FINANCING LEASES IN HAWAII
Raymond S. Iwamoto
Goodsill Anderson Quinn & Stifel
1099 Alakea Street
Alii Plaza, Suite 1800
Honolulu, Hawaii 96813
Ph.: 808.547.5600
Fax: 808.547.5880
Lenders both from Hawaii and from the continental U.S. have a wealth of experience in financing leases (ground and others) in Hawaii and, as a result, the major landowner/lessors are well acquainted with the requirements of the lenders and have developed standard provisions in their leases to respond to the lender’s concerns. Lenders have responded so well to these arrangements and have found Hawaii leases to be financeable to such a point that no lessor will pay much attention to a request for a subordination of the fee interest. The following are standard mortgagee provisions in Hawaii leases.
Consent to Mortgage. The Lease will provide that the lessee may from time to time, without further consent, mortgage the lease. There may or may not be requirements as to the purpose of the mortgage and requirements for the use of the proceeds and requirements as to the type of entity that is to be the mortgagee. The lessee is required to provide the lessor with a copy of the mortgage.
Enforcement of Mortgage. The Lease will provide that the mortgagee may enforce the mortgage.
Cure Rights. The Lease will provide that the mortgagee has a right of entry to cure defaults.
Possession Rights. The mortgagee is given the right of possession pending foreclosure or pending deed in lieu of foreclosure, and may rent the property.
Assignment Rights. The mortgagee may sell and assign the lease. Sometimes this is only with the consent of the lessor, which the lessor agrees will not be unreasonably withheld if the lessee meets certain qualifications stated in the lease. The assignee has the right to give a purchase money mortgage to the assignor. If the mortgagee becomes the lessee, then the mortgagee is responsible only for defaults during its watch.
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Raymond S. Iwamoto is with the firm of Goodsill Anderson Quinn & Stifel specializing in real estate and corporate securities law.
Notice of Default. The lessor covenants to deliver to the mortgagee notice of default simultaneously with giving notice of default to the lessee, and the notice to lessee is not effective unless the lessor fulfills this covenant.
Protection of Mortgagee for Monetary Defaults. The lessor covenants not to terminate the lease for default, if the mortgagee within a specified period of time (often 90 days) from receipt of notice that the Lessor intends to terminate the lease because of default, cures the default if the default is one that can be cured by the payment of money. The 90 days is extended if the lease covenant is such that the default cannot reasonably be cured within the 90 days.
Protection of Mortgagee for Non Monetary Defaults. If the default is not of a nature that can be cured by the payment of money, then the Lessor covenants not to terminate the lease if the mortgagee undertakes in writing to perform all lease covenants that the mortgagee is capable of performing and actually performs those covenants while diligently pursuing foreclosure proceedings until the lease is sold upon foreclosure. If the default is a failure to discharge a lien that could be cured by the payment of money but also could be wiped out by the mortgage foreclosure, or if the default is not susceptible of being cured except upon taking possession or foreclosure, then if the mortgagee commences foreclosure within the 90-day period and prosecutes the action in a diligent and timely manner, the default will be deemed to be cured.
New Lease. Lessor’s covenant to issue a new lease is tied to bankruptcy because if the mortgagee performs pursuant to the mortgagee protection provisions described above, the lease will not be terminated by the lessor and, therefore, the only risk of termination outside the mortgagee’s control is an actual or deemed rejection of the lease under bankruptcy laws. In this case, the lessor agrees to issue a new lease, on the same terms and conditions, upon request by the mortgagee, to the mortgagee or a designee (sometimes a qualified designee). If any subtenant had attorned to the lessor, then the lessor also will assign its interest in that sublease to the new lessee. A condition of the new lease is to cure only defaults susceptible of being cured by the new lessee. There is no requirement to cure by performing any personal covenants of the original lessee. If possession is required to cure, then the requirement is to cure within a reasonable time after obtaining possession.
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