If you are buying a motel and your financier is taking security over the motel lease, then the financier will inevitably need the landlord (and often the landlord’s bank) to enter into an agreement whereby all parties recognise each other’s rights. This document goes by many names including Deed of Agreement, Deed of Consent to Security and/or a Right of Entry Agreement. Although the name may vary, the effect of this document remains basically the same.

The purpose of the right of entry agreement is to balance the rights of the parties, access and control. In essence the agreement should allow the financier the opportunity to protect its security in the motel lease and will usually cover off some key areas being:

• The landlord acknowledges that the financier is entitled to step in if the tenant defaults under the loan, or the lease.
• The financier may step in (in place of the tenant) for the purposes of rectifying any default or just to run the motel generally and transfer the business to a new operator.
• The landlord promises not to terminate the motel lease in the event that the financier steps in.
• The landlord is required to give notice of any default to the financier prior to terminating the lease.
• The landlord is required 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, but given the opportunity to protect its security. 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 that they did not know about. To mitigate this risk, a right of entry agreement is a necessary part of motel leasehold transactions.

So what are the problems (or perceived problems) with these documents?

• Often the biggest problem, is that these documents are provided to the landlord to sign and return with very little time allowed for them to seek proper advice and negotiate the terms with the financier. Usually by the time that the landlord is provided with the documents, the buyer and seller have been under contract for weeks or even months and everyone’s patience is wearing thin.
• Some documents tend to go further than what is necessary to protect the financier’s interest or are not drafted to suit the nuances of the motel industry. If you are looking to buy a motel lease, we strongly recommend using a finance broker that knows the motel industry and knows which lenders to use;
• Many landlords are concerned that the financier (if they step in) will run the motel without regard to the landlord. This concern is unfounded as the financier (if they take possession of the motel business) will need to comply with all the terms of the lease in the same way that the tenant did.
• There is often a fear that the landlord will lose its rights of termination. This is not the case. The right of entry agreement only requires the landlord to give the financier notice of any default or notice to remedy a breach. If the tenant or the financier declines to rectify a breach, then any rights of termination are still available.
• It is a unique feature of motel leases that the landlord is required to or can choose to acquire the tenant’s chattels. If the financier is able to remove the chattels, that would leave the landlord with nothing to run the motel. But, what is the bank going to do with a truckload full of beds, tables and crockery? In our experience, in the rare circumstance that the financier needs to exercise their rights under the agreements, they will want to negotiate to sell the chattels back to the landlord (this is the simplest way for the financier to obtain the most value).

Key takeaways

If you are an experienced motelier, or freehold motel owner, then you will be familiar with right of entry agreements. They are both commonplace and necessary in the motel industry. Whilst there is always some back and forth, an agreement will inevitably be reached.

Please take our comments as general guidance and contact Mahoneys to obtain timely and practical legal advice on the actual issues you are facing.

Written by Amy ODonnell

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