Landlords will often lease property to a tenant which is subject to a mortgage. Accordingly, as part of the leasing process, landlords are often requesting the consent of the bank to register the lease. However, sometimes obtaining the bank’s consent may not be as straight forward as it seems.
Why is mortgagee consent required?
It is a standard term of commercial mortgages that the landlord cannot lease the property without the consent of the bank. An example clause is:
“Without our consent you may not, and may not agree to lease or licence the property, or allow a surrender or variation of any lease or licence.”
A breach of this clause is a breach of the mortgage, which could have serious consequences for the landlord.
Is it just a rubber stamp?
As in the above example, the mortgage usually requires consent to be obtained prior to leasing or agreeing to lease the property. However, standard practice is that a bank will not consider a request for consent to a lease until the lease has been signed by both parties. This means that the lease has been entered into by the parties and often the tenant has taken possession of the premises before the landlord or its solicitor seeks the consent of the bank. In most cases, the bank gives its consent. It could be perceived that obtaining mortgagee consent to a lease is just a rubber stamp.
However, a prudent bank will receive legal advice on a lease before consenting to it and may require amendments to the lease as a condition of consent. These amendments are usually to further secure the bank’s interests, for example:
if the tenant has a first right of refusal to purchase the property, a bank may request that the clause make it clear this right does not apply if the bank has taken possession of the premises under the mortgage or
if the parties enter into an agreement for lease on the understanding that the lease will not be registered for some time and the tenant has the right to lodge a caveat, the bank may request an amendment to the clause that provides that the tenant (as caveator) will consent to any dealings of the bank.
In these instances the landlord will request authority from the tenant to amend or vary the lease to comply with the bank’s requirements.
A bank may also refuse consent to a lease on the basis that the rent was below the market rent. Unlike the above examples, this issue is not easily resolved by asking the tenant’s authority to amend the lease as the bank may require the tenant to pay more rent.
What happens if consent is withheld?
If consent to a lease is refused by a bank it can leave a landlord in a difficult situation. If the parties do not vary the lease so that it is acceptable to the bank or, if this is not an option, if the landlord does not terminate the lease, then the landlord is likely be in breach of its obligations under the mortgage.
This highlights the importance of including a clause in the lease which provides that the lease will not bind the landlord unless and until the landlord has obtained consent to the lease by any relevant mortgagee, in a form satisfactory to the landlord.
What should you do?
The MV leasing team have observed that banks are currently more likely to place conditions on their consent and in some instances have questioned the commercial terms of some leases. This has prompted our team to review the process for obtaining consent. To minimise the risk of a landlord being in breach of its mortgage, we suggest that landlords should:
consider requesting consent in principle to commercial terms before the lease is entered into and perhaps even provide a copy of the proposed lease to the bank before it is signed and
ensure that the lease protects the landlord if the bank’s consent is refused.
By taking these steps before the lease is signed by both parties, the landlord may avoid a situation where it is bound to a lease which is in breach of its mortgage.
For more information contact the Property, Commercial and Finance Team:
Christine Murray Partner Property, Commercial and Finance
(02) 6279 4402 Christine.Murray@MVLawyers.com.au
Jennifer Jaeschke Associate Property, Commercial and Finance
(02) 6279 4361 Jennifer.Jaeschke@MVLawyers.com.au