The Leasehold Mortgage

A leasehold property may be described as the land or ground under buildings that have been chartered by its proprietor(s). In fact, a leasehold mortgage is generated from a leasehold property. It is important to note that prior to signing a ground on lease, it is essential for a builder to procure an irreversible mortgage assurance for his building. The leasehold mortgage necessitates the handing over of the ground lease or charter or the sub-lease. Unless the provisions of the ground lease are found to be agreeable to the mortgage, there cannot be any lease at all.

Compared to the situation where the mortgagor possessed the land, the principal amount of a leasehold mortgage is reasonably a lesser amount. In the instance when a mortgagee or investor takes his mortgage under the obligation of the lease, a condition is set up between the property owner or the lessor and the mortgagee by means of which the mortgagee becomes accountable for the provisions of the lease. The mortgagee also becomes responsible for disbursing the rental fee for the leased ground. In this case, the investor will also be legally responsible for any violation of the contract if and when it takes place.

The pre-requisite in the case of a sub-lease contract is that the mortgagor or borrower would control the last day of the lease term in confidence for the mortgagee with a view to permit the mortgagee to hold the mortgage and in this manner be in charge of the sub-lease renewable period. Such an act is essential even though the period of the mortgage is normally lesser than the lease; it may well be likely that the mortgagee has not received his full and final payment even by the time the term of the sub-lease term expires.

All leasehold investors want to safeguard their investments completely with a view to make certain that the ground lease does not come to an end. Hence, the leasehold mortgagee will enter into a contract with the lessor or property owner to agree to give the investor ample time to deal with any default on the part of the lessee or the renter's failure to pay the arrears. In such a situation, the mortgagee will include a clause or section in the leasehold contract specifying that any default or failure to make any payment by the borrower as per the terms and conditions laid down in the ground lease agreement will naturally turn out to be an evasion under the mortgage.

In a leasehold mortgage it is essential that the lessee or the renter disburses the rental of the ground occupied by him or her to the mortgagee and in turn the latter would pay the same to the lessor or property owner. Alternately, it makes it necessary for the lessee or the mortgagor to produce proof of purchase without any delay. There may be instances where a mortgagor or borrower may not be the land owner of the actual property, but will control its profits following a long term ground lease. The fact remains that ground leases still create specific trials for the mortgage investors.

Land or ground leases

In instances where the ownership of a land is held by any institution or the municipality and the proprietor is not willing to give up its rights on that important part of realty, but is not opposed to charter it, the land particular may be given under ground lease. In a usual ground lease, the lessee or the occupant is entirely accountable for all the principal and operational expenses and possess the privilege to erect as well as preserve a construction on the landed property. Usually, the term of a ground lease is for approximately 50 years or less, but in some specific cases it may go on for as many as 99 years. In lieu of the ground lease, the lessee or tenant pays a fixed rent to the owner. The rent may also be subject to the rising market value of the leased land or the income generated from the property built on the ground. Or the rent may be subject to both the conditions. It is important to note here that the ground lessees usually have great liberty in offering sub-lease of the property and also mortgages of the leasehold realty.

Finance against leased property

If you look at it from the lender's point of view, you will realize that financing leasehold mortgages give rise to numerous distinctive concerns. First and foremost, it must be ensured that the term of the credit is securely contained by the prevailing period of the ground lease. The lender will have no protection for his mortgage investment in case the borrower does not repay the outstanding loan amount before the expiry of the land lease. In such a situation, the lender will ask the tenant or occupant of the property to implement any accessible alternative to extend the land lease term and also like to ascertain that exceptional alternatives to refresh the land lease do not remain personal to the occupant, but, if required, can also be implemented by the lender or its appointed person. At the same time, it is essential to cautiously analyze the conditions laid down in the ground lease with a view to find out if there are any limitations enforced on investing, passing on or the occupant's capacity to maneuver the mortgaged property. It must also be ensured that the ground lease is listed against the ownership document of the property to enable the lender to register the leasehold mortgage in a related manner. It may be specifically mentioned here that in case the term of a land lease goes beyond 21 years in Ontario, it is essential for the lender to be cautious and ascertain that the land lease agreement abides by the sub-division limitations of the Planning Act (Ontario).

Responsibility by way of sub-lease

It is essential for the lender to remain cautious that under the provisions of the ground lease it does not unintentionally turns out to be accountable for the duties and debts of the occupant of the property. The lender may ensure his safety in this regard by presenting that the leasehold mortgage is a responsibility as per the sub-lease and not by means of delegation. The responsibility as per the sub-lease agreement is implemented by the tenant or occupant of the property by holding back the last day of the term of the ground lease. In fact, the last day of the term of the land or ground lease is controlled by the tenant in confidence for the creditor.

Perils of tenant non-payment

In the case of a ground lease, the tenant or occupant of the property is directly accountable to the land owner for the implementation of all its duties and responsibilities. As a result of such provisions in the ground lease, the lender is susceptible to the perils that the occupant may default in implementing either one or more of its responsibilities leading the landlord or property owner to lapse the ground lease. If this happens, it may prove to be lethal for the leasehold investor or lender as its investment security will be completely eroded. However, in a few instances, the landlord may agree to allow the leasehold mortgage to continue in spite of the ground lease being terminated. Such an act in actual fact reflects the land owner's interest in his estate and may be consummated by signing an independent mortgage against the freehold property. Such an agreement is normally non-recourse or without any choice. On the other hand, the land owner may merely not be in agreement to conclude the ground lease on any grounds such as tenant's failure to pay the rent till such a time as long as the credit continues to be unpaid.

Leasehold credit contract

Nevertheless, the fact remains that most land owners will never consent to demotion their freehold benefit to leasehold mortgage. Hence, a more normal method for all the concerned parties, counting the tenant, is to sign a leasehold mortgage contract so that the landlord concurs to notify the lender of any instance of default by the tenant and provide the lender with a scope to resolve the default normally within an unmitigated period of time. Supposing that the default by the tenant is of an irresolvable kind, like in the instance of insolvency of the occupant or tenant, the lender normally discusses the facility to acquire a fresh lease straightforwardly from the land owner on the identical conditions as the earlier ground lease for the remaining term of the contract. It is possible that the existing ground lease would enclose conditions that envisage such an understanding; the lender would still want to ascertain that it includes privities of agreement with the land owner that is only possible to consummate by signing a new or independent contract. It may be noted here that it is important for the tenant to be a party in this independent agreement as it may become essential for the lender get into the property to resolve the failure or inaction on the part of the tenant.

Additional issues

Characteristically, the leasehold mortgage contract also attends to many other issues, especially those that relates to the lender's concerns. In a leasehold mortgage, it is very natural that the lender or investor will be anxious to set up an activation point when the lender turns out to be accountable for the liabilities of the tenant as in the instance of a default. It is also true that the lender will be eager to make certain that he is in charge of the actions he initiates, like serving a written notice to the land owner. At the same time, the lender will also want the make sure that once he takes over the responsibilities of the tenant in case of a default, he doesn't have to be loaded with the tenant's earlier default liabilities that occurred before the lender utilized the trigger point or a predetermined action. Moreover, the lender would also wish to offer that it is evidently liberated the moment it arranges the fulfillment of the tenant's interest.

At the same time, the leasehold mortgage contract will also confine the land owner's facility to modify or revise the ground lease or to agree to a transfer of the lease by the tenant without seeking the lender's permission. The leasehold mortgage agreement will also include estoppel words (a bar or impediment preventing a party from asserting a fact or a claim inconsistent with a position that party previously took, either by conduct or words) pertaining to the existing condition of the ground lease as well as enclose conditions aimed to make certain that the contract turns out to be obligatory on the descendants and delegates of the lender as well as the land owner. In the instance of an opportunity of a regeneration of the land mortgage contract being due, the lender or investor may well necessitate that it be given a notification in this regard from the land owner. In the situation of the renewal opportunity or option being unexecuted, the lender may ask for being given a chance to execute the renewal in the best interests of the tenant or the occupant of the property. On the other hand, the ground lease agreement encloses constraints on its transfer by the tenant, the leasehold mortgage contract ought to allow the lender to delegate the tenant's interest as per the ground lease during accomplishing the lender's protection even without requiring to obtain the land owner's permission on the issue.

Structure of safety measures

It is interesting to note that the safety measures for leasehold mortgage loan and freehold mortgage credit are quite comparable barring the leasehold mortgage contract and the stipulation of the last day of the ground lease term. The Land Registration Reform Act in Ontario offers some specific oblique conditions in the leasehold land mortgages and they will remain relevant in the leasehold mortgage deeds if not these implied covenants are particularly kept out. Save for a detached or independent leasehold package for the tenant's leasehold benefit under the provisions in the Land Titles Act of Ontario, all leasehold mortgages are listed under electronic registration or recording method in Ontario. Here the registration of the leasehold mortgages are not done according to the common Charge/ Mortgage type, but like lease notifications of a charge or fee. The leasehold mortgage form can be affixed with this notification.

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