§ 106.8 Approval or decline of application. (a) Applications shall be accompanied by legible leases or proposed leases in print or type having a size of not less than 8 point.

(b) No insurance or reinsurance shall be approved or issued unless the analysis of location, management and finance made by the use of a system of risk analysis, approved by SBA, indicates that there exists a reasonable expectation that the small business applicant will perform the covenants and conditions of the lease or proposed lease.

(c) The terms, conditions, and coVenants in a lease or proposed lease submitted to the insurer with an application shall be subject to recipient's approval. Insurer may require modifications to be made in the lease before issuance of the policy.

(d) If the insurer so determines because of the magnitude or complexity of a single application or if there are applications filed for three or more guarantees of leases in a single development or project, an independently prepared feasibility study provided by the applicant or applicants must be submitted.

§ 106.9 Required lease agreements.

Agreements shall be reached between the lessor and lessee and stated in the lease concerning:

(a) The division, if any, of any award in condemnation proceedings representing the value of the real estate, including fixtures and the value of the leasehold interest. The lessee must retain the rights, on the presumption that such rights exist under condemnation laws, to awards from or claims against the condemnor for any taking of the lessee's property (including any

ownership in the leasehold improvements) for moving expenses and for damages for interruption of the lessee's business.

(b) The party or parties responsible for maintenance of hazard insurance and the payment of premiums therefor to insure real and personal property and whether such premiums on real property insurance are included in the minimum rent or are to be paid as additional minimum rent.

(c) The disposition of any hazard insurance proceeds and the party or parties responsible for reconstruction or repair of the premises and refurnishing or reequipping the building.

(d) The party or parties responsible for the payment of local taxes on the premises and whether such taxes are included in the minimum rent or are to be paid as additional minimum rent.

(e) That the lessee may not without the prior written consent of the lessor assign the lessee's interest in the lease or sublet the whole or any part of the premises.

(f) An equitable abatement of rent in the event all or any part of the premises are lost by casualty or condemnation proceedings. In lieu of such abatements, covenants by the tenant to obtain rent insurance or business interruption insurance will be considered.

§ 106.10 Minimizing the risk.

(a) Upon the effective date of the policy of rental insurance:

(1) The lessee shall pay an amount not to exceed one-quarter of the average guaranteed annual rental into an escrow account with the insurer for the purpose of paying rental charges not in excess of the guaranteed minimum monthly rental accruing in any month in which the lessee is in default or,

(2) The lessor shall accept an insurance policy providing for a deduction of from three (3) to six (6), months rent due after the date of default as the amount of loss to be borne by the lessor, as determined by the insurer.

(b) If an escrow account is established, it shall be accompanied by a written escrow agreement containing the following provisions:

(1) Simple interest at the rate of 4 percent per annum shall accrue to the escrowed fund from the date of deposit until the date of default.

(2) A default by the lessee in the covenants and conditions of the insured lease which is asserted by the lessor in a written demand for possession of the leased premises, shall forfeit all right and title of the lessee to the escrowed fund and interest accrued thereon.

(3) Upon such default and either before or after the lessee's actual possession is terminated, the insurer shall disburse to the lessor so much of the escrow as is necessary to pay claims for the guaranteed rent of rental charges accruing in any month in which the lessee is in default.

(4) If such default is cured by written agreement between the lessor and the lessee after the insurer has disbursed funds from the escrow to pay the lessor the guaranteed rent, the lessee shall, upon placing in this escrow an amount equivalent to the disbursed funds, be restored to all right, title, and interest in the escrowed fund as if such default had not occurred.

(5) If such default is not so cured and the lessee vacates because of eviction proceedings or the lessor's written demand, any portion of the escrowed funds remaining unused after the property is rerented shall be retained by the insurer.

(6) If no such default occurs during the term of the insurance policy, the insurer, upon written request of the lessee, shall disburse the funds to the lessor for application toward the payment of the final rental charges under said lease.

(7) If, prior to the expiration of the insurance policy, the lease is terminated by mutual consent of lessee and lessor, the total funds held in escrow shall be disbursed to the lessee upon receipt by the insurer of a request for such disbursement signed by the lessor and the lessee and advising the insurer of the termination date of the lease and that all rents due and payable to the date of termination were paid by the lessee.

(8) That the interests of the lessor and lessee in the escrowed funds shall

not be subject to the claims of creditors of either the lessee or lessor or others nor to legal process and may not be voluntarily or involuntarily alienated or encumbered by lessor or lessee.

[34 FR 14881, Sept. 27, 1969, as amended at 39 FR 11417, Mar. 28, 1974]

§ 106.11 Lessors duties to lessee and in

surer.

(a) The lessor shall perform the duties to the lessee required to be rendered by the terms of the insured lease.

(b) Upon the occurrence of a default by the lessee under the insured lease, the lessor shall give written notice simultaneously to the lessee and to the insurer of the specific default.

(c) Unless such default is corrected by amicable agreement of the lessee and lessor on or before 30 days from date of notice, the lessor will take prompt action to terminate the occupancy of the lessee, to make such repairs to the property as are necessary to restore it to its original condition, ordinary wear and tear excepted, and to deliver vacant possession to the insurer unless the requirement for vacant possession is postponed pursuant to § 106.12(c): Provided, however, This shall not be construed to prohibit improvements in the premises permitted by the lease.

(d) If such default is not corrected by the lessee, the lessor shall utilize the entire period for which there are funds available in escrow for the payment of rental claims (or the deductible period) in reasonably diligent efforts to eliminate or minimize losses by rerenting the property covered by the lease to another lessee subject to the approval of the insurer for the purpose of retaining the insurance coverage unless vacant possession has been postponed pursuant to § 106.12(c).

(e) At any time after an uncorrected default and before the escrowed funds are exhausted, or the deductible period has expired, the lessor may rerent the property described in the insured lease to a new lessee satisfactory solely to the lessor; provided, however, such action by the lessor

shall suspend the coverage of the insurance for the term of the new lease and no claim for losses sustained after the commencement date of the new lease and during the new tenant's term shall be paid by the insurer, and the aggregate amount of rent stated in the new lease shall be deducted from the total remaining amount guaranteed by the policy. The policy of insurance coverage shall be terminated and no claims shall be paid unless the lessor provides prompt written notice to the insurer of such rerenting with a true copy of the lease with the new lessee.

(f) At any time after an uncured default and before the escrowed funds are exhausted or the deductible period has expired, the lessor, before entering into a new lease with a new lessee may notify the insurer of the terms of the proposed new lease and of his intention to negotiate a lump-sum settlement of accrued and prospective losses based upon the terms of the proposed lease. If a settlement is agreed upon by the lessor and the insurer, payment of the negotiated settlement sum shall terminate the insurance policy.

(g) At any time after an uncured default and before the escrowed funds are exhausted or the deductible period has expired, the lessor may request the insurer to approve or consent to a new lessee and endorse the policy with the name of the new lessee; such consent shall not be given unless the risk to the insurer is not changed except for the nature of the business operation.

(h) Upon filing a claim for guaranteed rent in default, the lessor will continue to make reasonably diligent effort to minimize losses by assisting the insurer to locate a prospective lessee. Upon such filing and the exhaustion of the escrowed fund or the expiration of the deductible period, the lessor shall delivery vacant possession to the insurer with the right to rerent the premises unless vacant possession has been postponed pursuant to 106.12(c).

[34 FR 14881, Sept. 27, 1969, as amended at 39 FR 11417, Mar. 28, 1974]

§ 106.12 Insurer's rights.

(a) The insurer shall have the right to inspect the lessee's premises and operations and to examine and audit the lessee's books and records at any time during the term of the policy of insurance.

(b) Upon the exhaustion of the escrowed funds or the expiration of the deductible period:

(1) The insurer shall become the successor to the lessor for the sole purpose of causing the premises to be rerented by the lessor for any lawful purpose at such rentals and to any lessee acceptable to the insurer. Any rentals accruing under such new lease shall be paid to, and become the property of the insurer; provided, that if at the end of any month the cumulative rentals paid to SBA under the new lease shall exceed the sum of (i) the cumulative amounts of the guaranteed rent paid on the claim by the insurer, (ii) the cumulative amounts paid to the lessor in past months under this excess subparagraph by reason of rentals under new leases, and (iii) an amount determined by SBA to be sufficient to defray the direct and administrative expenses incurred by SBA in connection with the claim, then the insurer will remit to the lessor for that month the amount of any such excess.

(2) The insurer will become a successor to the lessor for the purpose of collecting from the lessee in default all rentals which are in arrears by the terms of the lease and with respect to which the lessor has either received payment or an acknowledgment of the insurer's liability for future payment.

(3) All collateral hypothecated to the lessor by the insured lessee as security for payment of the rent shall be automatically vested in the insurer to secure the lessee's payment of the rent to the insurer.

(c) The insurer may pay claims for the guaranteed rent where the lessor has been notified by the insurer, in writing, to postpone dispossession of the lessee, if in the judgment of the insurer it would be in the best interest of the insurer or the lessee and consistent with SBA's statutory purpose to permit the lessee to continue to occupy the property.

[34 FR 14881, Sept. 27, 1969, as amended at 36 FR 3185, Feb. 19, 1971; 39 FR 11417, Mar. 28, 1974]

§ 106.13 Assignments, subleases and surrenders after occupancy.

(a) The interest of the lessee in the leased premises shall not be voluntarily assigned or transferred by corporate merger or capital stock transfer to a new lessee without the prior written consent of the lessor and the insurer.

(b) The lessee shall not sublease the entire premises or any portion thereof without the prior written consent of the lessor and the insurer.

(c) The lessor shall not consent to an assignment or sublease by the tenant without the prior written consent of the insurer.

(d) If the lessor gives consent in violation of paragraph (c) of this section, the policy of lease guarantee insurance shall be suspended for the remainder of the term of the assigned lease or for the term of the sublease, regardless of whether the entire premises are subleased.

(e) In the case of a transfer by assignment or sublease of the leasehold estate or any portion thereof to a new tenant, a lessor who desires to retain the insurance of the rent in its original amount by obtaining the insurer's consent endorsed on the policy shall submit to the insurer such information concerning the assignee or sublessee as the insurer may require.

(f) If the assignee or sublessee is a small business concern and proposes to conduct business operations within the premises and the risks of management and financial structure have not increased, the insurer may consent to the assignment or sublease without payment of a new premium.

(g) If the insurer finds that the risk of the new management or financial structure of the assignee or sublessee is an increased risk, the insurer shall treat the assignment or sublease as a new lease and shall give consent only if the insurer is paid a premium based on the original rent or the rent of the sublease, the remaining months of the policy term and the prevailing rate schedule at the time the insurer's consent is requested.

(h) If the lessee, without default voluntarily vacates or surrenders possession of the leased premises to the lessor or to any other occupant (including any corporate survivor of a corporate merger with the lessee) with the consent of the lessor, the insurance shall terminate.

§ 106.14 Acquisition of premises by insured lessee.

If during the term of an insured lease an insured lessee exercises an option to purchase the premises or purchases an undivided interest in the premises or acquires any of a corporate lessor's capital stock, the initial amount of insured rent shall be reduced by an amount equivalent to the lessee's acquired interest in the premises or in the capital stock of the lessor.

§ 106.15 Acquisition of lessee by lessor.

If, during the term of an insured lease, the lessor, its subsidiaries or affiliates or any individual in control of the lessor acquires an interest in the lessee, the initial amount of insured rent shall be reduced by an amount equivalent to the acquired interest in the lessee.

§ 106.16 Effect of condemnation and casualty losses on insurance.

(a) In the event the property described in the lease which is the subject of the insurance is totally condemned or totally destroyed, the insurance is terminated as of the date of title vesting in the condemnor or as of the date of the casualty loss.

(b) In the event of partial condemnation or partial casualty losses, the amount of insurance is abated by the ratio which the minimum rent as abated by the terms of the lease bears to the guaranteed or insured minimum rent.

§ 106.17 Lease guarantee administration.

(a) Direct guarantees. All policies of insurance which are issued directly by SBA will be serviced by SBA.

(b) Participation guarantees. All policies of insurance which are issued by a participant shall be serviced by the participant.

§ 106.18 Rights and obligations of assignees of the lease rerental guarantee insurance policy.

An assignee of a lease rental guarantee insurance policy becomes a loss payee for its interest in rental payments made by the insurer after default by the tenant through an assignment of interest endorsement to the policy. Such rental payments will be made only when the lessor, or the assignee acting as lessor, is in compliance with the provisions of the policy and § 106.11 of these regulations.

[39 FR 11417, Mar. 28, 1974]

107.204 Collection or compromise of SBA claims.

107.901

107.205 Leverage for Section 301(d) Licensees.

107.902

Prohibited uses of funds. Inactive Licensees.

107.903

FINANCING OF SMALL CONCERNS (LOAN AND DEBT FINANCING; EQUITY CAPITAL FINANCING; GUARANTIES AND COMMITMENTS) GENERAL PROVISIONS

107.301 Financing term and amortization. 107.302 Cost of Money; Loans and Debt Securities.

107.303 Overline limitation.

107.304 Size status and nondiscrimination.

Conflicts of interest.

107.904 Disposition of assets to Licensee's Associates or to competitors of Portfolio Concern.

107.905 No Government sponsorship. 107.906 Violations based on false filings and nonperformance of agreements with SBA.

EXAMINATIONS, ACCOUNTS, RECORDS AND
REPORTS

107.1001 Examination and fees.