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loan documents should make clear that the lender agrees that the insurance proceeds
will be available for rebuilding and will not be applied to debt reduction.
If the ground lease requires rebuilding within a specified time, the tenant will want
to include a force majeure clause to allow for contingencies beyond the tenant’s control.
The same construction controls that are included in the ground lease for initial
construction should apply with equal force to any rebuilding of the improvements.
If the casualty loss occurs in the latter years of the lease term, the lease may
excuse the tenant from rebuilding the improvements or give the tenant the option to
terminate the lease instead of rebuilding. The lender will have one primary concern with
respect to the lease terminating as a result of a casualty loss: the lender will want to
require that the leasehold estate not be terminated until the loan is paid in full. The
landlord, on the other hand, will want the insurance proceeds to be used first to clear
the site. How the proceeds are applied will depend on the relative bargaining strengths
of the parties, but the lease should specify the order in which the proceeds will be
applied and the application of any excess proceeds.
3. Condemnation. The potential for condemnation is greater with a long-
term ground lease precisely because of the length of the term and the likelihood of
changing conditions over that time period. The ground lease should address the effect
of a total taking, in which the entire leased premises is taken, and a partial taking, in
which the premises can be reconstructed and used in an economic manner.
As to a total taking, the lease should provide that the lease will terminate. The
question then arises as to how to divide the condemnation award. How the award is
apportioned in the lease will depend on the relative bargaining strengths of the parties,
but if there is a lender involved, the lender will want to make sure that the amount
awarded to the tenant will be no less than the principal balance owing on the loan at the
time of the total taking.
There are a variety of approaches to apportionment. One approach is to base
the apportionment on the value of the respective estates of the landlord and the tenant
immediately prior to the condemnation and apply the ratio to the total amount of the
award. A second approach is to give to the landlord the value attributable to the land
and give to the tenant the remainder, except toward the end of the term, at which time
the landlord would be awarded the residual value of the improvements.
In a partial taking, it is typical for the award to be apportioned with the landlord
receiving the amount of the award attributable to the value of the land and the tenant
receiving the amount of the award attributable to the improvements and any
consequential damages, such as those pertaining to the tenant’s ongoing rental
obligation. If the tenant receives such consequential damages, then there should be no
rent abatement. Another approach to apportioning the condemnation proceeds is to
award to the tenant the amount equal to the cost of restoration or repair, then to the
landlord the present value of the income stream taken, plus the present value of the