Why is mortgagee’s consent to a lease so important?
By Jonathan Tisher
7 May 2014
A new tenant will want to have the "peace of mind" that they have a secure lease in place. In this respect the focus is usually on ensuring that the lease terms are fair and reflect what has been agreed upon between the landlord and tenant. However, what is often not contemplated is the importance of obtaining mortgagee’s consent to the lease and the risk for a tenant in not ensuring that it is obtained.
A title search will provide evidence as to whether there is a mortgage over the property. If there is not a mortgage, it is not an issue. It is also important to note that the tenant is not a party to the landlord’s mortgage and does not know what the terms of the mortgage provide. Such terms will almost inevitably provide evidence that the landlord cannot deal with the property without the mortgagee’s consent.
The proper procedure is, therefore, for the tenant to seek that the landlord obtains written mortgagee’s consent once the terms of the lease have been agreed upon. It can become a major issue for the tenant if this does not occur.
If a landlord fails to comply with the terms of their mortgage, the mortgagee can take possession of the premises and sell the property. If the mortgagee had previously consented to the lease, then when they sell the property, they must sell it subject to the lease. In these circumstances, the tenant is secure.
If however, mortgagee’s consent was not obtained, then a mortgagee has the right to sell the property with vacant possession. The practical impact of this is that the tenant may be required to urgently vacate the premise with no recourse against the mortgagee. Whilst they may have some recourse against the landlord, in circumstances where the property is being sold by a mortgagee, it is likely that the landlord has significant financial issues. The impact that this could have on the tenant’s business could be extremely damaging and stresses the importance of obtaining mortgagee’s consent.
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