Mortgagees Consent to the Grant of a Lease - Factors to Consider
04 February 2014
#Commercial Real Estate
The purpose of a condition against letting a property without the consent of the mortgagee is to protect the mortgagee`s security, and to ensure that it is not burdened with an unsatisfactory lease.
In the case of Commercial First Business Ltd v Atkins  EWHC 4388 (Ch) (13 July 2012) the High Court held that a mortgagee did have the right to refuse consent to the grant of a lease of mortgaged commercial property to protect its security over the mortgaged property but this was subject to an implied condition that consent must not be unreasonably withheld.
The Court adopted the test set out in International Drilling Fluids Ltd v Louisville Investments (Uxbridge) Ltd  EWCA Civ 3 (20 November 1985) to ascertain whether the mortgagee had acted reasonably in withholding its consent to the proposed letting. It held that the following factors should be considered:
- A mortgagee must not refuse its consent to a proposed letting on grounds which have nothing to do with the relationship of mortgagor and mortgagee in relation to the mortgaged property and the proposed letting.
- It is up to the mortgagor to prove that consent has been unreasonably withheld.
- Provided that the reasons given for refusing consent are deemed to be that of a mortgagee acting reasonably, a mortgagee may refuse his consent to a proposed letting for reasons not contained in the mortgage documentation and not disclosed to the mortgagor at the time the mortgage was first granted.
- So long as its decision to refuse consent was reasonable in the circumstances, the mortgagee does not need to prove that refusing consent was justified.
- Generally a mortgagee will only need to take its own interests into consideration when deciding whether or not to consent to a lease of a mortgaged property, however, there may be occasions when the disparity between the benefit to the mortgagee and the detriment to the mortgagor is so great it would be unreasonable for a mortgagee to refuse consent in the circumstances.
- It is a question of fact, depending upon all the circumstances, as to whether the mortgagee`s consent to a proposed letting is being unreasonably withheld.
This case set out some very helpful guidelines for a mortgagee to consider when reviewing an application for its consent to a proposed letting.
If you have any queries regarding applications for consent to lettings of commercial property please contact the Commercial Real Estate team.
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