The Leasehold Mortgage Without Written Consent
Your client, Green Valley (Pvt) Ltd, wants to borrow LKR 50 million from a licensed commercial bank and mortgage a 20-year leasehold interest in a commercial building in Colombo. The lease was registered in 2019 and contains a clause: 'The lessee shall not assign, sublet or mortgage the within premises without the prior written consent of the lessor.' The lessor has told the director by telephone that he has 'no objection', but no written consent is produced. The company's board resolution authorises the directors to borrow up to LKR 50 million and to mortgage 'all or any of the company's assets'. The articles contain a pre-emption right in favour of existing shareholders on any transfer of 'the undertaking'. The bank's draft mortgage permits the bank, after three months' default, to sell the property without recourse to court. The company granted an unregistered mortgage over the same lease to its managing director in 2022; the director has not consented.
1. What must you obtain and verify before attesting the mortgage?
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The lease covenant is a condition of the lease, so oral consent is insufficient. The lessor must sign a written consent, and the notary should verify the lessor's identity and title. The board resolution authorises borrowing and mortgaging 'all or any assets', but the articles' pre-emption right may be triggered by a mortgage over the leasehold, depending on its wording. The notary should obtain a shareholder waiver or a legal opinion. The existing unregistered mortgage to the managing director creates a priority and conflict issue. Registration affects priority under the Registration of Documents Ordinance, but an unregistered mortgage may still bind the company and the director. The director must consent to subordination or the mortgage must be discharged. The company must also register the charge with the Registrar of Companies within the statutory period. The notary should verify the lease registration, rent payments and arrears, obtain a valuation and confirm stamp duty before attesting.
2. Is the bank's power-of-sale clause enforceable, and what is your duty in relation to it?
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The clause is a parate execution type provision. Under the Mortgage Act, a mortgagee may have a right to sell without court action if the mortgage deed complies with the Act and the required notices and procedure are followed. The notary should not certify that the clause is enforceable; that is a matter for the bank's lawyers and the courts. The notary's duty is to explain the clause to the company's directors, ensure they have independent advice, and confirm that the notice periods and sale procedure are clearly stated. If the clause is ambiguous or goes beyond the Act, the notary should ask the bank to amend it. The notary should record the explanation and the directors' acknowledgement.
3. What are the risks if you attest without the lessor's written consent?
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The mortgage would breach the lease. The lessor could terminate the lease, which would destroy the bank's security and expose the company to damages. A notary who attests while knowing of the covenant may face disciplinary action for professional negligence and possibly civil liability to the client or the bank. The deed may be voidable, and the bank could be left with an unsecured loan. The correct course is to record the advice in writing and decline to attest until the written consent is produced.