Mortgagee consent to lettings

The purpose of this Law-Now is to provide a recap for lenders and borrowers as to the requirement for a mortgagee’s consent to new lettings, and the test as to when a mortgagee can refuse consent.

A lender/mortgagee will be concerned to retain control over the terms of prospective lettings to preserve the value of their security, and it is usual for a restriction or prohibition on lettings to be included in a facility agreement and mortgage.

The case of Commercial First Business Ltd v Atkins [2012] EWHC 4388 (Ch) (13 July 2012) held that a lender or mortgagee who is entitled to refuse consent to a letting must not unreasonably do so, even if there is no express requirement on the lender/mortgagee to act reasonably in the relevant mortgage document. The case also provided useful guidance as to assessing such reasonableness.

In this case, the High Court held that where a lender/ mortgagee of a commercial investment property was entitled to withhold consent to a letting it was subject to an implied condition that consent should not be unreasonably withheld, and that the same condition would apply in the case of a residential property which was financed on a buy to let basis.

When assessing whether consent to a proposed letting has been reasonably refused, the court considered the test set out in International Drilling Fluids Ltd v Louisville Investments (Uxbridge) Ltd [1985] EWCA Civ 3 (20 November 1985) and held that the following factors were relevant:

• consent should not be refused on grounds which have nothing whatever to do with the relationship of mortgagor and mortgagee in relation to the property and the proposed letting;
• the mortgagee does not need to demonstrate that its refusal was justified provided that its conclusions might be reached by a reasonable mortgagee in the circumstances;
• consent can be refused for reasons not contained the mortgage documentation and not disclosed to the mortgagor at the time the mortgage was granted, provided that the reasons are objectively reasonable, such as the proposed use of the property or rent to be payable under the proposed lease;
• whilst a mortgagee need usually consider its own interests, where there is such a disproportion between the benefit to the mortgagee and the detriment to the mortgagor if the mortgagee were to withhold its consent to a proposed letting, that it would be unreasonable to refuse such consent; and
• in each case, whether the mortgagee’s consent is being unreasonably withheld is a question of fact, in light of all the circumstances, but it is for the mortgagor to prove that consent has been unreasonably withheld.

This case is also a reminder that the law can intervene and impose such conditions even where the parties have not expressly agreed any such condition on the mortgagee in the final provisions of a mortgage document.