Wednesday, 9 August 2017

Commercial Leases - Registration and Mortgagees Consent


Registration

In terms of commercial leases, the issue of whether the lease should be registered on title needs to be addressed.

Lease registration in the land titles registry is a formal process administered in Queensland by the Department of Natural Resources and Mines (DNRM). The DNRM have prescribed forms and requirements which must be met in order for a lease to be registered.

The Land Title Act 1994 (Qld) and Property Law Act 1974 (Qld) have different provisions relating to registration depending on whether the lease is:
  • for a term of 3 year or more (including options to renew); or
  • for a term less than 3 years (called short-term-leases or short leases).
For a lease with a term of 3 year or more, the legislation requires such a lease to be registered in the land registry.

Whereas, for leases less than 3 years, the legislation does not require those leases to be registered.

Registration provides the Tenant with indefeasible title. That is, once the lease is registered on title to the land/property of the Landlord, the Landlord holds its interest in the land/property subject to the registered lease. In practice, this means for example:
  • the Tenant’s interest in the lease is protected in the event of the sale of the land/property to a 3rd party buyer; 
  • any buyer of the land/property must purchase the land/property subject to the Tenant’s lease. The buyer could not, for example, evict the Tenant. 
The legislation provides automatic indefeasibility protection for Tenants with short-term leases.

However, for Tenants with a lease term of 3 year or more, in order to obtain the same indefeasibility protection as is statutorily provided for in short-term-leases, those Tenants must ensure the lease is registered.

If a Tenant has a lease for a term of 3 year or more and does not have that lease registered:
  • unless there is a specific provision in the lease obliging the Landlord, upon sale of the land/property, to obtain a covenant from the buyer that the buyer will purchase the land/property subject to the Tenant’s interest in the lease and land/property; 
  • the buyer does not have to recognise the Tenant’s right to occupy the land/property, and can potentially evict the Tenant.
There are a number of costs involved in registering a lease, including:
  • Solicitor’s costs; 
  • Surveyor’s costs of drawing up plans (if the premises is only a part of a lot); 
  • DNRM lodgement fees; and 
  • Mortgagee consent fees (if applicable). 
Although a Tenant with a lease term of 3 years or more may decide not to seek to register a lease to avoid paying these costs, barring any specific covenants in the lease, the Tenant should weigh up the risks of losing the benefit of indefeasibility.

Mortgagees Consent

Although registration of a lease with the land titles office may provide protection to the Tenant from being evicted by a 3rd party buyer should the Landlord decide to sell the freehold in the land/property, there is still a potential issue of risk if the land/property is subject to a mortgage.

A prior Mortgagee (bank/financier) with its interest registered on title is not bound by a subsequent registered lease, unless the mortgagee has consented to the lease.

Section 66 Land Title Act 1994
Validity of lease or amendment of lease against mortgagee
A lease or amendment of a lease executed after registration of a mortgage of a lot is valid against the mortgagee only if the mortgagee consents to the lease or amendment before its registration.

It is not uncommon for a Landlord to take out a loan when purchasing land/property. Where that happens, the Landlord’s bank will register a mortgage on the title to the property to secure the loan.

Under the terms and conditions of the loan and mortgage:
  • it is likely there is a provision requiring the Landlord to obtain the bank’s consent before it leases all (or part) of the land/property; and
  • the Landlord’s bank will be given a right to exercise a power of sale over the land/property in the event that the Landlord defaults under its loan agreement. 
The risk to a Tenant is: - if the Landlord defaults under their mortgage, the Mortgagee could treat the Tenant as a trespasser, terminate the lease and eject the Tenant, allowing the mortgagee to sell the land/property as vacant possession.

It is important from a Tenant’s perspective to:
  • check if the Landlord’s land/property is subject to a mortgage; and
  • if so, obtain the mortgagee’s consent prior to registering the lease with the Land Titles Office. 
Conclusion

If you are a Tenant with a lease which exceeds a period of 3 years, ensuring the lease is registered on title and obtaining prior mortgagee’s consent (if the land/property is subject to a mortgage) is the safest method of protecting your interests as a Tenant.

Contact us for further information:


Disclaimer

The material provided in this document is for general information only and is not to be relied upon as advice. No responsibility is accepted for any loss, damage or injury, financial or otherwise, suffered by any person or organisation acting or relying on this information or anything omitted from it.

Copyright © Greyson Legal 2017, All rights reserved.

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