Thursday, August 07, 2008
What if the landlords of the banks couldn't pay their loans?
Interesting question posed in the pub a while back- what if either of the sets of people who bought the HQs of the two largest Irish banks couldn't continue to finance their operations? Many people thought at the time that when BOI and ABI sold their HQs and leased them back that this was a sure sign that the property market had peaked. And that may well turn out to be the case. Yet what of the finances of those who bought them, what if they were to find themselves over stretched? Would the banks lean on them or ease off for fear that they might seek to renogitiate the leases
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In the event of bankruptcy of the lessor, bank would normally have a right to terminate the lease without paying compensation for income foregone by the lessor. It would only do this if it thought that it could get a better deal elsewhere, which would seem unlikely when we are speaking of a large corporate headquarters.
Unless there are specific mechanisms in the lease that allow for the payment to be revised, then it cannot be revised without the consent of both parties. Why would the bank agree to an increase when it does not have to do so?
A lease would survive bankruptcy. In this instance, the property would presumably be taken over by the bank that had provided a commercial mortgage for the purchase without the lease being affected.
The only scenario where a deal might be done with the lease payments would be if the bank sold its property to a third party, leased the property back, and also provided the mortgage that the lessor used to acquire the property. In this instance, the bank might prefer to support the lessor rather than provision for / recognise a large loss in its accounts.
However, the lessor would have been ill-advised to sign up to such a deal in the first place given that his income would come from the same bank that could then foreclose a mortgage against him for non-timely repayments. Not a nice position to be in if things got sticky. Moreover, there would have to be ethical questions asked of a bank that did enter into such an arrangement.
Interesting to know.
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