06 Jan 2013
Words Tim Admin

The Motel Lease - Mortgages and Deeds of Consent

In most leasehold motel acquisitions the purchasers offer their interest in the lease to a financier as security. Our next couple of articles we will consider this security and the impact for prospective purchasers, vendors and landlords. Generally a mortgagee will require, as a condition of their finance approval, that the mortgagee the tenant and the landlord enter to an agreement (usually called a Deed of Consent or Right of Entry Agreement) to ensure all parties recognise the other’s rights. The effect of a Deed of Consent is:

1. The Landlord acknowledges that the financier is entitled to step in on the tenant's default under either the loan; or the Lease.
2. The financier may step into the tenant's shoes for the purposes of rectifying any default or just to run the motel generally and transferring the business to a new operator.
3. The Landlord promises not to terminate the Motel Lease in the event that financier takes any action against the tenant.
4. To require the Landlord to give notice of any default to the financier prior to terminating the Lease.
5. To require the Landlord to notify the financier in the event that the Lease is replaced or varied in certain respects.

Ideally, the financier will be placed in no higher or better position than the Tenant. The financier is given the opportunity to protect its security. It will meet costs and ensure that the Landlord is satisfied with the performance of the tenant's obligations under the Lease. The biggest risk that faces a leasehold mortgagee is that the lease may be forfeited by the landlord due to a default of the tenant. A Deed of Consent attempts to overcome this concern and so enable financiers to continue to lend on the security of a lease. In practice there can be difficulties in having the Landlord sign the agreement. In our next article we will consider the common concerns of landlord and ways these can be addressed. In an attempt to overcome these difficulties we have included a clause in our plain English lease which requires the landlord to consent to any mortgage of the lease provided that the tenant satisfies the landlord that the proposed mortgage or charge would not prevent the tenant from paying the rent and outgoings. Our plain English lease also requires the landlord to sign any documentation that the proposed mortgagee may reasonably require as a condition of granting the loan to the tenant, this will include a Deed of Consent. A Deed of Consent will be required by financiers in almost all circumstances where the financier does not have the security of real property. These agreements are commonplace in the motel industry. Whilst the interests of the landlord, the lessee, the freehold mortgagee and the freehold mortgagee may conflict the parties should be able to resolve most issues in the Deed of Consent.