It is common for JTC Corporation ("JTC") to grant leases for an initial lease term, with an option for a further lease term upon the satisfaction of certain conditions. This client update explains the issues that a financing bank may encounter when taking security over such leases and the possible solutions that may be adopted.
A mortgage is commonly taken by a bank over the initial JTC lease.
The mortgage only secures the initial JTC lease. Two issues to consider upon the expiry of the initial JTC lease are:
(a) Security over the further JTC lease
Upon the expiry of the initial JTC lease, the mortgage will correspondingly lapse as well, as it only secures the initial JTC lease. The mortgage will not automatically secure the further JTC lease upon its issuance. Further security documentation and steps are required for the bank to have security over the further JTC lease; and
(b) The gap period between the expiry of the initial JTC lease and issuance of the further JTC lease
There may be a gap period between the expiry of the initial JTC lease and issuance of the further JTC lease. The bank is technically unsecured during this gap period. The bank will have to consider the usual issues such as: (i) the ability and willingness of the borrower to create security when the further JTC lease is issued; (ii) insolvency issues during the gap period; and (iii) competing third party interest (eg conflicting security interest and negative pledge).
Debenture – fixed and floating charge
The bank can obtain a debenture which creates a fixed and floating charge over all the present and future assets of the borrower, in addition to the mortgage of the JTC lease. The debenture will create security over the further JTC lease upon its issuance. It will also contain the usual negative pledge to prevent the creation of security over the future JTC lease in favour of other parties. The debenture is in addition to a specific security by way of a mortgage over the further JTC lease upon its issuance.
Undertaking to extend the lease and create security over the further JTC lease
The bank can require the borrower to undertake to meet all the conditions and take all the steps for JTC to issue the further JTC lease and thereafter create security over the further JTC lease. The undertaking can be included in the finance documents or in a separate deed of undertaking. If the undertaking includes an obligation to create security over the further JTC lease upon its issuance, it would need to be registered under section 131 of the Companies Act as it amounts to an agreement to create a charge which is registrable.1
Assignment of the future JTC lease with mortgage in escrow
The bank can also consider an assignment, together with a mortgage in escrow, of the further JTC lease prior to its issuance.2 Additional steps including the lodging of a caveat, registration under section 131 of the Companies Act, and complying with the usual JTC requirements for creating security over JTC leases (eg notice of mortgage) would also have to be considered. It would also be advisable to engage with JTC on a case by case basis, if this option is chosen.
The mortgage in escrow would be completed upon JTC's grant of the further JTC lease and the registration of the mortgage with the Singapore Land Authority. Additional steps such as entering into a supplemental security document, completing a variation of charge, and issuing a fresh notice of mortgage would also have to be considered.
It is important for banks to understand the issues and solutions when taking security over a further JTC lease. Banks should also engage the borrower and JTC in a timely manner on the modus operandi relating to the lease extension and security. This is often dependent on the factual matrix of each case.
1 See the definition of "Charge" in section 4 of the Companies Act (Cap 50, 2006 Rev Ed) ("Companies Act"); see also Diablo Fortune Inc v Duncan, Cameron Lindsay and another  SGCA 26.
2 It is noted that the effectiveness of the assignment and the nature of the security that is created due to the assignment is not an issue that is completely settled.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.