The Motel Lease – Mortgages and Deeds of Consent
By David Burrough
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.
Below is a table of the various concerns often raised by Landlord’s and the corresponding responses:
|
Landlord’s Concerns |
Response |
|
The financier may appoint an operator unsuitable to the Landlord |
Invariably this operator must be acceptable to the Landlord as an assignment of the lease by the financier will take place pursuant to the terms of the lease. |
|
The Landlord will have no say in the appointment of a new operator |
The terms of the transfer must be in accordance with the Lease. |
|
The financier will run the complex without regard to the Landlord |
The Financier will be required to comply with all the terms of the Lease. |
|
The Landlord should not execute any document that it is not legally obliged to sign |
This type of agreement is a commercial fact of life for Motel Leases. Every year many landlords sign these agreements. |
|
Having a financier involved necessarily means time delays in dealing with the operator |
The financier will agree to act as promptly as possible in the terms of its security. |
|
The financier’s operator may not have any experience in operating a motel |
The financier generally will only engage highly competent professional operators. The financier will have the same motivation to maximise the profit of the business to ensure that it is sold for the highest possible price. To this end the landlord can be assured the financier will install a professional and experienced operator. |
|
Acknowledging the financier’s rights will cost the Landlord money |
The covenants between the financier and the Landlord mean that the financier must meet any extra costs incurred as a result of the operator’s default. |
|
The Landlord is losing its rights of termination. |
The Landlord’s rights of termination are still available if the financier declines to rectify the breaches. |
|
The Landlord is losing its rights against the operator |
The Landlord’s rights as against the operator remain intact so that the operator may be sued by the Landlord for breach of lease. Some agreements contain an express clause acknowledging this. |
|
If the financier enters into possession then they should be responsible for all breaches of the Lease (even those caused before the financier entered possession) |
This is asking the financier to be responsible for an unknown liability and in effect guarantee the obligations of the tenant (something which the financier will never agree to). The Landlord will continue to have rights against the operator for any past breaches. |
|
The financier is able to remove the Chattels leaving the Landlord with nothing to run the Motel |
In the rare circumstance that the financier needs to exercise their rights under the agreements they will want to negotiate to sell the Chattels back to the Landlord (this is the simplest way for the financier to obtain the most value for the Chattels). Once the Landlord buys the Chattels back he is able to appoint an operator to run the motel business, build that business up and then sell the business to a new leasehold operator (generally at a profit to the Landlord). |
