ALI-ABA Course of Study Commercial Real Estate Defaults ...

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(4) Evaluate liabilities of the landlord under leases to which lender
may succeed as a successor to the landlord - borrower. These may include
unpaid tenant allowances, lease inducements including moving expenses
and prior space lease assumptions and buyouts.
(5) Determine if any free rent periods will burden the projected income
flow.
(6) In residential leases, the lender may as a practical matter have to
reestablish escrow accounts for tenants if the borrower depleted these
funds. Consider possible claims by tenants under state unfair trade
practices procedures. In addition, unless there is an escrow tenants may
have no inducement to leave premises in proper condition upon
termination of lease or to pay last month's rent.
(7) Review Estoppels and Subordination, Attornment and
Nondisturbance Agreements. Are tenants obligated to pay rents directly to
the lender on notice of borrower's default from lender How are such
provisions phrased Is there any provision for lender or borrower
indemnification to tenants in the event of an improper claim by lender
Does the indemnification go beyond repayment of any amount paid to
lender but ultimately determined to belong to the borrower
4.2.2 Other Possible Sources of Income
(1) Insurance Recoveries - Review mortgage clauses and assignments
of proceeds. Do leases require proceeds to be used for reconstruction
(2) For-Sale Assets Such as Condominium Units or Houses -
Consider the ability of the lender to convey houses or condominium units
to contract purchasers. Will the debtor's cooperation be required or
helpful Do contract purchasers have outs Any change in market since
the agreements were executed Any relevant notice requirements
Evaluate obligations of Seller under existing unit or house sale
agreements. Is it important for your client to be a successor declarant
Who is in control of the Association 93
(3) Recently Terminated Leases. Consider whether lease
terminations may constitute fraudulent conveyances. Were any attempted
terminations without the consent of the mortgagee valid as against the
mortgagee to whom significant leases (rather the merely rents) were
assigned What happened to any termination fees paid by the tenant
93 See Van Atta, What Every Developer's Successor Should Know (part 1 and 2), The Practical Real Estate Lawyer, 24
(May 1990) (Vol. 6, No. 3).
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