Leasing powers
At common law, both a mortgagor and mortgagee have long had the power to lease land (See Iron Trades
Employers Assurance Association Ltd –v- Union Land and House Investors Ltd. [1937] Ch. 313 at p 317, Farwell
J.). Historically, a lease by a mortgagor, although binding as between the lessor and lessee, would not prejudice the
mortgagee’s ability to recover possession of the secured property (See JC Wiley, “Law of Landlord and Tenant”
2nd Edition, paragraph 6.10). However, certain provisions of section 18 of the Conveyancing Act, 1881 (“the 1881 Act”) conferred a statutory power of leasing upon both a mortgagor and a mortgagee which could be exercised while either was in possession of the land in question. Section 18 (1) of the 1881 Act provides that:-
“A mortgagor of land while in possession shall, as against every incumbrancer, have, by virtue of this Act, power to make from time to time any such lease of the mortgaged land, or any part thereof as is in this section described and authorised”.
Contrary intention
Thus, a lease granted by a mortgagor pursuant to the power conferred by the 1881 Act will bind a mortgagee.
Importantly, however, sub-section (13) of section 18 of the 1881 Act provides that:-
“This section applies only if and as far as a contrary intention is not expressed by the mortgagor and mortgagee in the mortgage deed, or otherwise in writing, and shall have effect subject to the terms of the mortgage deed or of any such writing and to the provisions therein contained”.
In the 1994 case of ICC v. Verling & Ors. [1995] 1 I.L.R.M 123 P (Lynch J.) the High Court considered an application for a mandatory interlocutory injunction to recover possession of an “off-licence” premises
which the first named defendant had let to the third named defendant without the plaintiff’s consent. Two years earlier, the first named defendant had executed a mortgage in the plaintiff’s favour which stated that
“During the continuance of this security the statutory and other powers of leasing, letting, entering into agreements for leases or lettings…shall not in relation to the mortgaged property or any part thereof be exercisable by the borrower…without…the prior consent in writing of the lender…”.
In granting the relief sought, Lynch J. held that this clause was sufficient indication of a “contrary intention” so as to exclude the statutory power of leasing conferred by the 1881 Act.
N17 electrics
More recently, in Fennell & Anor. v. N17 Electrics Limited (In Liquidation) - 2012 IEHC 228, the applicants sought a declaration from the High Court that a “business lease agreement” granted by the owner of a Galway premises, in favour of the respondent company, was not binding on them. The applicants relied on the contents of four charges in favour of the Bank executed by the owner/mortgagor prior to purporting to grant the lease. In each charge, the mortgagor agreed that he would not “except with the prior written consent of the bank …part
with, sell, convey, assign, transfer, lend, lease or otherwise dispose of…” the relevant property. No prior written consent had been given. What the court described as “to say the least an unusual form of document” stated that both parties agreed to be bound by further terms and conditions, none of which were specified in the agreement. It was also accepted that the rent payable by the company to the borrower/mortgagor was, in fact, multiples of the €30,000.00 specified in the lease.
Knowledge is not consent
The Bank accepted that a copy of the business lease agreement had been located on its files and the Court
was satisfied that the Bank was at all times aware of the fact that the company was in occupation of the premises.
The 11th May 2012 judgment by Ms. Justice Dunne, granting the declaratory relief sought by ACC and its receiver, contains a comprehensive analysis of previous authorities from which her Lordship summarised certain key principals as follows:-
“I think, first of all, that it is clear that a mortgagor and a mortgagee can expressly agree to exclude the power conferred by s.18 of the 1881 Act. If the power is excluded, it may be done in a way that permits the mortgagor to grant a lease subject to the prior consent of the mortgagee. If such prior written consent is not obtained by the mortgagor and the mortgagor proceeds to enter into a lease with a tenant, the lease will be binding on the
mortgagor as lessor, but as against the mortgagee, the lease will not be binding. It is also clear that in certain circumstances, the lease may be binding on the mortgagee in circumstances such as those described in the authorities referred, where, for example, the mortgagee “serves a notice on the tenant to pay the rent to him”. It is also clear from the authorities referred to above, that the mere fact that the mortgagee is aware of the existence of a tenancy and that a tenant is paying rent to the mortgagor which is being used to pay the obligations of the mortgagor to the mortgagee, is not, of itself, sufficient to create a relationship between the mortgagor’s tenant and the mortgagee.”
No commercial reality
Ms. Justice Dunne saw no reason to depart from what the court described as well-established authorities, commenting that:-
“From the bank’s point of view in this case, there was no commercial reality apparent in the business lease agreement. It is inconceivable that the bank would ever have consented to a lease in the terms of the business lease agreement had it been asked to do so. Its conduct in granting loans from time to time without appropriate leases having been put in place does not alter the position.”
In Ferris v. Meagher & Anor. [2013] IEHC 380 - Mr. Justice Birmingham considered an application by a receiver for a mandatory interlocutory injunction to recover possession of property owned by the first named defendant who had created a lease in favour of the second. The requirement for prior written consent was a provision in two mortgage deeds executed in 2000 and 2003, which explicitly excluded the application of sub-section (1) of Section 18 of the 1881 Act. No consent had been obtained in relation to the lease which also contained what the Court described as “some noteworthy features”.
These included the fact that, although the lease was dated the 30th of April 2012, it was not stamped until the 28th of January 2013, being some six weeks after the appointment of a receiver.
Trespasser
Citing with approval Judge Dunne’s decision in N17 Electrics, Birmingham J. considered the facts to be similar
in many respects to those in ICC v. Verling and held that the relevant defendant “…has not made out an arguable
defence. It has no entitlement to remain in occupation and is a trespasser. On that basis, the plaintiff is entitled to the order that it seeks without the necessity of considering the Campus Oil principles”.
Void against the mortgagee
In Maloney v. O’Shea & Anor. [2013] IEHC 354, the mortgagor averred that a company was incorporated, and a lease granted to it, on the advice of professional accountants and for prudent business reasons. Laffoy J. found the explanation of the objective for the incorporation of the company and of the creation of the Lease in favour of it to be “wholly plausible”. Furthermore, the lease was granted by the mortgagor almost a year prior to the appointment by the Bank of the receiver over the property. Notwithstanding the bona fide the reasons for the grant of the lease in question, Laffoy J. granted a mandatory interlocutory injunction requiring the tenant to deliver up possession to the receiver in circumstances where the lease had been granted without the mortgagee’s consent. Citing, with approval, Ms. Justice Dunne’s decision in the N17 Electrics case, Laffoy J. held that:-
“… what the academic commentary and the authorities indicate is that a lease created by a mortgagor without the consent in writing of the mortgagee, where the requirement of such consent is expressly stipulated for in the mortgage deed, is void as against the mortgagee and the mortgagee is not bound by it.”
Verbal agreement
In Murphy v. Hooton [2014] IEHC 266, Mr. Justice Peart considered an application by a NAMA-appointed receiver to recover property in circumstances where the debtor’s wife claimed to have reached a verbal agreement that she would take a monthly tenancy of the premises from her husband and son. She also claimed that the lender (IBRC) had acquiesced in this tenancy, given that she continued to run a business from the property and had paid the “rent” due to her husband on foot of the alleged tenancy, directly into his account with IBRC. Referring to Dunne J’s. conclusions in N17 Electrics, Peart J held that:-
“It is hard to avoid the same conclusion in the present case, particularly in circumstances where there was not even a written agreement between the defendant and her husband and son, which might at least have stood some chance of containing terms which the bank might have given its approval to had it seen them.”
Acquiescence
Mr. Justice Peart’s decision is also useful in relation to his view of what could constitute acquiescence. He put it as
follows:-
“In my view, the evidence of acquiescence or even consent must be clear. It must be clear also exactly what the terms to which they are deemed to have accepted are…Where it is sought to imply by its conduct that the lender has acquiesced or given up its entitlement to the protection of such a clause, the facts must be clear so that an intention to do so is clearly made out, in circumstances where the need for a prior written consent is so clearly spelt out. The onus is on the defendant to establish these matters clearly.”
A tangible example of such conduct was referred to by Lynch J. in ICC –v- Verling where, on the topic of acquiescence he commented that “The plaintiffs have never acquiesced in or recognised the lease by any express or positive conduct such as by demanding or accepting rent thereunder in place of the first defendant”.
In NALM & Ors. v. Southlodge Inns Limited & Anor. [2015] IEHC 109, the plaintiffs sought an mandatory interlocutory injunction to gain possession of a public house in Clonskeagh. Receivers were appointed in April 2014 and sought possession which was refused on the basis that the first named defendant company claimed an entitlement to remain under the terms of a two year lease granted by the second named defendant in January 2014. The mortgagee’s consent had not been obtained but the defendants argued that the plaintiffs had recognised the validity of the lease. White J. granted the injunction, referring to Moloney v. O’Shea as well as ICC v. Verling and quoting at length from Ms. Justice Dunne’s decision in N17 Electrics.
Conclusion
The law in this area is now settled. In the absence of special circumstances, where a mortgagor’s powers to
grant a lease under the 1881 Act have been explicitly curtailed, a lease granted without consent will not be
enforceable against a mortgagee. At the heart of the jurisprudence is the principle that a party will be held to
the terms of the contract which they entered into. As Lynch J. put it succinctly in ICC v. Verling:-
“…mortgagees….are entitled to place some reliance on their mortgagors not flagrantly to ignore and breach their solemn covenants entered under hand and seal…”