Do tenants still need mortgagee’s consent to lease in light of the Willmott decision?

A few solicitors have asked whether, in light of the High Court’s decision in Willmott last week (discussed here), tenants still need to insist on the consent of their landlord’s mortgagee before taking a lease.

The answer is ‘yes‘.

The High Court’s decision in Willmott recognises that a landlord’s liquidator has the power to extinguish a lease.  It does not give the landlord’s mortgagee (or its receiver) that ability.

Mortgagee’s consent is still very important for at least two reasons.

1. the mortgage was granted before the lease;
2. the landlord defaults;  and
3. the mortgagee wants to sell the land free of the lease.

If events 2 and 3 happen, the landlord will usually have other financial problems and is likely to have a liquidator appointed at some stage.

However, a liquidator will not necessarily be appointed, particularly if the landlord is relatively small and there is not enough money in the company to justify the cost of a liquidation.  If so, there is no liquidator to disclaim the lease, the tenant faces a simple priorities dispute between it and the landlord’s mortgagee and the mortgagee’s consent is essential, if the mortgage pre-dates the lease or (in states other than Victoria) the lease is not registered.

Secondly, if a tenant tries to set aside a disclaimer by the landlord’s liquidator, it will need to show that the prejudice to it resulting from the disclaimer is ‘grossly disproportionate to‘ the prejudice to the landlord’s creditors if the disclaimer is set aside (see ss 568B and 568E of the Corporations Act).

If the liquidator proves that the mortgagee can sell the land free of the tenant’s rights (regardless of the disclaimer) it may be very difficult for the tenant to show that it has suffered any real prejudice and set aside the disclaimer.

Similar considerations would apply to a tenant’s financier looking to take a mortgage or charge over the tenant’s lease.