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The federal government has been devising creative methods to enhance the value of one of its largest assets — its real estate holdings.

Extensions of lease terms are fairly simple documents to draft and review, but a thorough review of the existing lease is required by both parties in order to produce a lease amendment that fairly reflects the business deal.

Over the past several years, courts faced with the issue of whether a lease is a "true lease" or a "disguised security interest" have been making it more and more difficult for lessors to have their leases confirmed as true leases. Through a process of focusing on economic reality instead of the intent of the parties and increasing the amount of residual value required at the end of a lease term, courts are creating a dilemma for the leasing industry. Certain segments of the equipment leasing industry are more severely effected by these changes than others.

One of the common issues facing businessmen and lawyers in the lease financing of complicated equipment such as aircraft, is how to impose an obligation upon the lessee to pay and segregate funds sufficient to assure aircraft maintenance expenses, while preventing these funds from being treated as property of a debtor and cash collateral within the meaning of Bankruptcy Code Section 363 (11 U.S.C. '363). If a lessee is asked in a written lease agreement to deposit, from time to time, contemplated amounts of cash by which to assure the lessor that certain long-term maintenance obligations will be funded and completed, or that rent will be paid, then there is a risk that these deposits might be treated as cash collateral and property of the estate. This subjects the lessor to the risk that the bargained-for cash set-aside funds, might, in a bankruptcy case context, not be available for the purposes for which they were originally intended. This article addresses a risk avoidance approach to that problem.

News of interest to you and your practice.

In a discussion of the Financial Accounting Standards Board (FASB) Interpretation No. 46, Consolidation of Variable Interest Entities, in the November 2003 issue of this newsletter, Jeffrey Ellis wrote that: "accountants will be struggling to implement the guidance in FIN 46 for a while longer." The multiple FASB staff positions issued, ongoing public comment, and lengthy discussions at FASB meetings concerning changes to existing guidance on consolidation of variable interest entities, continuing almost a full year after issuance of the rules, confirm his conclusion. The effective date for certain applications of FIN 46 was delayed until Dec. 31, 2003, but all of the Big Four firms continued to clamor for guidance. With that new deadline only days away, FASB issued FIN 46-R on Dec. 24.

The law of consignment sales of goods — under which merchandise is delivered by a seller (a "consignor") to another person (a "consignee") to hold for sale to a third party — has long been a source of confusion and uncertainty for both consignors (seeking to protect their rights to their consigned goods) and creditors of the consignee (seeking to satisfy their claims against the consignee and its assets). Prior to the enactment in 2001 of revised Article 9 ("Revised Article 9") of the Uniform Commercial Code (UCC), the treatment of consignment sales had straddled both Article 2 of the UCC, which covers the sale of goods, and Article 9 of the UCC, which covers the creation and perfection of a security interest in goods. The drafters of Revised Article 9 sought to eliminate this confusion by removing all regulation of consignment sales from UCC Article 2, and lodging all regulation of consignments under the UCC (to the extent not covered by common law) squarely within UCC Article 9. However, the recent Bankruptcy Court decision in the case of In re Morgansen's Ltd., 302 B.R. 784 (Bankr. E.D.N.Y., Oct. 14, 2003) would, if sustained on appeal, negate many of the improvements introduced by Revised Article 9 and wreak havoc on the treatment of consignment sales of consumer goods and other "true" consignments not expressly covered by Revised Article 9.

Recent rulings of importance to you and your practice.

In the absence of a lease provision restricting subleasing and assignment, common law permits a tenant to freely sublease its leased premises or assign its leasehold interest in the leased premises. In order to provide for maximum landlord control over a tenant's ability to sublease or assign its leasehold interest, while at the same time balancing the need of tenants for an exit strategy, modern forms of leases contain extensive assignment and sublease provisions. This article traces the manner in which those provisions have evolved over the years.

Two recent decisions by the U.S. Court of Appeals for the Seventh Circuit have attracted the attention of leasing lawyers. Both of those cases demonstrate that landlords and tenants alike may be taken by surprise by the operation of the Bankruptcy Code.