Most leases will contain a forfeiture clause. Forfeiture allows a landlord to end the lease for non – compliance with their obligations under the lease. The problem is that this will not just impact the tenant but also the lender who would want to ensure that it will not lose its security.
The lender will not have control of the tenant who breaches the terms of the lease. The loan agreement will have certain terms that will state the tenant must comply with the terms of the lease and a threat of enforcement of the legal charge usually backs this up. Nevertheless, despite these safeguards, it does not prevent the forfeiture of the lease.
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 ended. The court has the 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. The lender also has a right to apply to the court for relief from forfeiture and the court can exercise its discretion similarly.
Most lenders will not agree to lend against a property if the lease does not contain a mortgagee protection clause. The reason for the latter is the lender would rather have an opportunity to remedy the breach rather than go through the expense and uncertainty of an application to 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 notification beforehand of the issue and allows the lender a reasonable period of time to remedy the breach or to ask the tenant – who is the borrower – to remedy the breach to prevent forfeiture. Therefore, the lender has the chance to protect its security.
It is good practice to ensure the lease has a mortgagee protection clause.
Even if a lease does not 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. It is often the case that the landlord and lender would have a common interest, i.e. remedying the tenant’s breach and ensuring the bank does not lose its security of the property.
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 sell the property 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. The conveyancer will look at the terms and advise accordingly. A Deed of Variation is always advised if the lease is currently defective without a mortgage protection clause – it is the strongest protection for the tenant.
Ultimately, in the long term, it’s in the interests of everyone involved to include a mortgagee protection clause in a lease.
For more information and further advice please call Attwells Solicitors LLP on 0207 722 9898.