Ground Lease Agreement

Ground Lease Agreement

Drafts a financeable ground lease governing long-term land use where the tenant constructs improvements on landlord-retained fee, with improvements reverting to landlord upon expiration.

Prerequisites

Gather before drafting:

1. Parties — legal names, entity types, formation jurisdictions, addresses (landlord, tenant, any guarantor)
2. Property — legal description (metes and bounds, lot/block, plat), street address, county/state, title/survey exceptions
3. Economics — initial base rent, escalation method, rent commencement trigger, any percentage/participation rent
4. Development — intended use, improvement scope, construction timeline, target CO date
5. Financing — subordinate vs. unsubordinate to tenant's financing; anticipated lender(s)
6. Special terms — LOI/term sheet deal points, governmental approvals, institutional/public-entity constraints

Agreement Sections

1. Parties, Recitals & Property

• Entity details; identify SPE structure and parent guaranty
• Recitals: fee ownership rationale, development intent, project scope
• Legal description controls over street address
• Appurtenant rights (access, utility, parking, signage); reservations (minerals, prior easements) carved out
• Address air rights / subsurface rights if bifurcated

2. Lease Term

3. Rent & Escalation

Base rent typically 5–8% of appraised land value.

Payment: due dates, late charge (5% after 10–15 day grace), default interest (prime + 3–5%). Verify usury compliance.

Taxes: tenant pays all real property taxes (land + improvements) directly; annual evidence; may contest but must prevent liens on fee.

4. Use, Development & Improvements

Permitted use: reference zoning; broad enough for evolution but restrict environmental-risk uses and covenant violations.

Construction milestones: commence within 6–12 mo; complete within 12–36 mo; completion = CO or AIA substantial completion; failure triggers landlord termination right or rent acceleration.

Improvement ownership:

• During term: tenant owns, may depreciate and encumber via leasehold mortgage
• Expiration: revert to landlord without compensation (unless negotiated otherwise)
• Trade fixtures/equipment: removable if not affixed

5. Maintenance, Compliance & Insurance

Tenant responsible for all maintenance (structural and non-structural) to first-class comparable standard.

Carrier: A.M. Best A- or better. Certificates annually; 30-day cancellation notice; primary and non-contributory; subrogation waived.

6. Casualty & Condemnation

Casualty: tenant restores (commence 60–90 days, complete 12–24 mo). Insurance proceeds in controlled disbursement against architect certifications. Tenant funds shortfall. Termination rights: damage in final [X] years, damage > [Y]% replacement cost, or insufficient proceeds.

Condemnation:

• Total taking: both terminate; landlord gets land value, tenant gets improvement value + leasehold bonus + business damages + relocation
• Partial taking: lease continues, rent adjusted proportionally, restoration applies

7. Assignment & Transfer

Consent: landlord required (not unreasonably withheld/conditioned/delayed); 30–60 day response; deemed consent if silent.

Criteria: net worth ≥ [X × annual rent], comparable operating experience, no prohibited use, audited financials.

Permitted (no consent): affiliate transfers (original tenant liable or transferee comparable), merger/consolidation to equal+ entity, leasehold mortgagee foreclosure.

No recapture right — inappropriate given tenant's capital investment.

8. Leasehold Mortgage Provisions

Critical for institutional financing. Include all:

• Right to mortgage: tenant may encumber leasehold + improvements without consent
• Lender notice: landlord sends all default notices to registered lenders simultaneously
• Lender cure rights: tenant's full cure period + 30–60 additional days (monetary); reasonable additional time for non-monetary defaults requiring possession
• New lease right: if ground lease terminates for tenant default, lender may elect (within 30–60 days) to receive new lease on identical terms, curing all defaults and arrears
• Non-disturbance: landlord won't disturb lender's security while lender performs tenant obligations
• Foreclosure recognition: landlord recognizes foreclosure sale purchaser as tenant upon assumption and cure

9. Environmental

• Landlord reps: no known contamination/violations at commencement (subject to Phase I disclosures)
• Tenant obligations: comply with environmental laws; permits; hazmat records; inspection access
• Remediation: tenant remediates tenant-caused contamination to regulatory closure; landlord self-help if tenant fails
• Indemnification: tenant indemnifies for environmental claims from tenant operations — survives expiration
• Surrender: deliver free of tenant-caused contamination; Phase I or regulatory closure evidence

10. Default & Remedies

Landlord remedies: termination; rent acceleration (subject to mitigation); self-help cure as additional rent; specific performance; damages.

Tenant remedies: damages; offset (perform and deduct); specific performance; termination only for material landlord breach.

11. General Provisions

• Governing law: property situs state
• Disputes: executive negotiation (30 days) → mediation (AAA/JAMS) → litigation/arbitration; carve out termination and injunctive relief
• Jury waiver: include with conspicuousness; confirm enforceability [VERIFY jurisdiction]
• Notices: simultaneous to lenders; certified mail + overnight + email
• Recording: memorandum/short-form (preserving economic confidentiality); include term, options, leasehold mortgage rights

Checks

• Confirm leasehold mortgage provisions satisfy anticipated lender requirements (CMBS, life company, bank) before finalizing
• Resolve subordination vs. unsubordination early — fundamentally changes risk allocation
• Terms of 49 or 99 years most common; avoid century-crossing terms without careful renewal/reset mechanics
• If FMV rent resets at renewal, model scenarios and ensure dispute procedure (baseball arbitration preferred) is functional
• If landlord is institutional/governmental, confirm improvement reversion is consistent with accounting, tax-exempt status, or regulatory obligations
• State-specific: usury caps, jury waiver enforceability, recording requirements, landlord-tenant statutes — flag for local counsel
• Mark [VERIFY] on any statutory citation, index reference, or local law requirement not confirmed against current sources