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Lease to beat the Banks

  • 17-04-2022 4:25pm
    Registered Users Posts: 849 ✭✭✭

    Hypothetical question.

    If I lease out a commercial property (not a home) such as a Bar/restaurant before the property is repossessed by the Bank does the lease still stand?


  • Registered Users Posts: 1,281 ✭✭✭Lenar3556

    Such a lease wouldn’t really impact the banks options in repossessing or selling the property.

  • Registered Users Posts: 7,471 ✭✭✭GerardKeating

    It's been tried before, the bank will just go to court and try to get the leave invaldated. If the lease was done to frustrate a reposession, they might be fraud. Plus many commercial mortgages have clauses requiring the banks approval for a lease, for exactly this reason.

    Even if they left the lease in place, the rent would go to the bank once they reposse, so little to be gained.

    There was a case here once, just before the developer went bust, they leased the property to a company they controlled for a peppercorn rent, and the case spent years in court

  • Registered Users Posts: 849 ✭✭✭Easten

    Why not? If I gave very favourable terms on the lease such as a very low rate and right of renewal surly that would effect the banks ability to sell it on even if it was then repossessed?

    Would it not depend on the repossession, if it was done through the courts yet the tenant remained would the tenant still enjoy the use of the property? It seems like a loop hole to me

  • Registered Users Posts: 1,281 ✭✭✭Lenar3556

    It is unlikely to have much impact. What you describe, a lease arranged on terms well below market level, in circumstances where the lessor knew or ought to know that the property was about to be repossessed would be tantamount to a fraud and would be a clear attempt to frustrate the repossession - the courts would simply set any such lease aside.

  • Moderators, Social & Fun Moderators, Society & Culture Moderators Posts: 10,547 Mod ✭✭✭✭Robbo

    The case you're looking for is Re N17 Electrics Ltd [2012] IEHC 228.

    TLDR; a lease was created in order to frustrate a receivership, it didn't work.

    The judgment cites the authorities for this and it should be noted that nearly all commercial loan agreements contain clauses where the bank must consent to the creation of the creation of any lease.

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  • Registered Users Posts: 25,742 ✭✭✭✭Peregrinus

    Liquidators, receivers, etc can set aside "onerous contracts" - i.e. contracts which stop them from realising the value of the assets they have taken. So, yeah, they can terminate a lease. Plus, if the lease has been granted on below-market terms in an attempt to defeat the liquidator (and the creditors), that's a fraudulent preference which lead to you being made personally liable for the debts that were supposed to be satisfied out of the proceeds of the asset involved.

    So, don't do this.

  • Moderators, Business & Finance Moderators Posts: 9,818 Mod ✭✭✭✭Jim2007

    “Why not?” Because you don’t know the law it’s as simple as that. It never ceases to amaze me as to how amateurs fancy their chances against the professionals, yet they would not bet on the parish soccer team beating Manchester United, although the task is just as great.

    The receiver will sell the property regardless and he’ll advise the Garda of your dumb idea (or perhaps the judge will direct the Garda) at which point your friend in crime will decide to file a complaint as well to avoid being prosecuted themselves. And you are in the draw for a free state sponsored holiday.

  • Registered Users Posts: 849 ✭✭✭Easten

    Yes I am only an amateur when it comes to these laws, but it was by looking at several repossession type auction sales like what sells through BidX1 and other auction houses that I looked at. Often you would come across properties with sitting tenants under "terms unknown". So is it a case whereby the "professionals" have been outsmarted? Maybe this is not a commercial property but how does one legally distinguish between commercial and private?

  • Registered Users Posts: 25,742 ✭✭✭✭Peregrinus

    Broadly speaking, the liquidator/receiver may terminate a tenancy, but does not have to. He will follow whichever course of action will recover the greatest amount for creditors. If a property is let to a commercial tenant of good repute on a good rent, it might be more attractive to sell with the benefit of the lease than to terminate the lease, evict the tenant and sell the property with vacant possession. The liquidator will factor in not just the likely sale price in either scenario but the cost, delay, trouble and risk of complication if he opts to terminate the lease first.

  • Registered Users Posts: 849 ✭✭✭Easten

    That gets back to my original point in that even if a lease is a fraud lease the bank/liquidator may just simply choose not to challenge it, at which point it is the original owners/tenants who are the only ones who can realistically buy back the property and at a knock down price. There is no obligation for the banks to act otherwise

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  • Registered Users Posts: 25,742 ✭✭✭✭Peregrinus

    the bank will act in their own best interest. If the lease devalues the property by more than a modest amount, they will terminate it. Why wouldn't they? It means a bit more time before they get their money, but the outcome is not in any doubt.

  • Posts: 0 ✭✭✭[Deleted User]

    Why do you think the original owners/tenants will be allowed to buy it? The new owner can just purchase a discount property and turf the trespassing tenant. Not like there isn't a market for property and a willingness to litigate this sort of nonsense.

  • Registered Users Posts: 849 ✭✭✭Easten

    Because a new owner would have to go through the whole procedure of trying to turf out the tenant. If the bank has not challenged the fraud lease then it is down to the new owner to do so. Who would want such hassle when buying a property.

    It kinda boils down to the saying "Possession is nine-tenths of the law"

  • Registered Users Posts: 40,012 ✭✭✭✭ohnonotgmail

    well, no. evicting a commercial tenant is a lot easier than evicting a private one. Besides, if the new purchaser thought the lease was fraudulent why would they have bought the property? I think you are trying to find loopholes and "clever" strategies that just don't work.

  • Moderators, Business & Finance Moderators Posts: 9,818 Mod ✭✭✭✭Jim2007

    Well there you go - possession is not 9/10 of law. For you theory to hold water, every player would need to suddenly decide not to act in their own best interests and that is just not going to happen.

    Why would you buy a property without full control of it, why would a bank lend you money to buy it? Why would a receiver do anything other than maximise the return he can obtain and leave him open to legal action by the original lender, why would a judge acting on supervised liquidation agree to anything other that the maximum outcome for the creditors? Why would creditors agree to accept less that is possible in a creditors supervised liquidations.

  • Registered Users Posts: 7,661 ✭✭✭whippet

    sounds like some of the tricks that a few people tried here over the years in an attempt to foil the banks and receivers .... in essence just delaying the inevitable, loosing case after case .. inventing legal arguments that have no basis in law - and usually as 'lay litigants'.

  • Registered Users Posts: 2,232 ✭✭✭TooTired123

    Shhhhh…the OP, like Baldrick, has a cunning plan to out fox them all!!! Formatted merely from observing repossession auctions on an auction website!!

  • Registered Users Posts: 849 ✭✭✭Easten

  • Registered Users Posts: 25,742 ✭✭✭✭Peregrinus

    The tenant isn't trespassing - they have a lease. And, while the liquidator/receiver may have the right to terminate the lease, depending on the facts, either as an onerous contract or as a fraudulent preference, if he chooses not to terminate a purchaser who buys the property with the lease in place has no such right. He's bound by the lease and can only terminate in circumstances which would allow any landlord to terminate any lease.

  • Registered Users Posts: 849 ✭✭✭Easten

    But how can a liquidator terminate a fraudulent lease?

    What I mean is if it is fraudulent then it is not a valid lease so as such the liquidator would ignore any claims of a lease but he would never challenge such a lease.

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  • Posts: 0 ✭✭✭[Deleted User]

    This is almost entirely incorrect unless the landlord has the prior written consent of the mortgagee to the creation of the lease. Without that the tenant is a tenant to the landlord and a trespasser to the mortgagee.

  • Posts: 0 ✭✭✭[Deleted User]

    It's pretty easy to remove a commercial tenant and commercial tenants are also usually marks for costs so it's no real risk to the purchaser who is taking the property at a bargain price.

  • Registered Users Posts: 40,012 ✭✭✭✭ohnonotgmail

    it has been explained to you that they can terminate a fraudulent lease. Everything relevant has been explained to you. there is no magic loophole.

  • Registered Users Posts: 25,742 ✭✭✭✭Peregrinus

    "Fraudulent preference" is a technical term in liquidation/bankruptcy practice. Basically, it's an arrangement entered into by the debtor for the purpose of depriving creditors of what they are entitled to for the benefit either of other creditors who should come lower down in the pecking order or of himself.

    The person entitled to complain about this is the person defrauded - the creditor, or the liquidator/receiver representing them. They can move to set the transaction aside (and take other steps as well to recover what is due to them). But, unless and until they do that, its a valid transaction. If they choose not to do it, nobody else is entitled to do it. Nobody else has been prejudiced by the transaction.

    So, I own a property. Aware that it's about to be seized by my creditors, I grant my cousin a fifty-year lease at a rent of €1 per year. The liquidator, when he seizes the property, can move to set the lease aside. But if he doesn't, if he simply sells the property at auction subject to the lease, the purchaser of the property can't set the lease aside on the grounds that it's fraudulent. He hasn't been defrauded; he knew the property was subject to the lease before he bought it and this (presumably) will have affected the price he paid for the property. He may or may not be able to terminate it on other grounds, the same grounds that could be relied upon to terminate any lease, but not on this ground.

    In that particular example, obviously, my creditors would almost certainly set the lease aside before auctioning the property - it will cause delay, but it will vastly increase the amount they can hope to get at auction. But if the fraud is less gross - if the debtor, say, granted a lease not for 50 years at €1 per year but for 5 years at a figure that is about 90% of the market rate - the creditors might weigh up the cost and trouble and delay of terminating the lease versus the more modest enhancement in the price they might get at auction, and decide that it's not worth the bother.

    This isn't a special rule for leases - basically any transaction the debtor entered into in the period coming up to the liquidation/receivership can potentially be challenged as a fraudulent preference if it's not conducted on open market terms and for full value, and serves to reduce the amount that the creditor can recover. But it's only the creditors who is defrauded who can do this. And, until they move to set the transaction aside, it's treated as valid.

    (Kayroo correctly points out that, if the property is mortgaged, it's likely to be a condition of the mortgage that the debtor can't grant a lease without the creditor's approval, so this particular version of fraudulent preference might be impossible even to attempt.)

  • Registered Users Posts: 18,709 ✭✭✭✭Donald Trump

    It doesn't have to be fraudulent for them to try to terminate it. I think a receiver can apply to the court to have any lease, or any contract, terminated.

    Was it not a strategy from the renters too after the bust? Go into receivership to try to get out of upwards-only leases?

  • Registered Users Posts: 849 ✭✭✭Easten

    I think it still goes back to how awkward it is for the liquidator. By having a lease in place be it fraudulent or not is going to put off buyers on the open market. It is at this stage the liquidator may choose to accept an offer from the original owners or the lease holders. There is no legal obligation on the liquidator to get the best price, he has only to get a price that satisfies the Bank

  • Posts: 0 [Deleted User]

    The strategy you're proposing has been tried literally hundreds of times (if not higher) and there are numerous easily applied legal mechanisms in place which have been clearly articulated above to show you why this won't work.

    In short in comes down to two options:

    (a) If the lease being entered into is market standard, market terms etc - then the receiver / liquidator may seek to leave it in situ and sell the property with tenant not affected to an investor looking to purchase an investment property

    (b) If the lease is not market standard, containing onerous terms etc, then the receiver / liquidator will very easily have it set aside as it will diminish the value of the property to the creditors.

    Having the lease set aside is not a complicated procedure at all, particularly as you have been told numerous times now that the overwhelming majority of commercial mortgages have an explicit requirement that the lender approve leases.

    If it cannot be illustrated that the lender consented to the lease (and particularly in a scenario where the lease is below market) then the receiver / liquidator will very quickly move to seize vacant possession of the property.

    You seem to be basing your hopes here on whether or not the receiver / liquidator will be bothered to go to this trouble or not, but they have a legal obligation to do so, and will not expose themselves to the potential litigation of not doing so.