Transfer occurs prior to the first anniversary of the Lease Commencement Date; (v) The Transferee has a net worth of less than $10,000,000.00; (vi) The proposed Transfer would cause a violation or trigger a termination right of another lease for space in the Building; or (vii) Either the proposed Transferee, or any person or entity which directly or indirectly, controls, is controlled by, or is under common control with, the proposed Transferee, (i) occupies space in the Building at the time of the request for consent, or (ii) is negotiating with Landlord to lease space in the Building at such time, or (iii) has negotiated with Landlord during the six (6)-month period immediately preceding the Transfer Notice.

Reprinted with permission from the March edition of the Commercial Leasing Law & Strategy© 2020 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or [email protected] .

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Assignment and Assumption of Tenant's Interest (Commercial Lease Transaction) (Short Form) | Practical Law

Assignment and Assumption of Tenant's Interest (Commercial Lease Transaction) (Short Form)

Practical law standard document 4-615-3645  (approx. 11 pages).

Collateral Assignment

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A collateral assignment involves granting a security interest in the asset or property to a lender. It is a lawful arrangement where the borrower promises an asset or property to the lender to guarantee the debt repayment or meet a financial obligation. Moreover, in a collateral assignment, the borrower maintains asset ownership, the lender holds the security interest, and the lender has the right to seize and sell the asset in event of default. This blog post will discuss a collateral assignment, its purpose, essential considerations, and more.

Key Purposes of a Collateral Assignment

Collateral assignment concerns allocating a property's ownership privileges, or a specific interest, to a lender as loan collateral. The lender retains a security interest in the asset until the borrower entirely settles the loan. If the borrower defaults on loan settlement, the lender can seize and market the collateral to recover the unpaid debt. Below are the key purposes of a collateral assignment.

• Enhanced Lender Protection: The primary purpose of the collateral assignment is to provide lenders with an added layer of security and assurance. Also, by maintaining a claim on the borrower's properties, lenders lower their risk and improve the probability of loan settlement. In case of default, the lender can sell the collateral to recover the unpaid balance. This security authorizes lenders to offer loans with lower interest rates, as the threat associated with the loan is reduced.
• Favorable Loan Terms: Collateral assignment allows borrowers to access financing on more favorable terms than unsecured loans . However, the terms of the loan will vary depending on the borrower’s creditworthiness and the value of the collateral. Generally, lenders are more willing to extend larger loan amounts and lower interest rates when they have collateral to fall back on. The presence of collateral reassures lenders that they have a viable means of recouping their investment, even in case of default. This increased confidence often leads to more competitive loan offers for borrowers.
• Unlocking Asset Value: Collateral assignment enables borrowers to leverage the value of their assets, even if those assets are not readily convertible into cash. For instance, a business owner with valuable machinery can assign it as collateral to secure a business loan. This arrangement allows the borrower to continue utilizing the asset for operational purposes while accessing the necessary funds for expansion or working capital. Collateral assignment, thus, enables the efficient allocation of resources. However, the collateral will still be considered in determining the loan amount and terms.
• Access to Higher Loan Amounts: When borrowers promise collateral against a loan, lenders can present greater loan amounts than for other unsecured loans. The worth of the collateral serves as a reassurance to lenders that they can recover their investment even if the borrower fails to settle the loan. Therefore, borrowers can obtain higher loans to finance important endeavors such as purchasing property, starting a business, or funding major projects.
• Diversification of Collateral: Collateral assignment offers flexibility for borrowers by allowing them to diversify their collateral base. While real estate is commonly used as collateral, borrowers can utilize other valuable assets such as investment portfolios, life insurance policies, or valuable personal belongings. This diversification allows borrowers to access financing without limiting themselves to a single asset, thereby preserving their financial flexibility.

Steps to Execute a Collateral Assignment

A collateral assignment is a financial procedure that involves utilizing an asset as security for a loan or other responsibilities. Below are the essential steps involved in the collateral assignment process.

• Assess the Need for Collateral Assignment. The initial step in collateral assignment is determining whether collateral is necessary. Lenders or creditors may require collateral to mitigate the risk of default or ensure repayment. Evaluating the value and marketability of the proposed collateral is crucial to ascertain if it meets the lender's requirements.
• Select Appropriate Collateral. The next step involves choosing a suitable asset for collateral assignment. Common classifications of collateral comprise stocks, real estate, bonds, cash deposits, and other valuable assets. The collateral's value should be sufficient to cover the loan amount or the obligation being secured.
• Understand Lawful and Regulatory Requirements. Before proceeding with collateral assignment, it is essential to comprehend the lawful and regulatory provisions specific to the jurisdiction where the transaction happens. Collateral assignment laws can vary, so seeking advice from legal professionals experienced in this area is advisable to ensure compliance.
• Negotiate Provisions. Once the collateral is recognized, the collateral assignment provisions must be negotiated among the concerned parties. It includes specifying the loan amount, interest rates, repayment terms, and any further duties or limitations associated with the collateral assignment.
• Prepare the Collateral Assignment Agreement. The collateral assignment agreement is a lawful document that typically includes details about the collateral, the loan or obligation being secured, and the rights and responsibilities of both parties. It is highly advised to engage the services of a legal specialist to prepare or review the contract.
• Enforce the Collateral Assignment Agreement. After completing the collateral assignment agreement, it must be executed by all involved parties. This step ensures that all necessary signatures are obtained and copies of the agreement are distributed to each individual for record-keeping objectives.
• Notify Relevant Parties. To ensure proper recognition and recording of the collateral assignment, it is important to notify all relevant parties. It may involve informing the lender or creditor, the custodian or holder of the collateral, and any other pertinent stakeholders. Sufficient documentation and communication will help prevent potential disputes or misunderstandings.
• Record the Collateral Assignment. Depending on the nature of the collateral, it may be necessary to record the collateral assignment with the appropriate government authority or registry. This step provides public notice of the assignment and establishes priority rights in case of multiple claims on the same collateral. Seeking guidance from legal professionals or relevant authorities can determine if recording the collateral assignment is required.
• Monitor and Maintain the Collateral. Throughout the collateral assignment term, it is crucial to monitor and maintain the value and condition of the collateral. This includes ensuring insurance coverage, property maintenance, and compliance with any ongoing obligations associated with the collateral. Regular communication between all parties involved is essential to address concerns or issues promptly.
• Terminate the Collateral Assignment. Once the loan or obligation secured by the collateral is fully satisfied, the collateral assignment can be terminated. This involves releasing the collateral from the assignment, updating relevant records, and notifying all parties involved. It is important to follow proper procedures to ensure the appropriate handling of the legal and financial aspects of the termination.

Key Terms for Collateral Assignments

• Security Interest: It is the legal right granted to a lender over the assigned collateral to protect their interests in case of borrower default.
• Collateral Valuation: The process of determining the worth or market value of the assigned collateral to assess its adequacy in securing the loan.
• Release of Collateral: The action taken by a lender to relinquish its claim over the assigned collateral after the borrower has fulfilled the loan obligations.
• Subordination Agreement : A legal document that establishes the priority of multiple creditors' claims over the same collateral, typically in the case of refinancing or additional loans.
• Lien : A legal claim or encumbrance on a property or asset, typically created through a collateral assignment, that allows a lender to seize and sell the collateral to recover the loan amount.

Final Thoughts on Collateral Assignments

A collateral assignment is a valuable instrument for borrowers and lenders in securing loans or obligations. It offers borrowers access to profitable terms and more extensive loan amounts while reducing the risk for lenders. Nevertheless, it is essential for borrowers to thoughtfully assess the terms and threats associated with collateral assignment before proceeding. Seeking professional guidance and understanding the contract can help ensure a successful and beneficial financial arrangement for all parties involved.

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I build legal solutions which create extraordinary value for my clients. I am a partner in Alliance Law Firm International PLLC in Washington. My specialties include tax, wealth management, estates, corporations/business, venture capital, private equity, and natural resources. Prior to practicing law, I had a decade-long career in international private equity and investment banking. I have worked on building and managing companies in technology, energy, materials, retail, and natural resources. I am licensed to practice in the District of Columbia and Pennsylvania. I have degrees from the Georgetown University Law Center (JD) and the Yale School of Management (MBA).

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Mrs. Rivera graduated from Palmetto High School in 2009 and went on to attend Florida State University in Tallahassee, FL. After graduating from Florida State University with a B.S. degree in Criminology and a minor in Philosophy in April 2012, she went on to attend the University of Central Florida where she earned a M.S. Degree in Criminal Justice in August 2013. That same month, She started law school at Stetson University College of Law. ​ While in Law school, Mrs. Rivera participated on Stetsons #1 Trial team. In May 2016, Mrs. Rivera graduated with her law degree and in December 2016, Mrs. Rivera obtained her Masters in Law from Stetson University through its Joint J.D./LL.M degree in Advocacy program. Mrs. Rivera was a part of the first graduating class for this joint program at Stetson University. ​ As a Law student, Mrs. Rivera was a law clerk at a well-known plaintiffs employment law firm in Tampa, FL and also interned for the Honorable Judge Edward Larose of the Second District Court of Appeal where she was able to draft PCA opinions draft legal opinions that were ultimately published. Mrs. Rivera also went on to participate as a Certified Legal Intern (CLI) with the 6th Judicial Circuit Office of the Public Defender in Pinellas County, FL and an Intern for LegalAid of Manasota in Sarasota, FL. ​ After Law School, Mrs. Rivera began her legal career working as a Public Defender with the Ninth Judicial Circuit Office of the Public Defender in Orlando, FL. During her time as a Public Defender, Mrs. Rivera litigated more than 20 trials, representing both adults and juveniles accused of Misdemeanor and Felony offenses. After engaging in extensive civil, criminal and family law litigation, Mrs. Rivera decided it was time to finally open Allstarr Legal, P.A. in order to provide both affordable and quality legal representation to the people of the State of Florida. Mrs. Rivera practices throughout the entire state of Florida.

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Assignment of Lease vs. Mortgage of Lease

This article may only be applicable in certain jurisdictions.

When lenders consider their real property security options, their analysis often goes beyond simply taking a mortgage from a debtor who owns real estate. A debtor's interest in real property leases (whether as landlord or tenant) means a lender often obtains either an Assignment of Lease or a Mortgage of Lease as additional security. Like any other specific security agreement, these agreements facilitate the orderly and more effective enforcement of the Lender's security in the underlying debtor asset.

Assignment of Lease

In cases where the debtor owns real property but does not occupy it, the revenue stream from third party leases is a significant asset that should be secured. Although most mortgage standard charge terms include at least a brief paragraph related to assignment of leases, they do not provide the benefit of the more fulsome provisions typically contained in a stand alone specific Assignment of Lease (in cases where there may be a significant tenant) or a general Assignment of Lease (securing all present and future leases without reference to a specific tenant).

The debtor's interest as landlord is secured by registration against title to the debtor's real property, typically immediately following the registration of the mortgage of land. It should be noted that in order to register a specific Assignment of Lease, there first requires the registration of a Notice of Lease in respect of the lease that is being specifically assigned. The Assignment of Lease also has a personal property component that cannot be overlooked. The rents and leases that are secured by the Assignment of Lease fall within the definition of personal property under the personal property security legislation; and as such require the registration of a financing statement against the debtor.

An Assignment of Lease document includes certain generally accepted provisions.

The debtor assigns to the lender (as collateral security for the payment of principal and interest under the mortgage of land) all rents and other monies due to it by tenants and the benefit of all tenant covenants under all current and future leases.

The debtor typically covenants to not collect rent more than one month in advance (to ensure that the normal revenue stream is available to the lender on enforcement) and not amend any material terms of the leases without the lender's approval. In the case of a specific Assignment of Lease, it is prudent to also obtain similar covenants from the tenant itself and an acknowledgement that the tenant will attorn to the Lender in the event of default by the debtor.

The debtor is permitted to continue to collect rent according to the terms of the leases until an event of default occurs pursuant to the mortgage of land, after which the Lender may give notice to the tenants to pay all future rents to the lender directly.

Mortgage of Lease

In cases where the debtor does not own real estate but rents space instead, the right to occupy the premises may be a key asset of the debtor that is secured. Although it is typical that a general security agreement includes a reference to leasehold interests in the description of the charged collateral, the general security agreement does not provide the benefit of the more complete language in a stand alone specific Mortgage of Lease document.

The debtor's interest as tenant is secured by registration against title to the debtor's leasehold interest in the real property. This requires the prior registration of a Notice of Lease in respect of the lease that is being secured.

It should be noted that if there is a real property mortgage on title granted by the owner/landlord to another lender prior to the lease, and if the tenant/debtor or tenant's lender has not obtained a non-disturbance agreement from the owner/landlord, the Mortgage of Lease will be no better security than the lease itself (i.e., subject to being terminated at the option of the prior mortgagee in the event of default under the real property mortgage). Most leases will contain a prohibition against mortgaging the lease, so it will be necessary to obtain the landlord's consent to a Mortgage of Lease.

A Mortgage of Lease document typically contains some basic standard provisions.

As in a mortgage of land, the Mortgage of Lease specifies a principal amount, interest rate, payment dates, and contains charging language whereby the debtor's leasehold interest is security for payment of the principal and interest.

Similarly, in the event of default, the lender has the ability to exercise a power of sale and sublease or assign the leasehold interest to a third party.

The debtor covenants to not pay rent more than one month in advance, to not amend any material terms of the leases without the lender's approval, to not terminate or surrender the term of the lease and to hold possession of the premises in trust for the lender.

Most lender mortgage standard charge terms contain flexible language that contemplates use of the terms for both cases where the chargor owns a freehold interest in the property or a leasehold interest in the property.

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Leasehold is a kind of property interest . A lease between a landlord and a tenant creates both a contractual interest and a property interest, the property interest here is called leasehold.

Leasehold is the presumption in the law that the lessee and lessor of the lease are protected even the lease is silent in some areas. For example, the landlord must make sure the real estate be habitable . Even if this is not included in the lease, if the real estate becomes inhabitable, the landlord offends the tenant’s leasehold. The tenant can sue the landlord and ask for remedies. However, if the lease specifically alters the presumed interests, the lessee and lessor should follow the lease.

[Last updated in July of 2020 by the Wex Definitions Team ]

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Leasehold Mortgage vs. Assignment of Lease

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Although leasehold mortgages and assignments of lease are both legal processes relating to property leases, they’re actually very different. A leasehold mortgage is a loan placed on a piece of leased land, usually used by developers for construction projects. An assignment of lease transfers an unexpired lease to someone else, who then takes over the rental payments.

A leasehold mortgage is a loan taken out on a piece of property that is owned by someone else, while an assignment of lease transfers the lease on a property to someone else.

Mortgage Leases and Leasehold Mortgages

Generally, when someone wants to purchase a property, that property is financed using a mortgage. For commercial property buyers, though, mortgage lending isn’t quite as straightforward. There are various types of commercial mortgages, and one of those is a leasehold mortgage .

With a leasehold mortgage, a commercial real estate investor can obtain financing for a building based on the land that person is leasing. Common in real estate development, this type of mortgage gives the developer the funds necessary to put a building on land that is leased, based on the assumption that once construction is finished it will begin generating the income necessary to make it worth it for the property owner.

Assignment of Lease

If you own a home and want to get rid of it, you must either bring in a renter or sell it to someone else. With a lease, though, you can turn over the lease to someone else, provided your landlord is OK with it. This is done through the use of an assignment of lease , which gets you out of an unexpired lease by letting you transfer it to someone else.

Unlike a leasehold mortgage, an assignment of lease is not only a process, but it’s also a title document that both parties must read and sign. This type of arrangement comes in handy if your business fails to become profitable and must close, yet you have a remaining lease on your space. It may also be an option if your business grows so quickly that you need a larger space and therefore must move before your lease expires.

Leasehold Mortgage Versus Lease Assignment

Although leasehold mortgages and lease assignments are different by nature, they also have something in common. They refer to various activities that can take place based on a lease . While leasehold mortgage financing requires taking out a loan, though, a lease assignment is merely transferring an agreement from one party to another.

One similarity between the two is that they both refer to leases, which means property owners may have a stake in the outcome. With a leasehold mortgage, the borrower must have permission to take out such a mortgage – a permission that is usually conveyed as part of a commercial ground lease . With an assignment of lease, the landlord must sign off on the transfer before it can be finalized.

Approvals for Leasehold Mortgages

Getting a leasehold mortgage isn’t just a matter of heading to a bank and asking. The borrower will need to be able to prove that he has the right to request this type of loan . Usually, this starts by looking at the lease and finding the section specific to mortgages on the leased property.

Most commercial ground leases will state that the lessee must provide written notice to the lessor of an impending request to obtain financing for the property. That notice should include contact information for the potential mortgage lender, and the lender should verify that the lease allows a tenant to borrow money from the type of lending institution the borrower has approached.

Approvals for Lease Assignments

A tenant can’t simply turn a lease over to someone else. Obviously, the landlord will have a say in the situation and likely will want to clear the new tenant before approving the transfer. The landlord’s permission is usually granted in the form of a legal document known as the License to Assign .

The landlord’s approval may not be the only thing you’ll need to secure before you can complete an assignment of lease. On your lease agreement, check the section called Alienation , which should detail circumstances in which your landlord can refuse to allow you to assign your lease to someone else. If you fail to go through the landlord approval process, your landlord could later revoke the lease assignment.

Defining a Ground Lease

Before you can establish a mortgage leasehold interest in a property, you first must have the rights to lease the space. Leasehold mortgages are most commonly seen with ground leases, which are commercial leases issued to a tenant who wants to develop property on a lot. The property owner permits the developer to erect a building on that land with the understanding that once development is complete, the land and all the improvements revert back to the owner of that land.

Property owners agree to leasehold mortgages because once development is complete, the owner can then sell the property at a profit. It’s a small price to pay to allow someone to lease the property during the construction phase in order to recoup some money at the end of it. However, it can be risky for the property owner if the person leasing the property stops paying the lease or the leasehold mortgage payment and there’s no one around to pay the rent.

Leasehold Mortgage Foreclosures

If you own a property and stop paying your mortgage, the bank will eventually foreclose. But if you stop making payments on your leasehold mortgage, things get a little more complicated. Someone else owns that property, and that person expects a lease to continue to be paid even if the loan goes bad.

A lender can foreclose on the borrower’s interest in a property , but that same lender likely won’t want to continue to make the rent on that property, even if the owner expects it. Since commercial leases can sometimes run for multiple years, this obligation is something a lender definitely needs to think about. It’s important that agreements be written in a way that the lender doesn’t expressly assume the lease in the event of a foreclosure.

Assignment of Lease Versus Subletting

If you think assignment of lease sounds a lot like subletting , you’re right. But there’s a very specific difference between the two. With an assignment of lease, you are stepping out of the situation and setting up a direct relationship between the new tenant and your previous landlord. With subletting, your relationship with your landlord continues, but you introduce a new relationship between you and a third-party tenant who now pays the rent.

While both processes require legal documentation, subletting puts the agreement between the original tenant and the person who will be staying in the rented property. As with an assignment of lease, though, you’ll need to make sure you have your landlord’s approval before the new person moves in. But neither assignment of lease nor subletting require that you involve a lender, as in the case of leasehold mortgage financing.

Liabilities of Assignments of Lease

As with any type of mortgage lease, when you have a lease on a property, the liability falls on you if you fail to make mortgage payments or you damage the building in some way. When you shift the lease via a legal document, though, this liability goes with it. This only applies if the landlord releases that liability , though, so it’s important to make sure that’s part of your documentation.

Although you may be able to escape liability for what the transferee does to the rental space, there’s one area where liability will probably be unavoidable. If your transferee exits the lease before your original term is up, your landlord will probably come right back to you to fix the issues. Your Assignment of Lease document should detail what will happen in this event, including your right to reoccupy the premises if you choose.

Benefits of a Ground Lease

You may have never heard of these ground leases before, but they’ve definitely happened all around you. Large chain retailers like Whole Foods and Starbucks use ground leases to build new locations on already-owned land, often in situations where they rest alongside other shops and restaurants in a retail strip.

Businesses often choose ground leases with leaseholder mortgages because they can access a property without having to make a considerable down payment. They simply need to obtain leasehold mortgage financing and they can start building. For larger corporations, this is as much a benefit as a slowly growing small business since it keeps capital free for them to spend on other expenses, such as building costs.

Subordinated Ground Lease

When a landlord agrees to a ground lease, often that means agreeing to take a subordinated position if the tenant defaults on her leasehold mortgage. This means your landlord is agreeing that if you don’t make your payments, the property itself acts as collateral. As a result, the landlord may increase rent payments for tenants in order to compensate for that risk.

An unsubordinated ground lease, on the other hand, accounts for any mortgage lease issues by stating that if you don’t pay your rent or your mortgage payments, the property owner takes a top role legally. You may have a tougher time getting a bank to agree to take a lower priority than the landlord and because of this inconvenience, generally, you’ll find the rent is lower to compensate for it.

Leasehold Improvements Versus Leasehold Mortgages

Another term that can be confused with leasehold mortgages is something called leasehold improvements , which can be done without the loan and subsequent mortgage leasehold interest involved in a leasehold mortgage. A leasehold improvement simply refers to adjustments a tenant makes to a property that apply specifically to the internal contents , such as paint, new flooring or upgraded lighting fixtures. This is different from the building improvements that are handled by a landlord and apply specifically to common areas, elevators and other nonrentable areas of a building.

Unlike leasehold mortgages, leasehold improvements don’t involve taking out a loan . The owner may provide a particular amount of money for such improvements, called a Tenant Improvement Allowance. Landlords may also be willing to discount rent or provide money through something called a Building Standard Allowance. In other cases, the landlord himself pays for the improvements in something called a Turnkey Job, which is generally done prior to move-in but can be done while you’re occupying the space, with sufficient notice each time before entering the unit.

Liabilities of Leasehold Mortgages

Before taking a mortgage leasehold interest stake in a property, a lessee will also want to reduce his own liability. If there is a casualty during the time this loan is in place, the developer may find it difficult to get access to the insurance proceeds necessary to repair any damages that were suffered. For that reason, many property owners will employ an escrow agent to hold the funds so that they’re guaranteed to only be used for damage-related costs.

If there’s an injury or another incident on your property during the time you hold a lease, local laws will determine where responsibility falls. Landlord-tenant law covers such a situation, and often landlords have insurance to protect against these types of claims. Although you, as the developer, have a responsibility to keep your worksite safe, the landlord is responsible for ensuring common areas are maintained and proper signage is posted when a hazard exists on site.

• USLegal: Leasehold Mortgage Law and Legal Definition
• JDSupra: When a Lender Forecloses on a Leasehold Interest
• White and Williams LLP: Leasehold Financing: Key Issues for Mortgage Lenders
• What Is A Ground Lease? | Massimo CRE Coach
• LawDepot: What Type of Leases Do You Have?
• Sherin and Lodgen: Why a Leasehold Mortgage?
• FindLaw: Liability for Tenant Injuries and Insurance for Landlords

Stephanie Faris has written about finance for entrepreneurs and marketing firms since 2013. She spent nearly a year as a ghostwriter for a credit card processing service and has ghostwritten about finance for numerous marketing firms and entrepreneurs. Her work has appeared on The Motley Fool, MoneyGeek, Ecommerce Insiders, GoBankingRates, and ThriveBy30.

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Best Practices: Considerations for SBA Loans Financing Improvements on Leased Land (Ground Leases)

• November 3, 2021
• Kristen Dickey

When financing improvements on leased land, it is important to consider the ways in which an SBA lender can adequately secure its loan.  The purpose of this article is to highlight the analysis the lender should complete and documentation the lender should obtain to remain in compliance with SBA rules and requirements when financing improvements for a borrower on leased land, generally known as a “ground lease.”

A ground lease is a type of lease wherein  a tenant leases raw land from its owner to develop and improve using its own or financed funds.  During the term of the ground lease, the improvements constructed by the tenant remain the property of the tenant, but once the term of the ground lease expires, the improvements on the land become the property of the landlord, i.e., the owner of the land.  A ground lease is often called a “land lease” because the landlord leases only the underlying land to the tenant upon which the tenant constructs the building from which it will operate.  This type of lease structure is beneficial to both the tenant and the landlord.  The tenant is able to obtain property in a prime location which may not be financially feasible to purchase, and the landlord’s property value typically increases once the tenant develops it.  The Landlord stands to sell the property for a substantial profit once the term of the ground lease expires.  Typically, the tenant assumes responsibility for most expenses of the improvements, including construction, repairs, renovations, improvements, taxes, insurance, and any financing costs associated with the property.  For this reason, the ground lease term also tends to be much longer than a typical lease given the additional costs involved with development of the improvements on the property.

SBA loans used for financing improvements on leased land are secured with a lien on the borrower’s leasehold interest in the land by means of a leasehold mortgage or deed of trust.  Lenders should consider obtaining title insurance to insure the lender’s lien position on the borrower’s leasehold interest.  A lender taking a leasehold interest in the land as security for a loan, would also be required to: (i) follow the appraisal requirements for commercial real estate collateral set forth in the SOP; and (ii) obtain an environmental investigation on the property, the type and depth of which would be determined by the risk of contamination associated with the property and prudent lending practices and internal lending policy of the lender.

The SBA requires very specific information to be included in the ground lease itself in addition to the standard landlord waiver and collateral assignment of lease.  In particular, the SOP requires the Lender obtain the landlord’s written consent to the leasehold mortgage or deed of trust and a collateral assignment of the ground lease.  If the ground lease has already been executed and does not contain the following provisions: (i) tenant’s right to encumber leasehold estate; (ii) no modification or cancellation of lease without lender’s or assignee’s approval; and (iii) lender’s or assignee’s right to: (a) acquire the leasehold at foreclosure sale or by assignment and right to reassign the leasehold estate (along with right to exercise any options) by lender or successors; landlord may not unreasonably withhold, condition, or delay the reassignment; (b) sublease; (c) share in hazard insurance proceeds resulting from damage to improvements; (d) share in condemnation proceeds; and (e) SBA lender’s or assignee’s rights upon default of the tenant or termination (including notice, extended time to cure (at least 60 days), time allotted for foreclosure and sale, and procedures for non-monetary defaults), the lender should consider obtaining an agreement of landlord encompassing all the foregoing requirements.

For assistance with SBA lender considerations and compliance for transactions involving a ground lease, please contact the attorneys at Starfield & Smith, PC at (215) 542-7070 or visit us at www.starfieldsmith.com.

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