A recent High Court decision highlights the risks that tenants can face if they have not registered their lease or required their landlords to obtain mortgagee’s consent to the lease.
The decision in GP96 Ltd v F M Custodians Ltd supports the principle that an unregistered lease, of which the mortgagee has no notice and has not consented to, does not take priority over the mortgagee’s registered mortgage and is therefore not binding on the mortgagee.
The case concerned an application by the second mortgagee to remove a caveat that had been lodged against its secured property by GP96, an assignee pursuant to an unregistered lease. The caveat prevented the mortgagee from selling the property to realise its debts.
A key issue in the case was whether the mortgagee had consented to the lease and the assignment of it.
The court did not find anything to suggest that the lease, and the assignment of it, had been brought to the mortgagee’s attention or that its consent was sought or provided. It therefore held that the unregistered lease did not take priority over the mortgagee’s interest and was not binding on the mortgagee. The caveatable interest asserted by the tenant therefore had to yield to the mortgagee’s registered mortgage.
For a mortgagee to give consent, the court said that mere knowledge of the existence of a lease and passively standing by and making no objection to it, does not in itself amount to consent.
Unlike in Australia, it is not common practice in New Zealand for leases to be registered. Nor is it usual in New Zealand for tenants to require landlords to obtain mortgagee consent to a lease or for tenants to have a right to lodge a caveat.
The case is a good reminder for a tenant, who has invested significantly into the leased premises, to consider the merits of requiring its landlord to obtain mortgagee consent to the lease to ensure that the landlord’s mortgagee is bound by the lease.
For landlords, seeking mortgagee consent to a lease is not an onerous obligation. In fact, most standard mortgage terms require landlords to obtain the prior written consent of its mortgagee before granting a lease over secured property. However, the landlord should ensure that the tenant is responsible for the landlord’s and mortgagee’s costs of obtaining this consent.