Financing a Motel Lease
In most leasehold motel acquisitions the purchasers offer their interest in the lease to a financier as security. Generally a mortgagee will require, as a condition of their finance approval, that the mortgagee, the tenant and the landlord enter to an agreement (usually called a Deed of Consent or Right of Entry Agreement) to ensure all parties recognize the other’s rights.
The effect of a Deed of Consent is (or should be) that:
- The Landlord acknowledges that the financier is entitled to step in on the tenant's default under either the loan or the Lease.
- The financier may step into the tenant's shoes for the purposes of rectifying any default or just to run the motel generally and transferring the business to a new operator.
- The Landlord promises not to terminate the Motel Lease in the event that financier takes any action against the tenant.
- To require the Landlord to give notice of any default to the financier prior to terminating the Lease.
- To require the Landlord to notify the financier in the event that the Lease is replaced or varied in certain respects.
Ideally, the financier will be placed in no higher or better position than the Tenant. The financier is given the opportunity to protect its security. It will meet costs and ensure that the Landlord is satisfied with the performance of the tenant's obligations under the Lease. The biggest risk that faces a leasehold mortgagee is that the lease may be forfeited by the landlord due to a default of the tenant. A Deed of Consent attempts to overcome this concern and so enable financiers to continue to lend on the security of a lease.
In practice there can be difficulties in having the Landlord sign the agreement.
These are not standard documents and we have assisted negotiating many deeds of consent.