Understanding the mortgagee protection clause in a lease

A lease is a contract between a landlord and a tenant and has certain key characteristics defined in both statute and in case law. For the purposes of this Guide, we will refer to a lender as a ‘mortgagee’.

Depending upon the terms of the lease, it can be mortgaged to raise monies.  The mortgagee will require certain criteria to be met before advancing funds and in order to minimise financial risk.

A mortgagee protection clause is therefore a critical component in leases. This clause ensures that a landlord cannot terminate a lease without first notifying the lender, thereby protecting the lender’s interests.

An example of a mortgagee protection clause is this:-

“Before re-entering the Property pursuant to this clause, or commencing any proceedings for forfeiture of this lease, the Landlord shall:

(a) give notice of the breach complained of to any mortgagee of this lease of whom the Landlord has received notice; and

(b) if the mortgagee confirms in writing to the Landlord within 14 days of the notice that it wishes to remedy the breach, allow the mortgagee 28 days (or such longer time as may be reasonable in view of the nature of the breach) to remedy the breach.”

As one might expect, there are many variations of such wording, but the effect is largely the same.

Purpose and function

The primary function of a mortgagee protection clause is to prevent the landlord from forfeiting a lease without serving written notice on the lender. Forfeiture allows a landlord to terminate a lease if the tenant breaches its terms or if another specified event occurs. This clause motivates tenants to adhere to their covenants, as non-compliance could result in the tenant losing their premises.

Impact on lenders

Forfeiture doesn’t only affect tenants; it also impacts lenders who have taken security over a leasehold property. If a tenant breaches the lease terms, the lender has no direct control over the situation. The lender’s control is limited to the covenants in the loan documentation, backed by the threat of enforcing the legal charge. However, this does not prevent the forfeiture of the lease and the potential loss of the lender’s security.

Relief from forfeiture

When a landlord has the right to forfeit a lease, the tenant can apply to the court for relief from forfeiture. If granted, this relief effectively restores the lease as if it had never ended. The court generally favours the tenant, provided they promptly remedy any covenant breach. Similarly, a mortgagee can apply for relief from forfeiture, and the court can exercise its discretion in the same manner.

Lender requirements

Most lenders will not finance valuable leasehold properties unless the lease includes a mortgagee protection clause. This is because lenders prefer the opportunity to remedy a covenant breach rather than face the expense and uncertainty of applying to the court for relief. The clause ensures that the landlord must notify the lender in writing before forfeiting the lease, giving the lender a chance to remedy the breach or instruct the tenant to do so.

Conclusion

Even if a lease lacks a mortgagee protection clause, some landlords might inform a tenant’s lender before taking steps to forfeit the lease.

Often, landlords and lenders have similar vested commercial interests, such as remedying the tenant’s breach and protecting the income stream that arises from the proper performance of the lease covenants . From a tenant’s perspective, accepting a lease without a mortgagee protection clause can complicate future assignments or refinancing.

New lenders may require the lease to be amended to include such a clause, leading to delays and additional costs. Therefore, including a mortgagee protection clause when drafting a lease benefits all parties involved in the long term.

Contact information

For further information or legal advice, including conveyancing services in England, please contact our dedicated UKRE team: Anna Douglass, Alastair Hargreaves, Caren Vidamour, and Hannah Damant, who will be delighted to assist.