DIGGING INTO GROUND LEASES: INSURANCE AND RECONSTRUCTION ISSUES Ann Peldo Cargile Boult, Cummings, Conners & Berry, PLC 1600 Division Street, Suite 700 Nashville, Tennessee 37203 Ph.: 615.252.2373 Fax: 615.252.6373 acargile@boultcummings.com I. INTRODUCTION Ground leases present different risks to landlords and tenants than do standard lease transactions. In a ground lease, the tenant bears the brunt of the risk of a casualty to the improvements, even though the landlord retains a reversionary interest in the improvements that grows in value as the ground lease nears expiration. The landlord often has a passive relationship to the use of the property, thus justifying a greater allocation of operational liability to the tenant. Further, there can be a layering of interests between fee mortgagees, leasehold mortgagees, and lenders who are providing tenant fixture financing. This adds a number of additional claimants to a limited pool of insurance proceeds. Lastly, because ground leases typically have a long duration, static lease provisions requiring specific types of insurance policies and coverage limits under those policies are subject to obsolescence. For the foregoing reasons, standard lease provisions relating to insurance and reconstruction often do not work well in the ground lease context. This article will outline a few basic insurance concepts that arise in the context of leases, discuss how they differ between standard leases and ground leases, and then highlight areas of concern on the overall management of risk under ground leases. II. BASIC INSURANCE CONCEPTS The two types of insurance policies with the greatest impact on leases are those that cover property insurance and liability insurance. Most policies are written on Insurance Services Offices ( ISO ) forms, although special coverages can be negotiated and underwritten. The following is a synopsis of these coverages: A. Property Insurance. Property insurance generally covers loss arising from damage to real or personal property owned by the insured. Leases often use the misnomer casualty insurance when they intend to refer to property insurance coverage. In the insurance industry, casualty insurance means liability insurance, which is discussed below. The most common type of property insurance is the Causes of Loss Special Form policy form promulgated by the ISO. The ISO Special Form policy covers losses from all causes unless they are specifically excluded. This policy form replaced all risk coverage, a term which is still commonly used, but which is, in fact, outdated. Supplemental
endorsements can handle many of the excluded perils under Special Form Coverage, such as extra costs incurred to meet current zoning and codes, earthquake, flood, boiler and machinery, and environmental risks. Property insurance policies cover direct physical loss. A casualty that disables a property and thus disrupts business operations, however, will create broader losses. The following additional endorsements to the property policy can protect against these ancillary losses in a meaningful way, and are especially relevant for ground leases: The Business Income endorsement covers loss of income resulting from loss of use of a property damaged by a covered cause of loss, up to a specified period of time. For example, if a lease does not permit abatement of rent following a casualty that renders the premises untenantable (a structure common to ground leases), the tenant should carry business income insurance to cover its obligation to pay rent. The Utility Services - Time Element endorsement covers loss due to disruption of utilities services away from the insured premises, such as off-site electrical, water or telecommunications. Again, since a ground lease will generally not entitle the tenant to abate rent during periods when utility services have been interrupted, the tenant should consider this type of coverage. Often, leases will require one party or the other to carry property insurance at full replacement cost, meaning that the policy will pay the entire cost of replacing or repairing the damaged property. This form of coverage always has certain limitations, such as if the property cannot be restored to its former condition because of a change in law. In such case, the added costs would not be covered unless the insured also obtained supplemental Ordinance or Law coverage. For the insured to recover full replacement cost, a property must be repaired or restored following a casualty. If, instead, the damaged property is demolished and not replaced, the insured can recover only the actual cash value of the property. Actual cash value is generally the value of the property at the time of the loss, determined by starting with the property s replacement cost and then deducting past depreciation, calculated over the property s useful life. A ground-leased, older building may only have a nominal actual cash value. Thus, a landlord who expects to receive a viable building at the end of the lease term should insist that the tenant restore the improvements following a casualty. If a lease does not require full replacement cost coverage, it should at least require the insuring party to carry sufficient property insurance to avoid co-insurance. Normally, in the event of partial damage, an insurance policy will cover the balance of the loss after the insured pays the deductible, If, however, the insured carries too little insurance, e.g., less than 80% or 90% (depending on the policy) of the value of the insured property, and there is a partial loss, the insurance company will require the insured to participate in paying for the restoration. This is called co-insurance. For instance, suppose there is a loss of $500,000 to a property worth $10,000,000. Assume that the policy has a $10,000 deductible and that the insured only carried insurance with a limit of $5,000,000 (i.e., 50% coinsurance). The insured will pay the $10,000 deductible, plus 50% of the
$490,000 balance of the loss ($245,000), for a total out-of-pocket expenditure of $255,000. If the insured had instead carried replacement cost insurance that did not the trigger the co-insurance provision (i.e., at least 80% or 90% of full replacement cost), the insured only would have paid the $10,000 deductible. Due to the long duration of ground leases, co-insurance poses a greater risk than it does in leases for shorter terms. If the tenant does not diligently update its coverage levels, it can find itself substantially underinsured. Unlike standard leases, where the tenant usually has a right to terminate the lease by reason of a major casualty, ground leases generally do not contain such rights until very near the expiration of the term, if at all. Thus, ground lessees must be careful to carry property insurance coverage sufficient to pay for a replacement building. An import aspect of this effort is an agreed value endorsement. This endorsement avoids the co-insurance problem because the insurance company agrees, in advance, that the amount of insurance carried under the policy satisfies the percentage of value required by the co-insurance provision. To obtain an agreed value endorsement, at the beginning of each coverage year the insurance company and its policyholder jointly determine the property s value, which becomes the agreed value. The policyholder must then insure for at least 90% of the agreed value. If a claim arises with an agreed value endorsement in place, the insurance company pays up to the coverage limit (i.e., full replacement cost or 90%, whatever coverage was acquired) regardless of whether the actual value of the property would have otherwise entitled the insurance company to impose a co-insurance penalty. B. Liability Insurance 1. Items of Coverage Liability policies cover bodily injury and property damage to third parties. The industry standard form for leases (promulgated by ISO) is known as Commercial General Liability coverage, often referred to as CGL coverage. CGL policies cover liability claims arising out of: Premises and operations Products and completed operations Advertising and personal injury Contractual liability (i.e., assumption of liability under an insured contract, which includes a lease) CGL policies generally cover bodily injury and property damage resulting from the negligence of the insured. The contractual liability coverage extends to the indemnity section of the lease and provides coverage to others for the same types of losses covered under the policy. For example, contractual liability coverage would cover a lease indemnity for bodily injury and property damage, but not for environmental contamination, since a standard CGL policy does not provide such coverage.
2. Limits of Coverage CGL policies are written with a combined single limit, per occurrence, for bodily injury and property damage. Many leases currently fix limits of CGL coverage somewhere in the range of $3,000,000 to $5,000,000 at the time of lease execution. Due to the typically long duration of ground leases, however, they should provide for periodic reviews and increases in coverage limits. Thus, a well-crafted ground lease might include a clause such as this: Landlord, from time to time, but not more frequently than every three (3) years during the Term, may require increases in the policy limits for any or all insurance policies required to be carried by Tenant hereunder in order to reflect standard limits for similar properties. 3. Changing Terminology and Coverages Insurance terminology changes over time. What was once known as fire and extended coverage became all-risk coverage and is now called Causes of Loss - Special Form coverage. What was once known as comprehensive general liability coverage is now commercial general liability coverage. Further, insurance policy provisions also change over time. Waiver of subrogation endorsements are no longer needed, because property policies generally permit waiver of subrogation as a matter of right. Contractual liability coverage is now a part of most CGL policies, and thus a separate endorsement for this coverage is no longer needed. As these examples demonstrate, a lease that uses technical terminology and specifies particular forms of coverage can become obsolete. Thus, for ground leases, many of which have a term of a century or more, the insurance section needs to accommodate change. For example, when the ground lease requires a certain type of coverage, it should provide for that coverage or its equivalent. This allows for the initial intent of the parties to carry through over time. It can also ensure, for instance, that if additional exclusions from coverage become a part of the standard forms (such as the recent exclusions for mold and terrorism), the landlord (or lender) has a good argument that these risks must be covered another way. This flexible language also allows for the use of manuscript policies, which are custom policies or endorsements available to large buyers of insurance. Although such customized policies and endorsements are not tied to ISO s forms, they usually provide substantially equivalent coverages. III. PARTIES. Various parties have insurable interests in a ground lease and the associated tenant improvements. For instance, the tenant and the leasehold mortgagee each have an insurable interest in the tenant improvements during the lease term. The landlord and its fee mortgagee also have insurable interests, because those improvements will revert to the landlord at the expiration of the lease. The trick here is to obtain appropriate, but not duplicative, insurance coverage. For instance, both the landlord and tenant can purchase property insurance for the same leasehold improvements. Although both insurance companies will be happy to collect a full premium for such coverage, in the event of a
loss the combined payments of the insurance companies will not exceed the amount of actual loss. Therefore, rather than duplicate coverage, it is preferable to obtain a single policy where possible, with various parties designated as beneficiaries as their respective interests may appear. Although the concept of sharing the benefits of a policy is straightforward, the terminology used in leases often runs amok. The following list sets forth the proper, basic terminology: The named insured is the party that pays the premium for the property or liability policy. The insurance company underwrites the policy and the premium based on the claims history and risk posed by the operations of the named insured. Subsidiaries of the named insured may be added as additional named insureds. An additional named insured usually is an affiliate of the primary insured. An additional named insured may be liable for premium payments, and some exclusions from coverage apply to an additional named insured but not to an additional insured as discussed below. Additional parties added to a liability policy, but not affiliated with the named insured, are additional insureds. Additional parties (other than lenders) added to a property policy are loss payees. Lenders with a lien on the property added to a property policy are insured mortgagees. This type of clause creates an independent contractual relationship between the lender and the insurer. [A] mortgagee clause in a standard fire policy creates an independent insurance of the mortgagee's interest just as if it had received a separate policy from the insurer but without any inconsistent or repugnant conditions imposed by the policy upon the owner of the insured property and free from invalidation by the latter s act or neglect. Syracuse Savings Bank v. Yorkshire Insurance Co., 301 N.Y. 403, 94 N.E.2d 73 (1950). For example, the lender cannot be denied coverage under the mortgagee clause for fraudulent acts of the insured. Further, no settlement between the insured and the insurer can operate in any way to the detriment of the lender. One wellknown form of this coverage is a New York standard clause, which is derived from the older form New York standard fire policy and appears in Section 3404(a) of the New York Insurance Law. Adding a party to a property policy as a loss payee results in a joint claim to the insurance proceeds, thus allowing the loss payee to direct the application of insurance proceeds in a fashion consistent with the lease or loan documents, as applicable. When a party is added as an additional insured to a CGL policy, the negligence of the named insured party will not defeat coverage of the additional insured under that policy. The additional insured has the independent right (regardless of the actions of the primary insured party) to a defense under the insured s policy, which can supplement the indirect
indemnification provisions under the lease. Depending on the scope of the additional insured endorsement, coverage may extend to liability arising from the acts of the additional insured, which could provide greater protection than that anticipated in the indemnification provisions of the lease. Further, if the lease does not contain a waiver of subrogation requirement, being added as an additional insured prevents the insurance company from pursuing the additional insured for losses that it may have caused. The actual coverage provided by an additional insured endorsement varies. A plethora of ACORD endorsement forms exists, which provide additional insureds greater or lesser rights depending on which form is chosen. IV. STRUCTURE OF COVERAGE To apply the general concept of shared insurance in the ground lease context, property and liability coverage, in their simplest form, would be structured as follows: The tenant would be required to carry property coverage on the improvements it builds, along with Ordinance or Law coverage to ensure there will be proceeds available to cover increased rebuilding cost related to changes in zoning and codes from those that were in effect when the improvements were first constructed. The landlord, and possibly the fee mortgagee, would be added to the tenant s property policy as a loss payee. That way, if the ground lease is near its end, and the tenant chooses not to restore the premises, the landlord gets the value of its residual interest in the improvements. The tenant s leasehold mortgagee would be added to the tenant s property policy as an insured mortgagee. That gives the mortgagee the ability to apply the proceeds consistent with its leasehold mortgage. The tenant would be required to carry CGL coverage. The landlord, the leasehold mortgagee, and possibly the fee mortgagee, would be added to the tenant s CGL policy as additional insureds. At minimum, this protects the landlord and those mortgagees against a loss arising out of the negligence of the tenant, and coverages can be broader depending on the type of additional insured endorsement supplied. Depending on the credit of the tenant and the importance of the ground lease to its overall operation, the lease may require the tenant to carry business interruption insurance. If the ground lease parcel functions as an integrated part of a landlord s larger development that includes shared facilities (such as a parking garage), the ground lease might require the landlord to obtain the following types of insurance: The landlord would be required to carry property coverage, with an Ordinance or Law endorsement, on the improvements it builds.
The tenant, and possibly the leasehold mortgagee, might be added to the landlord s property policy as a loss payee to ensure that the landlord uses the policy s proceeds to restore the shared facilities. The landlord s fee mortgagee would be added to the landlord s property policy as an insured mortgagee to ensure that the mortgagee has the ability to apply the proceeds consistent with its mortgage. The landlord would be required to carry CGL coverage. The tenant, the landlord s fee mortgagee, and possibly the leasehold mortgagee, would be added to the landlord s CGL policy as additional insureds. This protects the tenant and mortgagees from a loss arising out of the landlord s negligence. Use of certain forms of additional insured endorsements can expand this coverage. V. GROUND LEASE REBUILDING CONSIDERATIONS Where a lease is silent, common law governs the landlord-tenant relationship. At common law, damage to the premises is irrelevant neither party is required to repair the damage, and the rent does not abate. This rarely, if ever, reflects the expectations of the parties. Therefore, one of the main purposes of a written lease is to allocate risk in a consistent, predictable, and expected manner. The following are the main areas of issue in the ground lease context: A. Casualty. The scope of the repair obligations in a ground lease can vary, generally depending on the relationship of the ground lease parcel to other property owned by the landlord. Where the ground lease parcel is a stand alone facility, the landlord will care less about restoration of improvements than about the continuation of its income stream. If, on the other hand, the ground lease parcel constitutes an integral part of the landlord s overall development, the landlord will want the tenant to restore the premises in a timely fashion in accordance with approved plans and specifications. Regardless of the relationship of the ground lease to other property, at very minimum, following a casualty, a landlord will want the destroyed improvement(s) razed and its land restored to a clean, safe condition. It will also want to receive insurance proceeds equal to its residual interest in the improvements. A simple restoration clause might read as follows: If any structure or improvement situated upon the Premises should be damaged or destroyed, Tenant shall proceed, with due diligence, to do one of the following: (a) restore or replace the improvements constructed by Tenant; or (b) demolish and remove the damaged or unusable improvements and fill, grade, pave or landscape the Premises. Should the above damage occur during the last five (5) year period of the Lease, Tenant shall have the option to cancel the remaining term, but should Tenant elect to cancel, Landlord shall be entitled to the proceeds of all insurance collected, after deduction of: (i) the demolition and other costs set
forth in subsection (b); and (ii) Tenant s then current book value for the improvements. No standard clause such as this exists. In each ground lease, the landlord and tenant will battle over the duty to restore improvements, the right to terminate and the allocation of insurance proceeds. The result will depend upon the type of property and improvements (e.g., is the property a stand alone facility or is restoration essential to the operation of other improvements?), the duration of the ground lease (e.g., does the landlord have a valuable reversionary interest?), and importantly, the financing structure on the property (e.g., what are the expectations of the lenders?). B. Protection Against Uninsured Incidents. 1. Evidence of Insurance Maintaining up-to-date evidence of insurance provides the foremost protection against uninsured losses. To ensure that the required coverage has been obtained and that the proper parties have been added as loss payees, additional insureds or insured mortgagees, as the case may be, the ground lease should require each party to provide satisfactory evidence of all required insurance coverage, not just a certificate of insurance. This means the insured must supply other covered parties with a copy of an actual endorsement. Further, to protect the additional insureds against lapses in coverage, the lease should require the insurance company to communicate with the additional insureds before any coverage is modified, reduced or terminated. Thus, the ground lease should provide that insurance cannot be modified or terminated without thirty days prior notice to the other party, and that the insured must supply evidence of renewal at least thirty days prior to expiration. In the event of a potential lapse in coverage, either due to termination or non-renewal, the other party should have the right to obtain insurance at the expense of the party obligated under the lease to obtain and maintain such coverage. 2. Self-Insurance A landlord or tenant with a substantial net worth may want to elect to self-insure for some or all of its losses. This means that rather than paying an insurance company to take the risk, the self-insuring party underwrites the risk on its own behalf. Selfinsurance arises in many subtle forms that, on their face, may not directly violate simple insurance clauses. This can happen where there are: - High deductibles or self-insured retentions - Low policy limits - Co-insurance issues - Coverage for limited perils To protect against such risks, the ground lease should set forth explicit parameters as to permitted deductibles and retention amounts, policy limits, etc. Further, even if some amount of self-insurance will be permitted, the lease should have standards that cover at least the following:
- A minimum net worth to ensure that the self-insuring party can cover the loss. - A way to monitor the net worth of the self-insuring party. - Providing that provisions relating to indemnity, costs of repair, rent abatement, and waiver of subrogation apply as if the self-insuring party had insurance in place. VI. CONFLICTING INTERESTS OUTSIDE THE GROUND LEASE An abiding conflict exists among landlords, tenants and lenders with respect to the use of insurance proceeds after casualty damage. In the ground lease context, those parties respective interests may be aligned differently than with a standard lease because often there are additional concerned parties, such as leasehold mortgagees and tenants line of credit lenders. The landlord may also have a fee mortgagee who, at minimum, will want assurances of a continuing income stream under the ground lease to service its loan regardless of the existence or condition of the improvements. Lenders also will want discretion to determine whether to apply insurance proceeds to restore the property or to satisfy their loans. Each lender s decision will depend upon a number of factors, including how the loan s interest rate compares to the then current market, how much time remains until loan maturity, the value of the collateral, whether the borrower remains creditworthy, and the borrower s past performance. Conflicting provisions among leases, mortgages, and subordination, nondisturbance and recognition agreements all exacerbate the situation. The following four basic points of analysis may help mitigate such problems: A. Lease Insurance Provisions The first step, as discussed in Article IV above, is to ensure that the lease is clear as to who will carry what insurance. B. Lease Casualty Provisions The second step, as discussed in Article V(A) above, is to provide explicit direction in the lease as to the duty to repair and disposition of proceeds. As discussed, a ground lease may not require the tenant to restore its premises following a casualty, so long as the tenant puts the land back to a serviceable condition and the landlord gets its cut of the proceeds. But this will likely be anathema to a leasehold mortgagee, who will want the proceeds applied to its loan. To address this, the tenant may want the ground lease to provide that leasehold mortgagees have first right to property insurance proceeds. C. Mortgage Provisions The third step is to ensure that each fee or leasehold mortgage requires the lender to disburse insurance proceeds in a fashion consistent with the provisions of the ground lease. A standard mortgage will provide that following a casualty the lender will have sole discretion in choosing to use insurance proceeds for restoration of the property or to apply the proceeds to satisfy the loan, especially after a default. Almost certainly this
will conflict with the ground lease. The parties to the ground lease can find themselves in the unfortunate position where they can comply with either their mortgages or the lease, but not both. In the absence of other provisions, the resolution of such a conflict among the various mortgages and the lease will usually depend upon the relative priority of the applicable mortgage and the lease. If the lease is executed first, as will be the case in virtually all leasehold financing arrangements, the provisions of the lease will generally govern. In Alexander v. Security-First National Bank, 62 P.2d 735 (Calif. 1936), a landlord executed several long-term leases with one tenant for various properties. The leases required the tenant to procure fire insurance for the benefit of the landlord. The tenant subsequently executed a leasehold deed of trust securing a bond issue. The deed of trust required the tenant to procure earthquake insurance on the properties and to make the proceeds payable to the lender for redemption of the bonds if not used for repair, and unless provided for by the ground leases. The lender was also named as loss payee under the tenant s earthquake insurance policy. In 1933, an earthquake damaged the insured buildings. For some reason, the various leases did not have uniform casualty clauses. Under one of the leases, the landlord claimed that it, not the lender, had the right to the earthquake insurance proceeds under a lease covenant stating: [i]n case of destruction or damage by fire or other injury to the said structure and building,... [tenant] to rebuild the same with all reasonable diligence after such destruction or injury, such building when rebuilt to be of such construction, size, and value as the economical expenditure of all insurance monies will warrant. Id. at 738 (emphasis in original). The court held that although the lease did not require the tenant to carry earthquake insurance, if the tenant nonetheless procured such insurance, then all of the proceeds had to be used to repair the premises. Id. The court also held that language in the deed of trust qualifying the use of insurance proceeds [ unless provided for by the ground leases ] expressly subjected the lender s right to retain the insurance proceeds to the terms of the lease. Id. Thus, the lease covenant to use all of the insurance money for repairs preempted both the deed of trust clause making the proceeds payable to the trustee for redemption of the bonds and the loss-payable clause under the insurance policies making the proceeds payable to the lender. On the other hand, the Alexander court held that where one of the other leases did not include language stating, all insurance proceeds shall be devoted to repair, the earthquake insurance proceeds were to be paid to the lender for redemption of the bonds, not to the landlord. D. Contractual Reallocation of Priority Courts will recognize the right of the parties to reallocate common law priorities by contract. This is the last step in resolving conflicts on the use of proceeds, but it is the most difficult. The interests of each mortgagee are the same because: (a) they will generally want to assure the continued existence of the ground lease; (b) they will not want either the landlord or the tenant to terminate the ground lease without their consent;
(c) they will want the landlord and tenant to agree that insurance proceeds will be applied in a manner consistent with their mortgages; and (d) each will want assurances that foreclosure of any other lender s mortgage will not impair the continuation of its own mortgage. As easily can be seen, the common desires of each lender conflict with those of every other lender. To achieve their respective goals, the lenders will want to negotiate various subordination, recognition and attornment agreements amongst themselves, the landlord, and the tenant. The hidden danger in these agreements comes from what remains unsaid. A general subordination of one party s interest to another s will likely extend to a subordination of its interest in insurance proceeds. But what happens if the subordination agreement includes a non-disturbance provision? The result becomes uncertain. If documents do not specifically address the many facets of insurance coverage and the handling of insurance proceeds, the only certain result is a lawsuit. Unfortunately, most subordination, nondisturbance, and attornment agreements are silent as to insurance, making the correct disposition of proceeds more muddled than if the parties had not tampered with the initial common law priorities. Loving v. Ponderosa Systems, Inc., 479 N.E.2d 531 (Ind. 1985), aptly demonstrates this problem. Loving involved a sale-leaseback of a restaurant financed by a lender. The tenant sold the restaurant to the landlord, and the landlord and tenant executed a lease. The lease provided that the tenant was responsible for the cost of restoration even if the fire policy proceeds were not available. The lease also provided that the landlord would reimburse the tenant for the restoration costs to the extent that the lender made the proceeds available for repairs. The landlord then executed a mortgage on the premises. The mortgage provided that the landlord was to keep the premises in good repair and insured against loss by fire, and that the insurance was payable to the lender, which could, at its option, apply the proceeds to the indebtedness. The tenant signed an express agreement to subordinate its leasehold interest in the premises to the mortgage. The premises were later destroyed by fire and the tenant restored them. All of the parties then sued all others for the insurance proceeds. The court held that the lender was clearly entitled to use the insurance proceeds to satisfy the debt, based on both the language in the mortgage and the lease. Id. at 535. The court also held, however, that the tenant was entitled to repayment of the restoration cost from the landlord under the doctrine of equitable subrogation. Id. at 535. Although the lease did not require the landlord to repay the costs of reconstruction, the court held that applying the insurance proceeds to the landlord s debt subrogated the tenant to the lender s rights against the landlord. Id. at 537. The court reasoned that it would be against public policy to give the landlord a windfall of $149,500 (the debt repaid by the insurance proceeds) at the tenant s expense, but since the landlord did not have a ready source for repayment of this amount, the landlord could repay the tenant s restoration costs in installments. Id. at 536-37. Therefore, the tenant, in effect, became the landlord s new lender. The Loving court felt compelled to enforce the clear priority achieved between the lease and the mortgage resulting from the tenant s subordination agreement. It found the economic result of this priority unduly harsh on the tenant, however, and therefore crafted an unusual approach to adjust the equities.
In general, well-crafted subordination, nondisturbance, and recognition agreements solve the conundrum of varying rights to insurance proceeds. These agreements should specifically state whether the provisions of the mortgage or those of the lease will govern as to the use of insurance proceeds after a casualty. If more than one layer of financing exists, the lenders all must agree who wins, and all of the loan and leasing documents need to be consistent with one another. VII. CONCLUSION Ground leases require strict attention to the types of insurance needed and should have specific, tailored contractual provisions regarding the disbursement of insurance proceeds. Priority as among the provisions of the lease and related lending documents is a function of state law and the timing of execution and recording of the applicable instruments, but the allocation of risk achieved solely by reason of such priority will rarely reflect the expectations of all of the parties. Thus, contractual allocations of risk and rights within the lease, the loan documents, and those documents that reallocate priority (such as subordination, nondisturbance and recognition agreements), must all function in a clear, consistent fashion. The dialogue to achieve this goal will be multifaceted, with input from all the players, including insurance companies, landlords, tenants, fee mortgagees, leasehold mortgagees and other lenders.