Is the Lease of your Commercial Premises secure?
If you are a commercial or retail tenant, it’s likely that having a secure, long term premises from which to build your business is important to you. You may have invested a lot of resources to fit out your leased premises or built a solid business name, reputation and goodwill that is based on your particular location.
You may think that having a signed lease in place with the property owner is all that is necessary to give you security of tenure.
There are two ways to increase the security of your commercial lease: obtain the mortgagee consent and register the lease.
However, there are other steps you need to take to ensure that your leasehold interest in the land is secure.
The landlord’s mortgagee
If there is a mortgage over your leased premises, the terms of the mortgage will most likely require that the landlord obtains the consent of the mortgagee to any subsequent dealings the landlord has with the land. This means that the landlord is required to obtain the mortgagee’s consent to your lease. (The term mortgagee here refers to the landlord’s bank or finance company holding a mortgage over the premises.)
What does this mean for you?
If the landlord defaults under the terms of their mortgage (yes, it does happen!), the mortgagee may be well within their rights to extinguish your lease if they have not previously consented to it.
Obtaining the mortgagee’s consent to your lease is important for the security of your Lease.
If the mortgagee has consented to your lease, then they would generally be bound to honour it and your interest in the lease will be secure.
What if there is no mortgage?
If there is currently no mortgage, it doesn’t mean that there won’t be one in the future.
The best way to protect your interest is to register the lease on the title. You can do this through the Land Titles Office in your state. Your leasing kit contains instructions on how to do this.
That way, all subsequent parties who deal with the property, are put on notice as to your interest in the land, which on registration, becomes indefeasible. This means that your leasehold interest in the land will take priority over later interests should they arise, such as later registered mortgages, or should the property be sold and subsequently transferred to a new owner.
For example, if the landlord later sells the land, the purchaser must honour your registered lease.
Similarly, if the landlord later mortgages the property, your leasehold interest will prevail and take priority over the mortgage. The mortgagee will be bound to honour your lease.
How to obtain the mortgagees consent?
The landlord submits the lease to the mortgagee requesting their consent. Generally, the mortgagee will not withhold consent unless the terms are un-commercial. The mortgagee will likely request a fee to cover their costs associated with consenting to the lease.
What are my obligations if I am the landlord?
It is wise for the landlord to obtain the mortgagee’s consent to a lease in addition to registering the lease on the title. This will limit any liability towards the tenant should things turn sour.
What if I am the tenant?
If you are the tenant and wish to protect your investment and ensure your lease is secure, you should ensure that your lease is registered on the title and, if there is a mortgage, obtain the mortgagee’s consent to your lease.
Real life example of when a lease goes wrong
The tenant held an unregistered lease. The landlord later mortgaged the property and the mortgagee registered a mortgage on the title.
Subsequently, the landlord defaulted under the mortgage.
Since the lease was unregistered and the mortgagee had not consented to the lease, the mortgagee did not consider itself bound by the lease.
Under the terms of the mortgage, the mortgagee was entitled to possession of the premises.
The court held that the mortgagee’s registered interest prevailed over the tenant’s unregistered lease and ordered that the tenant give up possession of the premises.
(Epworth Group Holdings Pty Ltd v Permanent Custodians Limited )
The importance of obtaining mortgagee’s consent
- Obtaining the mortgagee’s consent to your lease is vital to the security of your lease.
- Registering your lease is also an important way to ensure your interest in the land takes priority over all subsequent registered interests.