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COMMERCIAL LEASES - REGISTRATION OF LEASES, CAVEATS AND OBTAINING MORTGAGEE CONSENT
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It is not common practice in New Zealand for leases to be registered. Nor is it usual in New Zealand for tenants to require landlords to obtain their mortgagee’s consent to a lease or for tenants to have a right to lodge a caveat to protect their interests under an unregistered lease.

This position is emphasised by the standard ADLS deed of lease which contains a clause that the landlord is not required to do anything to enable the lease to be registered or be required to obtain the consent of the mortgagee and that the tenant will not register a caveat in respect of its interest under the lease.

In comparison, most states in Australia require registration of leases which have a term of more than 3 years. For registration of a lease, the consent of the landlord’s existing mortgagee (if any) would be needed.

There can be some risks with not registering a lease. For example, if the landlord sells the leased property and the incoming purchaser has no knowledge or notice of the lease, then in certain circumstances the incoming purchaser can be entitled to not honour or recognise the tenant’s interest under the unregistered lease. However, generally when a property is sold, the incoming purchaser is made aware of any lease and from a practical perspective, the lack of a registered lease is not a major concern.

Another example could be if a landlord becomes insolvent and the landlord’s mortgagee looks to exercise its power of sale, in which case there is a risk that the mortgagee could try to sell the property without the lease. However, selling a property with a tenancy in place (assuming that the lease is on standard commercial terms) generally adds value to the property, and as such, it would usually be in the mortgagee’s interest to sell the property subject to the lease.

The recent High Court case. GP96 LTD v F M CUSTODIANS LTD ([2019] NZHC 1183, 28/5/2019, Christchurch, Gendall J 99 paras), highlights this risk and it is a good reminder to both landlords and tenants as to the steps they can take to protect themselves.

Background

GP96 Limited (Tenant) lodged a caveat against a commercial property, claiming an interest as the lessee under an unregistered lease.

The second mortgagee of the property, PVG Securities Trustee Limited (Mortgagee), applied to Court to remove this caveat. The caveat prevented the Mortgagee from selling the property to realise its debts.

The Mortgagee claimed that the Tenant’s claimed interest was not binding on or enforceable against the Mortgagee because the lease was entered into without the Mortgagee’s consent. The Mortgagee said that it simply wished to exercise its statutory right to sell the property free of the unregistered lease to which it had not consented.

Was the lease binding on the second mortgagee?

A key issue in this case was whether the Mortgagee had consented to the lease.

The Count said that there was nothing available to suggest that the lease had been brought to the Mortgagee’s attention or that its consent was sought or provided.

The Court therefore found that the unregistered lease did not take priority over the Mortgagee’s interests and was therefore not binding on the Mortgagee. The caveatable interest asserted by the Tenant therefore had to yield to the Mortgagee’s registered mortgage, i.e. the Mortgagee’s interest trumped the Tenant’s interest and the Mortgagee was therefore able to sell the property free of the lease.

For a mortgagee to give consent, the Court made a comment that mere knowledge of the existence of a lease and passively standing by and making no objection to it, does not in itself amount to consent.

What this means for you

As a tenant, if you have invested significantly into the leased premises, then you should consider requiring the landlord to obtain mortgagee consent to the lease if you are concerned to ensure that the landlord’s mortgagee is bound by the lease. You should also consider asking for an express right in the lease to register a caveat, although most landlords would be resistant to this.

For landlords, seeking mortgagee consent to a lease is not an onerous obligation. However, if a tenant insists on you obtaining the mortgagee’s consent to the lease, you should ensure that the tenant is responsible for your and the mortgagee’s costs in respect of obtaining this consent. Landlords should also be aware that most standard mortgage terms require landlords to obtain the prior written consent of its mortgagee before the landlord owner can lease a secured property. If this is a concern, landlords may wish to negotiate against this requirement with its mortgagee.

Landlords should ideally resist granting tenants the right to lodge a caveat against their title as it affects their rights to deal with the land. If a landlord concedes for a tenant to have a right to caveat under the lease, then the lease should be drafted so that there is an obligation on the tenant to do all things promptly to consent to any dealings by the landlord that do not impede on the tenant’s rights under the lease and for the landlord’s and mortgagee’s costs in this regard to be paid by the tenant.

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