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Leases – a guide to mortgagee protection clauses

Forfeiture allows a landlord to end a lease in the event that the tenant breaches the terms of the lease or another specified event occurs. Forfeiture clauses ensure that tenants are properly incentivised to comply with their covenants, due to the threat that their premises could be taken back for non-compliance. However, tenants are not the only parties that forfeiture will impact.

If a lender takes security over a leasehold property, it is out of their control if the tenant/borrower breaches the terms of the lease. The lender’s control is through the covenants in the loan documentation, which is backed up by the threat of enforcement of the legal charge. However, that does not in itself prevent the forfeiture of the lease – and the loss to the lender of the security offered by it.

Where a landlord has a right to forfeit a lease, the tenant has the right to apply to court for relief from forfeiture. If relief is granted to the tenant, it effectively restores the lease as if it had never been determined. The court has discretion to grant or withhold relief, but will generally exercise it in the tenant’s favour, provided that the tenant promptly takes steps to remedy any breach of covenant. A mortgagee/lender also has a right to apply to the court for relief from forfeiture and the court can exercise its discretion similarly.

The lender’s position

Most lenders will not agree to lend against valuable commercial leasehold properties if the lease does not contain a mortgagee protection clause. Why? Because prevention is better than cure and a lender would prefer the opportunity to remedy the breach of covenant, rather than having to go through the expense and uncertainty of an application the court for relief. A mortgagee protection clause prevents the landlord from forfeiting a lease without first serving written notice on the lender of its intention to do so. This gives the lender a ‘heads up’ and allows the lender a reasonable period of time to remedy the breach or to ask the tenant – its borrower – to remedy the breach to prevent forfeiture. Therefore, the lender has the chance to protect its security.

Practical considerations

Even if a lease doesn’t contain a mortgagee protection clause, some landlords might notify a tenant’s lender that it’s about to take steps to forfeit a lease, before it actually does so. Quite often, the landlord and the lender may have similar interests, i.e. remedying the tenant’s breach and protecting the income stream under the lease.

From a tenant’s point of view, if the tenant accepts a lease without a mortgagee protection clause, then it may find it more difficult to assign or refinance in future. Any new lender may insist that the lease is varied to include a mortgagee protection clause, which could lead to delays and additional costs.

Therefore, in the long term, it’s in the interests of everyone involved to include a mortgagee protection clause in a lease.

 


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Spring 2018

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Clare Davitt