The leasehold mortgage

Not all building owners own the land on which the building stands.

The owners of some very large buildings lease the land under the buildings, which is called leasehold property. Leasehold property creates a leasehold mortgage.

Before a builder signs a ground lease, he will have an irrevocable mortgage commitment for his building. The mortgage requires an assignment of the ground lease, or sub-lease, and the terms of the ground lease will be satisfactory to the mortgagee, or there is no lease.

The principal sum of a leasehold mortgage is understandably less than it would be if the mortgagor owned the land.

If the mortgagee takes his mortgage under assignment of the lease, a situation is established between the lessor and mortgagee whereby the mortgagee becomes responsible for the terms of the lease, including that of paying the ground rent. The mortgagee would be liable for all breaches of covenant that might occur.

Under a sub-lease arrangement, the requirement would be that the mortgagor would hold the last day of the term of the lease in trust for the mortgagee, in order to allow the mortgagee to control the last day and thereby control the renewable term. This is necessary, because although the mortgage term is usually of shorter duration than that of the lease, it could be possible for the mortgagee to have not received his final payments by the end of the term.

A leasehold mortgagee will most certainly protect himself fully to ensure that there is no termination of the ground lease, and will therefore have an agreement with the lessor to allow the mortgagee time to remedy any default on the part of the lessee.

The mortgage will contain a clause stipulating that a default by the mortgagor under the terms of the ground lease will automatically become a default under the mortgage.

The leasehold mortgage will require that the lessee pays the ground rent to the mortgagee, who in turn will pay it to the lessor, or require the lessee/mortgagor to produce receipts promptly.

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