With the recent rate increases it is worth reflecting on the potential impacts on a tenant of a failure to obtain mortgagee consent to a lease.
At the time of publication (September 2023), the Reserve Bank had increased the target cash rate from 0.10 per cent to 4.10 per cent over the space of just over 12 months from May 2022.
These increases (which tend to be reflected by corresponding increases in rates on variable rate loans) are likely to have the effect of increasing mortgage stress on property owners. And when mortgage stress increases, mortgage defaults can be expected to follow.
It is, then, timely to reflect on the potential impacts on a tenant of a failure to obtain mortgagee consent to a lease.
In the absence of mortgagee’s consent, a lease between a landlord and tenant will not be binding on a mortgagee of the land. This means that if the landlord defaults under its mortgage the mortgagee will be entitled to exercise its rights under the lease to recover possession of the land without regard to the interests of the tenant.
This can see a tenant removed from a premises during the term of the lease for reasons outside the tenant’s control and despite having not defaulted under its lease. A mortgagee can be expected to remove a tenant in circumstances in which the mortgagee considers it will achieve a better sale price with a vacant property than with a property subject to lease.
Most leases include a provision requiring a landlord to obtain mortgagee’s consent, although any practitioner acting for a tenant should be conscious when reviewing a proposed lease to ensure this is the case before the tenant signs.
It is rare, however, to see a lease that contemplates any specific consequence on a landlord, or rights accruing to a tenant, where that consent is not then obtained. A clause that contemplates consent being provided won’t provide any protection to a tenant against a mortgagee unless and until the consent is actually obtained in writing.
The Legal Practitioners’ Liability Committee (LPLC), in the context of Clause 6.3 of the LIV copyright form of lease (which requires the landlord to obtain and provide its mortgagee’s consent where requested to do so by the tenant), comments as follows:
“Clause 6.3 . . . provides that the landlord must give the tenant written consent to the lease from all relevant mortgagees. However, the clause can only be enforced after the lease has been entered into. The clause is of little use to the tenant if the mortgagee refuses consent. The tenant client should be informed in order to fully protect its interests. The consent must be obtained before the tenant enters into the lease.”
While in a perfect world a tenant might require its prospective landlord to provide evidence of mortgagee’s consent prior to execution of the lease, the practical reality is that mortgagees will not ordinarily provide consent until after the lease is signed (and landlords will generally not be willing to request that consent until the tenant has committed to the lease) and, accordingly, the LPLC’s suggestion does not translate into day-to-day practice.
From a practical perspective the starting point is simply that tenants (or practitioners acting for them) must undertake appropriate searches to establish whether or not a mortgage is in place and, where a mortgage is in place, must not overlook the need to obtain mortgagee’s consent. Tenants should ensure that they request provision of mortgagee’s consent from the landlord (particularly where the provision of the lease only imposes any obligation on the landlord to obtain that consent on request) and pursue that until they sight the written consent.
It may be sensible, where circumstances and timing allow, to negotiate a provision that makes commencement of the lease subject to the landlord’s provision of mortgagee’s consent.
Where a landlord fails, refuses, or is unable to obtain consent of its mortgagee a tenant has few practical options. Often by the time it becomes clear that consent will not be forthcoming the tenant has spent considerable time and money investing in the premises (and so will be unlikely to want to take steps to bring the lease to an end for the landlord’s breach even if able to establish some right to do so (which would be questionable)).
A tenant is likely to be able to obtain an order for specific performance against a landlord who is refusing to seek its mortgagee’s consent, however, the costs of obtaining such an order will be prohibitive in most cases and the order only useful where the landlord is refusing to seek consent, rather than where the mortgagee is refusing to provide the consent.
It is important to note the interests of a tenant in possession will take precedence over the interests of an incoming mortgage, however, tenants (and practitioners acting for them) should be aware that varying a lease after the mortgage has been registered in those circumstances will require the consent of the mortgagee.
This article was first published in the September 2022 Law Institute Journal (save for some minor amendments, including in relation to interest rate details which steadfastly increased after that date)