Often commercial property which is leased to Tenants is subject to a mortgage securing the Landlord’s loan from the bank. The bank is required to consent to the Lease in almost all cases and this consent is called Mortgagee’s consent. It is vitally important for both the Landlord and the Tenant that the Mortgagee’s consent to the Lease is obtained.
For Landlord’s it is important to obtain the consent as it is a standard term of almost all commercial loans that the secured property cannot be leased without the consent of the bank, breaching this term can have serious consequences for the Landlord.
It is also usually a term of a lease that the Landlord must obtain the consent of the Mortgagee to the lease. This means that failing to obtain the consent of the bank to the Lease, you can be in breach of both the loan agreement with the bank and the lease itself.
For Tenant’s it is even more important to ensure the Landlord obtains and provides evidence of the Mortgagee’s consent to the lease. In Victoria, the competing interests of the Mortgagee and the Tenant in the property in question are ranked based on time. This means if the Tenant leased the property first and the Landlord subsequently obtained a loan with a mortgage over the property the Tenant is protected, even if the Landlord defaults on their loan from the bank.
However, if the mortgage was in place first it is given priority over the lease. That means that if the Landlord defaults then the Mortgagee will only be required to honour the lease to the Tenant if they had consented to the lease. If the Mortgagee’s consent was not obtained then the Tenant can be removed and the property sold vacant by the Mortgagee after the Landlord defaults. This leaves the Tenant with no premises and a business of little or no value in many cases.
Obtaining the Mortgagee’s consent to a Lease is normally a straightforward process, particularly where the Landlord keeps the bank up to date with the Lease negotiations.
The bank may withhold their consent if the Lease is unacceptable to them in some way and request the Lease be amended. Although many banks will not provide their consent until after the Lease has been executed, the Lease should be provided to the bank for their review prior to execution to ensure that the bank is satisfied with the terms of the Lease.
If the Lease is not provided to the bank prior and consent is subsequently withheld the Lease must either be amended after signing or if this is not possible the Landlord will need to terminate the Lease to ensure they are not in breach of their loan agreement with the bank.
It is also important to obtain this consent on renewal of the lease and when varying or transferring the lease. This is because the bank has only consented to the lease as it was when it was presented to them, any variation in the terms of the lease or indeed the party can void that consent and leave the Tenant unprotected and the Landlord in breach.
It is also important to review the Landlord’s situation when the lease changes as the Landlord may have mortgaged the property after the original lease. Whilst this original lease will be given priority over the mortgage if the Lease is inadvertently surrendered, as shown in the examples in Traps when you vary or surrender your commercial lease, the “new” lease will not have priority over the mortgage if anything goes wrong.
The complexity of all of this is a great reminder as to why you need to obtain specific legal advice when considering a commercial lease – and even when varying it. Need to talk more about this? Give Josh Ennis a call on 03 5445 1032.