The Necessity To Obtain a Lender's Consent to a Lease Agreement

Even though the economy may be showing glimpses of recovery in certain sectors, some tenants continue to struggle to meet lease obligations. Many tenants, either through economic necessity, or as an “across-the-board” policy, are seeking lease amendments from their landlords, including fixed rent reductions, operating expense reductions or caps, kick-out rights, more liberal assignment and sublet rights, and the right to give back space. If the property is subject to a mortgage, then making those lease modifications may not be so easy, as a mortgagee may have a right to interject itself in the negotiation process due to its concern that the collateral is in jeopardy. Conversely, tenants usually wish to avoid the delay and cost of obtaining a lender’s consent. So, many tenants and landlords are asking the question of whether it is necessary to obtain a lender’s consent to a lease amendment.

The place to start in answering this question is to review the lease and loan documentation to determine each party’s rights and relative priority. Any lease signed after the mortgage will be subordinate and subject to the terms of the mortgage. Regardless of priority, many leases provide that the lease is subject and subordinate to all current and future mortgages. Likewise, many mortgages will contain a covenant wherein the landlord/borrower has agreed not to amend or terminate any lease without the lender’s consent. Some borrowers are sophisticated enough to negotiate leasing parameters with their lender and include the parameters in the loan documents, so that, for example, consent is not required for amendments to existing leases, if the particular lease is for less than 10 percent of the floor area of the mortgaged property or represents less than 10 percent of the gross rent of the mortgaged property. So, if the tenant’s lease is subordinate and the mortgage of record contains the covenant restricting lease amendments without obtaining the lender’s consent, or sets forth criteria for when consent is, or is not, required, the answer to the question should be fairly straightforward, unless of course the language used is unclear or ambiguous.