REPORT TITLE:
Public Lands


DESCRIPTION:
Provides additional security to lenders on land or interest
covered by a lease, patent, license, agreement or other
instrument.  Provides flexibility to the Department of Land and
Natural Resources to assign or transfer leases based on current
industry standards.  (HB796 HD2)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                        796
HOUSE OF REPRESENTATIVES                H.B. NO.           H.D. 2
TWENTIETH LEGISLATURE, 1999                                
STATE OF HAWAII                                            
                                                             
________________________________________________________________
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                   A  BILL  FOR  AN  ACT

RELATING TO PUBLIC LANDS.



BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:

 1      SECTION 1.  The purpose of this Act is to provide additional
 
 2 security for lenders on land or interests covered by a lease,
 
 3 patent, license, agreement, or other instrument and provides
 
 4 flexibility to the department of land and natural resources to
 
 5 assign or transfer leases based on current industry standards.
 
 6      SECTION 2.  Chapter 166, Hawaii Revised Statues, is amended
 
 7 by adding a new section to be appropriately designated and to
 
 8 read as follows:
 
 9      "§166-    Rights of holders of security interests.  (a)
 
10 Definitions.  For the purpose of this section:
 
11      "Institutional lender" means a federal, state, or private
 
12 lending institution licensed to do business in the State of
 
13 Hawaii in making loans to qualified applicants under section 166-
 
14 7 on the basis of a lease for security, in whole or in part,
 
15 together with any other entity who acquires all or substantially
 
16 all of an institutional lender's loan portfolio.
 
17      "Making a loan" means lending of new money after the
 
18 effective date of this Act or the renewal or extension of
 

 
Page 2                                                     796
                                     H.B. NO.           H.D. 2
                                                        
                                                        

 
 1 indebtedness owing by a qualified applicant to an institutional
 
 2 lender.
 
 3      "Security interest" means any interest created or perfected
 
 4 by a mortgage, assignment by way of mortgage, or by a financing
 
 5 statement and encumbering a lease, land demised by the lease, or
 
 6 personal property located at, affixed or to be affixed to, or
 
 7 growing or to be grown upon the demised land.
 
 8      (b)  Board action shall be required when an institutional
 
 9 lender acquires the lessee's interest through a foreclosure sale,
 
10 judicial or nonjudicial, or by way of assignment in lieu of
 
11 foreclosure, or when the institutional lender sells or causes the
 
12 sale of the lessee's interest in a lease by way of a foreclosure
 
13 sale, judicial or nonjudicial.  The institutional lender shall
 
14 convey a copy of the sale or assignment as recorded in the Bureau
 
15 of Conveyances.
 
16      (c)  Notwithstanding any provisions of this chapter or any
 
17 law to the contrary, if any lease is subject to a security
 
18 interest held by an institutional lender, and provided the
 
19 institutional lender has given to the board a copy of such
 
20 encumbrance as recorded in the Bureau of Conveyances:
 
21      (1)  If the lease is cancelled for violation of any non-
 
22           monetary lease term or condition, or if the lease is
 
23           deemed terminated or rejected under bankruptcy laws,
 

 
Page 3                                                     796
                                     H.B. NO.           H.D. 2
                                                        
                                                        

 
 1           than in either event, the institutional lender shall be
 
 2           entitled to issuance of a new lease in its name for a
 
 3           term equal to the term of the lease remaining
 
 4           immediately prior to the cancellation, termination or
 
 5           rejection, with all terms and conditions being the same
 
 6           as in the cancelled, terminated or rejected lease,
 
 7           except only for such liens, claims and encumbrances, if
 
 8           any, which were superior to the institutional lender
 
 9           prior to the cancellation, termination, or rejection.
 
10           If a lease is rejected or deemed rejected under
 
11           bankruptcy law, the lease shall be deemed to be
 
12           canceled and terminated for all purposes under state
 
13           law.
 
14      (2)  If the lessee's interest under a lease is transferred
 
15           to an institutional lender, including by reason of the
 
16           provisions of subsection (1) above, by reason of
 
17           acquisition of lessee's interest pursuant to a
 
18           foreclosure sale, judicial or nonjudicial, and by
 
19           reason of an assignment in lieu of foreclosure, then:
 
20           (A)  The institutional lender shall be liable for the
 
21                obligations of the lessee under the lease for the
 
22                period of time during which the institutional
 
23                lender is the holder of lessee's interest but
 

 
Page 4                                                     796
                                     H.B. NO.           H.D. 2
                                                        
                                                        

 
 1                shall not be liable for any obligations of the
 
 2                lessee arising after the institutional lender has
 
 3                assigned the lease;
 
 4           (B)  The provisions of subsections 166-6 (a)(1) and (2)
 
 5                shall not apply to the lease or the demised land
 
 6                during such time the institutional lender holds
 
 7                the lease; provided, however, that for non-
 
 8                monetary lease violations, the institutional
 
 9                lender shall first remedy the lease terms which
 
10                caused the cancellation, termination, or rejection
 
11                to the satisfaction of the board; provided further
 
12                that the new lease issued to the institutional
 
13                lender shall have a sunset date (120 days from the
 
14                effective date of issuance), when the
 
15                institutional lender shall either sell or assign
 
16                the lease, after which date the provisions of
 
17                subsection 166-6 (a) shall become applicable to
 
18                the new lease.
 
19      (3)  As long as there is a delinquent loan balance secured
 
20           by a security interest, the lease may not be cancelled
 
21           or terminated, except for cancellation by reason of
 
22           default of the lessee, and no increase over and above
 
23           the fair market rent, based upon the actual use of the
 

 
Page 5                                                     796
                                     H.B. NO.           H.D. 2
                                                        
                                                        

 
 1           land demised and subject to the use restrictions
 
 2           imposed by the lease and applicable laws, may be
 
 3           imposed or become payable, and no lands may be
 
 4           withdrawn from the lease, except by eminent domain
 
 5           proceedings beyond the control of the board, except
 
 6           with prior written consent by the institutional lender
 
 7           and such consent shall not be unreasonably withheld.
 
 8      (4)  If the lease contains any provision requiring the
 
 9           payment of a premium to the lessor on assignment of the
 
10           lease, any premium shall be assessed only after all
 
11           amounts owing by any debt secured by a security
 
12           interest held by a institutional lender shall have been
 
13           paid in full.
 
14      (d)  Ownership of both the lease and the security interest
 
15 by an institutional lender shall not effect or cause a merger
 
16 thereof, and both interests shall remain distinct and in full
 
17 force and effect unless the institutional lender elects in
 
18 writing to merge said estates with the consent of the board.
 
19      (e)  The board may include in any consent form or document
 
20 such provisions not inconsistent with the intent of this section
 
21 as may be required to make a lease mortgageable or more
 
22 acceptable for mortgageability by an institutional lender.
 

 
 
 
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                                     H.B. NO.           H.D. 2
                                                        
                                                        

 
 1      (f)  The purchaser, including junior lien holder, of the
 
 2 institutional lender's security interest, and the same is
 
 3 assigned to such purchaser, then the rights herein shall be
 
 4 exercisable by such transferee as successor in interest to the
 
 5 institutional lender, except that such purchase shall conform
 
 6 with subsection (c)(4) above and, further, the transfer of such
 
 7 rights shall be reserved unto and exercisable only to an
 
 8 institutional lender.  Other purchasers may not be precluded in
 
 9 acquiring the institutional lender's security interest but cannot
 
10 have exercisable rights as successor in interest to the original
 
11 institutional lender."
 
12      SECTION 3.  Section 171, Hawaii Revised Statutes, is amended
 
13 to read as follows:
 
14      "§171-21  Rights of holder of security interest.  Whenever
 
15 any notice of breach or default is given to any party under
 
16 section 171-20, or under the terms of any lease, patent, license,
 
17 agreement, or other instrument issued or to be issued under this
 
18 chapter, a copy of the notice shall be delivered by the board of
 
19 land and natural resources to all holders of record of any
 
20 security interest in the land or interest covered by the lease,
 
21 patent, license, agreement, or other instrument whose security
 
22 interest has been recorded with the board.  Should the board seek
 

 
 
 
Page 7                                                     796
                                     H.B. NO.           H.D. 2
                                                        
                                                        

 
 1 to forfeit the privilege, interest, or estate created by the
 
 2 lease, license, agreement, patent, or other instrument, each
 
 3 holder may, at its option, cure or remedy the breach or default,
 
 4 if the same can be cured or remedied, by the payment of money or,
 
 5 if such is not the case, by performing or undertake in writing to
 
 6 perform all the terms, covenants, restrictions, or conditions of
 
 7 any lease, patent, license, agreement, or other instrument
 
 8 capable of performance by the holder, as determined by the board,
 
 9 within the time period provided in section 171-20 or within such
 
10 additional period as the board may allow for good cause and add
 
11 the cost thereof to the mortgage debt and the lien of the
 
12 mortgage. Any lease, patent, license, agreement, or other
 
13 instrument transferred pursuant to this section shall not be
 
14 subject to the requirements in section 171-14. Upon failure of
 
15 the holder to exercise its option, the board may:
 
16      (1)  Pay to the holder from any moneys at its disposal,
 
17           including the special land and development fund, which
 
18           is made available for that purpose, the amount of the
 
19           mortgage debt, together with interest and penalties,
 
20           and secure an assignment of the debt and mortgage from
 
21           the holder, or if ownership of the interest or estate
 
22           shall then have vested in the holder by way of
 
23           foreclosure or action in lieu thereof the board shall
 

 
Page 8                                                     796
                                     H.B. NO.           H.D. 2
                                                        
                                                        

 
 1           be entitled to a conveyance of the interest or estate
 
 2           upon payment to the holder of the amount of the
 
 3           mortgage debt, including interest and penalties, and
 
 4           all reasonable expenses incurred by the holder in
 
 5           connection with the foreclosure and preservation of its
 
 6           security interest, less appropriate credits, including
 
 7           income received from the privilege, interest, or estate
 
 8           subsequent to the foreclosure; or
 
 9      (2)  If the property cannot be reasonably reassigned without
 
10           loss to the State, then terminate the outstanding
 
11           privilege, interest, or estate without prejudice to any
 
12           other right or remedy for arrears of rent or for any
 
13           preceding or other breach or default, and use its best
 
14           efforts to redispose of the affected land to a
 
15           qualified and responsible person free and clear of the
 
16           mortgage and the debt thereby secured; provided that a
 
17           reasonable delay by the board in instituting or
 
18           prosecuting any right or remedy it may have under this
 
19           section shall not operate as a waiver of the right or
 
20           to deprive it of the remedy when it may still hope
 
21           otherwise to resolve the problems created by the breach
 
22           or default involved.
 

 
 
 
Page 9                                                     796
                                     H.B. NO.           H.D. 2
                                                        
                                                        

 
 1 Section 171-19 to the contrary notwithstanding, the proceeds of
 
 2 any redisposition under paragraph (2) shall be applied:  first,
 
 3 to reimburse the board for costs and expenses in connection with
 
 4 the redisposition; second, to discharge in full any unpaid
 
 5 purchase price or other indebtedness owing the State in
 
 6 connection with the privilege, interest, or estate terminated;
 
 7 third, to the mortgagee to the extent of the value received by
 
 8 the State upon redisposition which exceeds the fair market lease
 
 9 value of the land as previously determined by the State's
 
10 appraiser; and fourth, to the owner of the privilege, interest,
 
11 or estate.  Nothing contained in this section shall be construed
 
12 in a manner as to infringe upon or prejudice in any way the
 
13 rights of a holder of record having a security interest which
 
14 shall have vested prior to the effective date hereof, and to the
 
15 extent that this section and section 171-98 shall or may conflict
 
16 and adversely affect such interests, the same shall be of no
 
17 force and effect. 
 
18      SECTION 4.  Section 171-36, Hawaii Revised Statutes, is
 
19 amended by amending subsection (a) to read as follows:
 
20      "(a)  Except as otherwise provided, the following
 
21 restrictions shall apply to all leases:
 
22      (1)  Options for renewal of terms are prohibited;
 

 
 
 
Page 10                                                    796
                                     H.B. NO.           H.D. 2
                                                        
                                                        

 
 1      (2)  No lease shall be for a longer term than sixty-five
 
 2           years, except in the case of a residential leasehold
 
 3           which may provide for an initial term of fifty-five
 
 4           years with the privilege of extension to meet the
 
 5           requirements of the Federal Housing Administration,
 
 6           Federal National Mortgage Association, Federal Land
 
 7           Bank of Berkeley, Federal Intermediate Credit Bank of
 
 8           Berkeley, Berkeley Bank for Cooperatives, or Veterans
 
 9           Administration requirements; provided that the
 
10           aggregate of the initial term and extension shall in no
 
11           event exceed seventy-five years;
 
12      (3)  No lease shall be made for any land under a lease which
 
13           has more than two years to run;
 
14      (4)  No lease shall be made to any person who is in arrears
 
15           in the payment of taxes, rents, or other obligations
 
16           owing the State or any county;
 
17      (5)  No lease shall be transferable or assignable, except by
 
18           devise, bequest, or intestate succession; provided that
 
19           with the approval of the board of land and natural
 
20           resources, the assignment and transfer of a lease or
 
21           unit thereof may be made in accordance with current
 
22           industry standards, as determined by the board [if:
 

 
 
 
Page 11                                                    796
                                     H.B. NO.           H.D. 2
                                                        
                                                        

 
 1           (A)  It contains the personal residence of the lessee;
 
 2           (B)  In the case of commercial, industrial, hotel,
 
 3                resort, apartment, and other business uses, the
 
 4                lessee was required to put in substantial building
 
 5                improvements;
 
 6           (C)  The lessee becomes mentally or physically
 
 7                disabled;
 
 8           (D)  Extreme economic hardship is demonstrated to the
 
 9                satisfaction of the board;
 
10           (E)  It is to the corporate successor of the lessee; or
 
11           (F)  In the case of agricultural uses, the assignee
 
12                meets the qualifications of a bona fide individual
 
13                farmer or a nonindividual farm concern pursuant to
 
14                section 171-14.5, in addition to or
 
15                notwithstanding the other conditions of this
 
16                paragraph;
 
17           provided further that prior to the approval of any
 
18           assignment of lease, the board shall have the right to
 
19           review and approve the consideration to be paid by the
 
20           assignee and may condition its consent to the
 
21           assignment of the lease on payment by the lessee of a
 
22           premium based on the amount by which the consideration
 

 
 
 
Page 12                                                    796
                                     H.B. NO.           H.D. 2
                                                        
                                                        

 
 1           for the assignment, whether by cash, credit, or
 
 2           otherwise, exceeds the depreciated cost of improvements
 
 3           and trade fixtures being transferred to the assignee;
 
 4           provided further that with respect to state
 
 5           agricultural leases, in the event of foreclosure or
 
 6           sale, the premium, if any, shall be assessed only after
 
 7           the encumbrances of record and any other advances made
 
 8           by the holder of a security interest are paid;].
 
 9      SECTION 5.  Statutory material to be repealed is bracketed.
 
10 New statutory material is underscored.
 
11      SECTION 6.  This Act shall take effect upon its approval.