Each week, national law firm Simpson Grierson answers commercial property questions which can be emailed and headed "prime asset question". This week's question is answered by Senior Associate Daniel Kelleher and Associate Claire Green who can be contacted at daniel.kelleher@simpsongrierson.com and claire.green@simpsongrierson.com
Q. I have a company which leases part of a building for use as its business premises. I have been hearing numerous stories about the owner of the property. It seems that he is in financial difficulty and having discussions with his bank in respect of substantial business debts. I have heard that the bank may be considering selling the property and am very worried as the last thing that my business needs is to be moved from this property. Does the bank have to consider my business and the lease should it look to sell the property?
A. There are some general points for you to consider such as how long has the term of your lease to run? If it is ending soon and you have no rights of renewal available, then the answer to your question should be relatively straightforward. If the lease ends soon then the bank will not have to take your lease into account if it exercises its power of sale after the lease ends. Alternatively, if there is a clause within your lease enabling the landlord to terminate it then this may mean that the property could be sold free of your lease. Your lawyer should be able to help you with the particular wording of your lease.
From your question, we assume that there is a mortgage over the property in favour of a bank. If there is not, then the bank may not be able to sell the property. Your lawyer would be able to look at the title to the property and assist you with this question. An owner of a mortgaged property is generally entitled to lease their property to another - just as your landlord has. It is unusual for a bank to require a property with a mortgage over it to be free of leases. The important issue for you is whether the bank consented to your lease.
This is something that your landlord should be able to assist you with.
Most leases contain a provision that states the landlord is not required to obtain the consent of any mortgagee (the mortgagee being the bank) to a lease. However, if the bank consented to your lease, or had knowledge of your lease, then the bank's power to sell the property can only be exercised without prejudice to your lease. This means that the bank would have to honour the terms of your lease and the bank would have to sell the property with your lease in place.
If the bank's consent to your lease was not obtained, or if the bank had no knowledge of the existence of your lease, then you are in a vulnerable position. There is a risk that the bank may exercise its power to sell the property and transfer the property to a purchaser free of your lease. You will have seen advertisements for properties sold with vacant possession which is the situation we are describing. The bank could choose to sell the property subject to the lease if that made it more desirable to investors, but that is a big risk for you to take.
The bank's consent or knowledge of the lease can be implied by the things that the bank has done or the circumstances around the lease and the bank's mortgage. There is no particular form that the bank's consent must take but to be able to say that a bank has consented to a lease, there must be some act of positive affirmation made by the bank.
Usually when someone is purchasing a commercial property they will have to demonstrate to the bank that they have the ability to meet the loan repayments. When a property is tenanted the money received by way of rent will often be used to service the loan so the bank will have been shown evidence of the rental cashflow.
This may be a way of proving that the bank had knowledge of your lease. We strongly suggest that you talk with your landlord as soon as possible to obtain a clearer picture of what is happening in respect of his dealings with the bank.
The information contained in Prime Assets is intended to provide general information in summary form current at the time of printing. The contents do not constitute legal advice and should not be relied on as such. Specialist advice should be sought in particular matters.
