Protecting a mortgagee against forfeiture in a Data Centre lease
What is the protection in reference to and why is it important to have?
When entering into any commercial relationship, exiting that relationship is one of the less pleasant points to explore, however, it is just as important as protecting your interest during or prior to the arrangement.
One of the ways in which a lease can be brought to an end ahead of the term coming to an end by virtue of effluxion of time is through forfeiture.
As a back to basics, in order to be able to forfeit a lease, you will need:
- A provision in the lease permitting forfeiture – otherwise a fundamental breach is needed which would make the lease impossible to continue.
- A breach by the tenant.
- A section 146 notice to be served (unless forfeiture is for non-payment of rent).
Thereafter, unless the landlord has not inadvertently waived its right to forfeit, it can:
- Forfeit through court proceedings
- Forfeit via peaceful re-entry (entering into the property and changing its locks).
During the lifetime of a lease, it is not uncommon for there to be breaches of covenant giving rise to the possibility of forfeiture and it is important to ensure that in a lease of capital value or other significant operational importance, the interest of a mortgagee of the tenant is protected.
Additionally, in the case of Data Centres, parties’ drafting will need to ensure that the lease does not permit forfeiture in the case of insolvency as that can render a lease unbankable.
What is a mortgagee protection clause?
In essence, it is a notification provision whereby a mortgagee is informed of a breach and is granted time to remedy the tenant’s breach (and thereby avoid forfeiture).
The lack of a mortgagee protection clause is likely to create significant difficulties for a mortgagee. It may be difficult to obtain insurance to cover the risk arising from the lack of a mortgagee protection clause.
If there is no such clause tenants and funders are at the mercy of needing the landlord to agree variations or comfort letters to overcome this gap in the security.
This can have implications both in terms of costs and time on financings.
Therefore, it is important that care is taken both in drafting Data Centre leases and ensuring mortgagee’s interests are protected as well as on any due diligence that such risks are flagged as early as possible, to ensure the relevant conversations are had between the parties to protect the mortgagee and thus to ensure that the interest can be financed.
We at CMS are experts on Data Centre leases and conducting due diligence to ensure our clients are adequately advised and protected against such risks, so please reach out to us if you have any questions. (Also, if you would like information on the equivalent for Scotland, please contact chris.rae@cms-cmno.com).
