The function of a mortgagee protection clause is to prevent the landlord from forfeiting (ending the lease and taking the property back) a lease without first serving written notice on the lender. Therefore, the clause protects a mortgage lender’s interest and provides the lender with an opportunity to rectify any breach of the lease that has taken place, and in doing so prevents the loss of their security.
Forfeiture allows a landlord to terminate a lease if the tenant breaches its terms, therefore the clause motivates tenants to comply with the covenants (to pay ground rent and service charge etc) set down in the lease. Non-compliance of the covenants may result in the tenant losing his/her property.
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.”
Lender requirements
Most lenders will not agree to financing leasehold properties unless there is a suitable mortgagee protection clause contained within the lease. This is because lenders wish to have the opportunity to remedy the breached covenant rather than pursing the alternative timely and costly route of court action.
If the lease does not contain such a clause there are three ways of dealing with this:
Deed of Variation - You can contact the landlord to vary the terms of the lease to insert the clause into the lease. This method can be costly and time consuming, but it does fix the issue and ensures it will not be a problem on re-sale.
Indemnity Insurance - You can obtain indemnity insurance which protects the mortgage lender and provides cover to a mortgagee of the property (as defined in the policy) where the lease of the mortgaged property does not contain a mortgagee protection clause and the landlord exercises a right to forfeit the lease following a breach (without giving you sufficient notice, and you are unable to seek relief from forfeiture and/or remedy the breach, before the lease is terminated). This method is a much quicker and usually less expensive route of moving forward. You should be aware however that these policies are specific to your mortgage lender and cannot be passed on to any future buyer meaning that you may be required to pay for a policy when you come to sell the property. This does not fix the issue but will usually allow the transaction to proceed.
You should also take note that not all lenders currently accept indemnity insurance as a solution. There is a possibility that when you come to sell your buyer or their lender or lawyers will want a permanent fix rather than insurance. In that scenario there is no guarantee that such a fix (via a Deed of Variation) will be possible.
Side Agreement between the Landlord and your mortgage Company – this option is rarer than the other two options and may be lengthy and costly. It only solves the issue for your current lender and not a future lender or buyer as the Agreement will be specific to your lender.
Tenant’s Perspective and Conclusion
Accepting a lease without a mortgagee protection clause can cause complications when selling the property in the future and trying to obtain refinancing. It would be prudent and beneficial to deal with any required changes to the lease to ensure this clause is included to offer better protection to yourself, any current or future mortgage lender and future marketability. There is also a risk that lenders may impose stricter requirements in this area and insist on a Mortgagee Protection Clause within the lease, which may limit future financing options.
If you are considering selling or refinancing your property and would like us to check there is a suitable clause in place, call us and we can assist you. Be sale ready to save delay!