Imagine this – you’re about to begin a commercial lease of a property. You want to get through the formalities as quickly as possible, but you discover that the landlord has a mortgage. Must you obtain the lender’s consent?
The short answer is 'yes'. In theory, this is the landlord’s responsibility, but potential tenants should always ensure that their landlord's lender has consented to their potential lease.
To understand the implications better, we’ll take you through some of the possible consequences for the tenant if consent is not obtained.
Leases of more than seven years
A lease that is granted for seven years or more must be registered at the Land Registry. The lender's charge will be registered on the landlord's title (assuming that that is registered). The charge is usually protected by a restriction (or a condition) preventing registration of the grant of a lease without evidence of the lender's consent.
Accordingly, without the lender’s consent the tenant will not be able to complete the application and obtain legal title to the lease.
Short leases of seven years or less
Leases of seven years or less might also be caught by a Land Registry restriction (or condition), as any rights (also called easements) granted by the lease must be registered. The grant of a legal right or easement over the property will usually require lender’s consent.
Even if there is no restriction preventing registration, for example if the lease is not eligible for registration, there is also a serious implication for the tenant if the landlord defaults and the lender becomes a mortgagee in possession, or appoints a receiver.
Where lender's consent was not obtained to the grant of the lease but ought to have been, the lease will be deemed as void. The lender will be able to sell the property to a third party who will not be bound by the lease and may require the tenant to vacate the property.
Even if the landlord does not default on the charge, if it has not obtained consent when it should have, that may be enough to trigger enforcement action by the lender.
Can the requirement for lender's consent be varied?
Yes, it is sometimes possible to negotiate funding on the basis that short leases within defined bounds can be granted without the lender's consent. If this is done, the Land Registry restriction can be modified to reflect that.
There is no obligation on the lender to consent to the grant of a lease or to act reasonably - neither is there a deadline to which the lender must adhere. The tenant should raise the issue of lender's consent as early as possible in inter-party negotiations to ensure it will not delay completion of the lease. The landlord should also be mindful that the lender's consent may also be required in future dealings with the lease.
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