Public Lands

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 HD1)

HOUSE OF REPRESENTATIVES                H.B. NO.           H.D.1
TWENTIETH LEGISLATURE, 1999                                
STATE OF HAWAII                                            

                   A  BILL  FOR  AN  ACT



 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)  A
10 lessee of a lease may freely give a security interest to any
11 institutional lender, and no action of the board will be required
12 when a lessee gives a security interest to an institutional
13 lender; provided that the institutional lender shall give to the
14 board a copy of the institutional lender's mortgage, assignment
15 by way of mortgage, or financing statement, as recorded in the
16 bureau of conveyances of the State.
17      (b)  No action of the board will be required when an
18 institutional lender acquires the lessee's interest through a
19 foreclosure sale, judicial or non-judicial, or by way of
20 assignment in lieu of foreclosure, when the institutional lender

Page 2                                                     796
                                     H.B. NO.           H.D. 1

 1 assigns an acquired lease, or when an institutional lender sells
 2 or causes the sale of the lessee's interest in a lease by way of
 3 a foreclosure sale, judicial or non-judicial; provided that the
 4 institutional lender shall give to the board a copy of the sale
 5 or assignment, as recorded in the bureau of conveyances.
 6      (c)  Notwithstanding any provision of this chapter or other
 7 law to the contrary, if any lease is subject to a security
 8 interest which is held by an institutional lender, and provided
 9 that the institutional lender has given to the board a copy of
10 the institutional lender's mortgage, assignment by way of
11 mortgage, or financing statement, as recorded in the bureau of
12 conveyances:
13      (1)  The board shall give to the institutional lender,
14           concurrently with the giving of notice to the lessee, a
15           copy of each notice given to the lessee.  No
16           cancellation of a lease shall be made by the board for
17           any monetary default by the lessee, without first
18           giving the institutional lender written notice of
19           intention to cancel and permitting the institutional
20           lender at least sixty days to remedy the monetary
21           default;
22      (2)  If the lease is canceled for violation of any lease
23           term or condition, the violation of which is not

Page 3                                                     796
                                     H.B. NO.           H.D. 1

 1           remediable by payment of money, or if the lease is
 2           deemed terminated or deemed rejected under bankruptcy
 3           law, then, in either such event, the institutional
 4           lender will be entitled to issuance of a new lease in
 5           the name of the institutional lender for a term equal
 6           to the term of the lease remaining immediately prior to
 7           the cancellation, termination, rejection, or deemed
 8           rejection, with all other terms and conditions being
 9           the same as in the canceled, terminated, rejected, or
10           deemed rejected lease, including any renewal option, if
11           any, free and clear of all liens, claims and
12           encumbrances, except only for such liens, claims and
13           encumbrances, if any, which were superior to the
14           security interests of the institutional lender prior to
15           the termination, cancellation, rejection, or deemed
16           rejection of the lease.  If a lease is rejected or
17           deemed rejected under bankruptcy law, the lease shall
18           be deemed to be canceled and terminated for all
19           purposes;
20      (3)  If the lessee's interest under a lease shall become
21           owned by an institutional lender, including by reason
22           of the provisions of the foregoing subsection (2), by
23           reason of acquisition of the lessee's interest pursuant

Page 4                                                     796
                                     H.B. NO.           H.D. 1

 1           to a foreclosure sale, judicial or non-judicial, or by
 2           reason of any assignment in lieu of foreclosure, then: 
 3           (A)  The institutional lender shall be liable for the
 4                obligations of the lessee under the lease for the
 5                period of time during which the institutional
 6                lender is the holder of the lessee's interest but
 7                shall not be liable for any obligations of the
 8                lessee under the lease arising after the
 9                institutional lender has assigned the lease; and 
10           (B)  The provisions of subsection 166-6(a)(1) and (2)
11                shall not apply to the lease or the demised land
12                during such time the institutional lender holds
13                the lessee's interest in the lease;
14      (4)  As long as there is unpaid to an institutional lender
15           any sum secured by a security interest, the lease will
16           not be modified, surrendered, canceled, or terminated,
17           except for cancellation by reasons of default of the
18           lessee, subject to subsection (a) above, and no rent
19           increase over and above fair market rent increases,
20           based upon actual use of the lands demised and subject
21           to the use restrictions imposed by the lease and
22           applicable laws, shall be imposed or become payable,
23           and no lands shall be withdrawn from the lease, without

Page 5                                                     796
                                     H.B. NO.           H.D. 1

 1           the prior written consent of the institutional lender;
 2           and
 3      (5)  If the lease shall contain any provision requiring the
 4           payment of a premium to the State on assignment of the
 5           lease, the premium shall be assessed only after all
 6           amounts owing by any debt secured by a security
 7           interest held by an institutional lender shall have
 8           been paid in full, such premium shall not be payable on
 9           any assignment of a lease to or by an institutional
10           lender, including any sale of the lease at foreclosure
11           sale, acquisition of the lease by an institutional
12           lender, by foreclosure or otherwise, and the re-
13           disposition of such acquired lease by the institutional
14           lender.
15      (d)  Ownership of both the lease and the security interest
16 by an institutional lender shall not effect or cause the merger
17 thereof, and both interests shall remain distinct and in full
18 force and effect unless the institutional lender, by written
19 instrument, elects to have said estates merge.
20      (e)  The department or board may include in any consent form
21 or other document with such provisions, not inconsistent with the
22 intent of this section, as may be required to make a lease
23 mortgageable or more acceptable for mortgageability by an
24 institutional lender.

Page 6                                                     796
                                     H.B. NO.           H.D. 1

 1      (f)  If any person, including a junior lien holder,
 2 purchases the institutional lender's security interest, and the
 3 same is assigned to such person, then the rights herein shall be
 4 exercisable by such transferee as successor in interest to the
 5 institutional lender.
 6      (g)  Whenever any action of the board is required, including
 7 the consent of the board and approval of qualification under
 8 subsection 166-6(a)(6) or chapter 167, if the board shall fail to
 9 notify the applicant, for any action of the board, of disapproval
10 of the application in writing within      days of the submission
11 of the application, the application shall be deemed to be
12 approved.
13      (h)  For purposes of this section:
14      "Action of the board" means any action by the board or
15 department, including consent of the board, qualification under
16 subsection 166-6(a)(6) or chapter 167, and negotiation, drawing
17 of lot or public auction under section 166(a).
18      "Institutional lender" means a federal, state or private
19 lending institution permitted to do business in this State making
20 a loan to a qualified applicant under section 166-77 on the basis
21 of a lease for security, in whole or in part, together with any
22 other entity who acquires all or substantially all of an
23 institutional lender's loan portfolio.

Page 7                                                     796
                                     H.B. NO.           H.D. 1

 1      "Lease" means any lease issued under this chapter.
 2      "Lessee" means the lessee under a lease.
 3      "Loan" shall also include any renewals and extensions of
 4 such loan.
 5      "Making a loan" means the funding of new money after the
 6 effective date of this section or the renewal or extension of
 7 indebtedness owing by a qualified applicant on the effective date
 8 of this section; provided the institutional lender shall be the
 9 entity making the loan or the entity who acquires all or
10 substantially all of such institutional lender's loan portfolio.
11      "Security interest" means any interest created or perfected
12 by a mortgage, assignment by way of mortgage, or by a financing
13 statement encumbering a lease, land demised by the lease, or
14 personal property located at, affixed, or to be affixed to, or
15 growing, or to be grown, upon the demised land."
16      SECTION 3.  Section 171, Hawaii Revised Statutes, is amended
17 to read as follows:
18      "171-21  Rights of holder of security interest.  Whenever
19 any notice of breach or default is given to any party under
20 section 171-20, or under the terms of any lease, patent, license,
21 agreement, or other instrument issued or to be issued under this
22 chapter, a copy of the notice shall be delivered by the board of
23 land and natural resources to all holders of record of any

Page 8                                                     796
                                     H.B. NO.           H.D. 1

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

Page 9                                                     796
                                     H.B. NO.           H.D. 1

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

Page 10                                                    796
                                     H.B. NO.           H.D. 1

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

Page 11                                                    796
                                     H.B. NO.           H.D. 1

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

Page 12                                                    796
                                     H.B. NO.           H.D. 1

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

Page 13                                                    796
                                     H.B. NO.           H.D. 1

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