Leases - do they require lender's consent?
Author: Lisa On-Iam and Claire Byrne
Applies to: England and Wales
It can be imperative for a tenant to ensure that lease formalities are completed as quickly as possible. Obtaining a landlord's lender's consent to the grant of the lease can delay matters. Is it vital to obtain lender's consent?
The short answer is 'yes'. Prospective tenants must always ensure that their landlord's lender is aware of the lease, and has consented to it, regardless of the length of the term.
What are the implications for the tenant if consent is not obtained?
- Leases of more than seven years
A lease that is granted for more than seven years must be registered at the Land Registry. The lender's charge will be registered on the landlord's title (assuming that that is registered). The charge is usually protected by a restriction preventing registration of any dispositions of the landlord's title without proof of the lender's consent.
A disposition includes the grant of a lease and so the tenant's application to register its lease will not be completed unless the lender's consent has been obtained. The tenant does not obtain legal title to the lease until the application is completed. Ultimately, the application to register the lease can be cancelled by the Land Registry.
Leases of seven years or less might also be caught by a Land Registry restriction, as any easements granted by the lease must be registered. The grant of a legal easement also falls within the standard definition of disposition.
Even if there is no restriction preventing registration or, the lease is not eligible for registration, there is also a serious implication for the tenant if the landlord defaults and the lender becomes a mortgagee in possession, or appoints a receiver.
Where lender's consent was not obtained to the grant of the lease but should have been, the lease will be void against the lender. The lender will be able to sell the property to a third party who will not be bound by the lease and may require the tenant to vacate the property.
Even if the landlord does not default on the charge, if it has not obtained consent when it should have, that may be enough to trigger enforcement action by the lender.
Can the requirement for lender's consent be changed by agreement or by statute?
Yes. It is possible a landlord may have negotiated its funding documentation on the basis that short leases within defined parameters can be granted without the lender's consent, and the Land Registry restriction can be modified to reflect this.
There are statutory powers in the Law of Property Act 1925 to grant leases which will be binding on both the lender and the landlord, but these are usually excluded in funding agreements.
There is no obligation on the lender to consent to the grant of a lease, or to act reasonably or make a decision quickly. Tenants should raise the issue of lender's consent as early as possible in negotiations to ensure it will not hold up completion of the lease. They should also be mindful that lender's consent may also be required to future dealings with the lease.
This document is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.