Where a commercial property is mortgaged, the landlord will usually need the lender’s consent before granting a lease. This is because the lender has a financial interest in the property and will want to protect its security. Failing to obtain that consent at an early stage can create legal and practical problems for both landlord and tenant, particularly where the lease is long term or needs to be registered.
When a property is subject to a mortgage or charge, things to bear in mind are as follows:
Protecting the Mortgage Security
The lender has a legal interest in the title. Most funding agreements require the Landlord to obtain the lender’s consent before granting a lease, especially when the lease is long term. Without consent, the mortgage arrangements may be breached and the lender’s security position compromised.
Lease Registration Requirements
For leases with terms over seven years, the lease must be registered at the HM Land Registry. If a lender’s charge is registered against the property, there will typically be restriction on the landlord’s title that prevents registration against the lease without lender’s consent. Without that consent, the lease may not be capable of registration, meaning the tenant would not acquire the legal title to the lease.
Risks if Consent is not Obtained
If consent is not obtained;
(a) the lease may be ineffective against the lender. If the landlord defaults on the mortgage or the lender takes possession (e.g. appoints a receiver), the lender could sell the property free of the lease, leaving the tenant without security of tenure.
(b) the tenant’s application to register the lease at the Land Registry may be refused or cancelled due to the restriction on the Landlord’s title.
(c) enforcement actions by the lender (even where there is no default) may be easier if the lease was granted without proper consent.
(d) Lenders are under no statutory obligation to grant consent and may take time to consider, potentially delaying completion if raised too late in the negotiation.
Practical Considerations
(1) Raise consent issues early because lenders are not obliged to respond quickly or grant consent, Solicitors often advise that consent matters be raised at the outset of the lease negotiations to avoid unnecessary delays or complications at completion.
(2) Even leases of seven years or less can require consent where they grant easements or other rights to be registered.
(3) Managing the expectation of prospective tenants is very important because their objective is to get the lease transaction completed as fast as possible. Hence, it is important to take a step back to ensure that the landlord’s lender has provided his consent to the grant of the lease.
(4) Requirement of the loan can be amended by the landlord negotiating its funding agreements with the lender to the effect that certain specified short leases can be granted without needing the lender’s consent and would be reflected in the restrictions on the title.
Takeaways
(1) Do not undervalue the importance of obtaining the consent of the Landlord’s Lender because the lender is not obliged to provide a decision quickly or even grant a lease.
(2) Prospective tenants tend to be impatiently eager about completing the process as quickly as possible. (3) It is recommendable that tenants raise this issue quite early in the negotiation to avoid unnecessary delays.
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