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I'm auditing a fund which owns and leases a number of commercial properties. There is no borrowing involved, they are all owned outright by the fund. On one of the title searches I have discovered the following:
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CAVEAT AV.............. 15/12/2021
Caveator
JUDO BANK PTY LTD ACN: 615995581
Grounds of Claim
MORTGAGE OF LEASE WITH THE FOLLOWING PARTIES AND DATE.
Parties
XXXXXXX PTY LTD ACN: XXXXX
Date
01/12/2021
Estate or Interest
INTEREST AS MORTGAGEE
Prohibition
ANY INSTRUMENT THAT AFFECTS MY/OUR INTEREST
Lodged by
GADENS LAWYERS
Notices to
GADENS LAWYERS of LEVEL 13 447 COLLINS STREET MELBOURNE VIC 3000
I haven't seen this before and am concerned that there is a registered encumberance that doesn't relate to a LRBA. Is this a reportable contravention and does it require a qualification in the audit report per regulation 13.14 where a fund must not give a charge over a fund asset?
Is the business in question a pharmacy? It is a very common clause which is essentially a "right to entry" clause on pharmacy loans. I personally dont think SMSF has anything to do with this. The asset being "mortgaged" is the lease on the shop owned by SMSF, NOT on the shop itself. I would agree with what Jason G has said.
I cannot find any ATO resource on this. A charge over or in relation to an asset means a party has a security interest in the property. A mortgage of lease is when a tenant has obtained finance, and has used their lease as security. If the tenant defaults on their loan, the bank can take over the lease and occupy the property. By allowing a mortgage of lease to be registered on the title, has the SMSF has allowed the bank to have a security interest / charge in relation to the property? I don't think so. The bank has no proprietary interest in the property. If the registered tenant/lessee cannot pay their loan, the bank will become the tenant/lessee and perhaps take over the tenant's business. But the bank has no right to own or sell the property itself. The bank has no claim to the property, neither a proprietary or legal interest, just as the tenant does not either.
I am not a solicitor. A mortgage of lease is the use of a lease as security. There should be some kind of documents or deed. This may be classified as a breach of r.13.12 where the trustees have recognised or in any way encouraged, an assignment of the superannuation interest of a member or beneficiary, I am not sure of this. Maybe someone of our fellow auditors may know. Certainly looks like there may be a breach of s67. What did the trustees/SMSF get as a benefit from Judo Bank when they used the lease as security?
Hi Ross
I have not seen this before as well. I would ask the trustees to prove that this is not a charge over the asset and not in breach of SIS Regulation 13.14.
If any other member has seen this or can explain it please let the forum know.
Thanks
Rohan