Wednesday, 9 October 2013

Who will win in priority dispute between a mortgagee and a tenant (Part 3)?

Further to my second post about who will win a priority dispute between a mortgagee and a tenant, the tenant (Mendonca) appealed to the Court of Appeal of the Supreme Court of Victoria. 

In a miraculous outcome, the appeal was heard on 3 October 2013, being 4 working days after the original decision was handed down on 27 September 2013. 

The next day, 4 October 2013, Justices of Appeal Priest and Santamaria handed down their reasons for decision in Mendonca v Mason [2013] VSCA 280. 

The Court of Appeal refused the tenant's appeal. 

The same day, 4 October 2013, the tenant applied for special leave to appeal to the High Court, and issued an application for a stay of the dismissal by Macaulay J of the application for an interlocutory injunction. Even more miraculously, Hayne J of the High Court heard the application for a stay on the day it was issued.

I appeared for the mortgagee in both the Court of Appeal and the High Court, successfully opposing the tenant's appeal and the application for a stay or an injunction pending the hearing of the application for special leave to appeal to the High Court.

The Court of Appeal and the High Court (Justice Hayne) both held that Macaulay J was not in error in concluding that damages for the alleged breach of the tenant's lease would be an adequate remedy and the mortgagee was entitled to lock the alleged tenant out of the premises. 

In both appeals, I submitted to the court that:
(a) an order granting or refusing an interlocutory injunction is an order made in the exercise of discretion on a point of practice and procedure which does not have the effect of finally determining the rights of the parties;
(b) in accordance with the principles that generally govern appellate review of a discretionary judgment given in a matter of practice and procedure, an appeal court will not interfere with an order granting or refusing an interlocutory injunction unless an error of principle has occurred and failure to correct the error would work an injustice. 
(c) the appellant cannot show that the primary judge acted on a wrong principle, or made an order which works a substantial injustice to the appellant. To the contrary, any decision to grant an injunction would have worked a substantial injustice to the respondent. 
(d) it was relevant for the primary judge to consider that the appellant would not be able to meet the damages which might be awarded pursuant to the necessary undertaking; and
(e) the appellant’s claimed sentimental attachment to the premises did not weigh against the balance of convenience.

At paragraph 34 and following of the judgment of Priest JA, the Court of Appeal agreed with those submissions.

Significantly, at paragraph 42 Priest JA decided: 
The primary judge also found that damages would be an adequate remedy. In my opinion it has not been demonstrated that he fell into error in so finding.

W G Stark
Hayden Starke Chambers

Who will win in a priority dispute between a mortgagee and a tenant (Part 2)?

Further to my post about who will win a priority dispute between a mortgagee and a tenant, Macaulay J of the Supreme Court of Victoria on 27 September 2013 handed down the decision in Mendonca v Mason [2013] VSC 516.

In that case, the alleged tenant of premises at 1st floor, 375 Queen St, Melbourne sought an injunction to prevent the mortgagee in possession from locking the tenant out. 

In refusing the tenant’s application for an injunction, Macaulay J concluded that the tenant had relatively low prospects of success in his claim about the lease and its renewal, and that the balance of convenience overwhelmingly favoured the refusal of the injunction.

The premises are residential premises. Mendonca alleged that he was granted a lease by the registered proprietor of the freehold estate, Candolim Pty Ltd, for a term of 10 years commencing 8 June 1998. Three months before its expiry, on 8 June 2008, he claimed to have renewed that lease, pursuant to an option to do so, for a further 10 year term. Hence, he claimed to be entitled to occupation of the premises under a fixed lease term to 7 September 2018.

Candolim Pty Ltd (the landlord and borrower) was placed into liquidation in April 2009.

Mason is the mortgagee of the freehold of the whole of the premises at 375 Queen St, both the ground floor and the first floor. 

Mason served notices on Candolim and its liquidator, and upon Mendonca as alleged tenant, requiring payment of all rents and other monies under any lease or tenancy between them to be paid to her. She also demanded written details of any such lease. None were provided by either party. Mendonca has since denied receiving the notices.

On 26 June 2013, having received neither rent nor details of any lease or tenancy agreement between Mendonca and Candolim, Mason sent Mendonca a further notice alleging that if there were any lease of the premises Mendonca had repudiated it and stating that she accepted that repudiation. She demanded that he vacate the premises not later than 15 days after service of the notice. On 15 July 2013 Mason took possession of the premises by changing the locks.

Mendonca immediately sought and obtained an interim injunction from the Victorian Civil and Administrative Tribunal. An interim order was made but ultimately on 17 September 2013 Senior Member Vassie dismissed Mendonca’s proceeding at VCAT without determination on the merits after both parties agreed that VCAT had no jurisdiction. 

Hence, the matter came before the Supreme Court of Victoria.

Justice Macaulay set out the well known legal principles that should apply in deciding the matter at an interlocutory stage. 

The first is whether the plaintiff has made out a prima facie case. 

The second consideration (often combined with the third) is whether or not damages would be an adequate remedy.

The third consideration is what is usually called the balance of convenience, but has been expressed by the Court of Appeal in Victoria in terms of where the lowest risk of injustice lies:
In our view, the flexibility and adaptability of the remedy of injunction as an instrument of justice will be best served by the adoption of the Hoffman approach. That is, whether the relief sought is prohibitory or mandatory, the court should take whichever course appears to carry the lower risk of injustice if it should turn out to have been “wrong”, in the sense of granting an injunction to a party who fails to establish his right at the trial, or in failing to grant an injunction to a party who succeeds at trial.

Mendonca submitted that if there is a contested question of fact, it is not appropriate for a court to make any conclusive finding at the interlocutory injunction stage but it must assume the fact in the plaintiff’s favour. 

Macaulay J decided that 
So expressed, the proposition is too wide. One of the authorities relied upon for the proposition was the decision of Croft J in BDO Group Investments (NSW-Vic) Pty Ltd v Ngo. But his Honour was careful to qualify his statement about resolving conflicts in favour of the plaintiff with the words “insofar as it goes to establishing whether or not there is a serious question to be tried”.

He pointed out that:
In ABC v O’Neill, Gummow and Hayne JJ (Gleeson CJ and Crennan J agreeing) rejected the idea that so long as the court is satisfied that there is a question for determination that is not frivolous and vexatious there will necessarily be a serious question to be tried sufficient to satisfy the first of the usual elements. Instead, their Honours described the “governing consideration” as “the strength of the probability of ultimate success [which] depends upon the nature of the rights asserted and the practical consequences likely to flow from the interlocutory order sought”.

At Paragraph 23 and following of the judgment, Macaulay J concludes that
... there is a dispute between the parties on each of the five questions referred to at [14] above. Although it may be said that there is a serious question to be tried on each of these issues — and therefore in respect of the cause of action pleaded by the plaintiff — the totality of the evidence advanced by the parties demonstrates, in my view, that the strength of Mendonca’s prospects of ultimate success is relatively low. That is not to say that I make any final conclusions on any of the facts.
Macaulay J went on to list in detail why he thought that Mendonca’s claim may face considerable hurdles. 

That list included that when requested to do so, Mendonca did not (perhaps, could not) produce the lease or a copy of it, and the renewal of the lease between 2009 and July 2013; No original of the lease or the renewal was ever produced; The liquidator apparently did not produce the lease or the renewal or a copy of them when requested to do so (suggesting it may not have existed within Candolim’s records); Mason’s solicitor, Terry Fraser, swore that on 13 July 2009 Mendonca telephoned him and said “that the residential lease to him [ie Mendoca] had expired and that the last date for renewal was 8 June 2008 and that he was proposing to show that lease to the liquidator”. Fraser further swore that Mendonca “requested … advice as to whether he should produce a letter of renewal which he would backdate to 8 June 2008”. Fraser swore that he informed Mendonca that he (Fraser) could not be involved in advising him on such a matter because he was acting for Mason and not for him.

Justice Macaulay decided that if he declined to order an interlocutory injunction, yet Mendonca ultimately succeeded at trial, damages would be an adequate remedy. 

Mendonca did not depose to his financial circumstances. However, the evidence showed that he had been paying Mason $3,000 per month in compliance with the conditions of the interim injunction already granted.  The judge concluded that if Mendonca is able to pay $3,000 a month there is no reason to believe that he could not obtain suitable, alternative residential premises within the city area. 

Justice Macaulay concluded that the balance of convenience favoured refusing the injunction. 

This decision confirms that the courts are moving away from the ancient proposition that claims to proprietary rights will automatically mean that damages are not an adequate remedy. 

In fact, there have been a number of decisions of the Court of Appeal of the Supreme Court of Victoria that have decided that damages may be an adequate remedy when a person claims a proprietary interest, and as a result a stay of a decision or the grant of an injunction pending an appeal will not be made (See, for example: Johnson v Cressy [2009] VSCA 123; Palmer v Permanent Custodians Ltd [2009] VSCA 164 and Ozden v Commonwealth Bank of Australia [2013] VSCA 195).

In those circumstances it seems that in the majority of circumstances, a lender/mortgagee will win a priority fight with a tenant.

W G Stark
Hayden Starke Chambers  

Who will win in a priority dispute between a mortgagee and a tenant (Part 1)?

A mortgagee in possession is entitled, as such, to the rents and profits of the mortgaged property by virtue of the legal and equitable ownership which the mortgage confers (see Cockburn v Edwards (1881) 18 Ch D 449 at 457 and section 141 of the Property Law Act, 1958). 

Where the tenancy was created before the mortgage, and so at the time of the mortgage there was a tenant in possession, the mortgagee can take possession of the mortgaged property by giving notice to the tenant to pay the rent to him or her. After the notice is served, the mortgagee is entitled to the rents and profits accruing. In fact, the mortgagee may demand payment of all arrears of rent due at the date of taking possession. 

Where the tenant has paid the rent in advance to the mortgagor, the mortgagee, on going into possession may demand payment over again (see Reeves v Pope [1914] 2 KB 284), unless payment in advance was made before the creation of the mortgage. 

If a tenancy is created after the mortgage, unless the mortgagee consents to the tenancy, any lease will not be binding on the mortgagee. 

Where the tenancy is not binding on the mortgagee, the mortgagee can obtain physical possession of the property either by court order or by changing the locks (if a confrontation can be avoided). 

In SEAA Enterprises Pty Ltd v Figgins Holdings Pty Ltd [1998] 2 VR 90, the Court of Appeal ruled on a dispute between a mortgagee and a tenant. 

In that case, the lease in question was created before the mortgage. As a result, the lender took the land subject to the interest of the tenant in possession pursuant to section 42(2)(e) of the Transfer of Land Act, 1958. 

After the borrower defaulted under the terms of the mortgage, the borrower, as landlord, and the tenant purported vary the terms of the lease. 

The leading judgment of the Court of Appeal was handed down by Brooking JA (with whom Winneke P and Charles JA agreed). Among other things, Brooking JA held (at VR 100):
Payment of rent in advance did not discharge the obligation until the rent fell due. The receipt of the rent in advance could not be treated as a discharge by the landlord because it was received after he had assigned the reversion and so lost the power to give a discharge.
And at VR 102:
The result of the authorities is that if there is an arrangement whereby rent is paid in advance or future rent is to be set off against money due to the tenant from the mortgagor, this arrangement will, whether it was made before or after the mortgage, have the result that the tenant must be taken, as against the mortgagee, to have paid the rent in respect of such amounts as fell due before the mortgagee gave notice to the tenant to pay rent to him. 
As regards amounts of rent which fall due after the mortgagee gives notice to the tenant to pay rent to him, the effect of the arrangement will depend on when it was made. If ... before the mortgage, it will ... bind the mortgagee. ... If the arrangement is made after the mortgage, then, whether or not the mortgage is a registered mortgage of land under the [Transfer of Land] Act, the arrangement does not bind the mortgagee. ... If the arrangement is subsequent to the mortgage, then the only defence to an action by the mortgagee for rent is that of payment.
In that case, the Court of Appeal decided that after notice was given by the mortgagee to pay the rent to its receiver, the mortgagor could not give a good discharge for the rent.

As a result, the tenant was obliged to pay the rent again to the mortgagee, even though it had paid the (varied) rent to the mortgagor.

The result of the authorities is that when a tenant rents premises that are mortgaged, there are inherent risks associated with paying rent to a landlord who may not meet its obligations to a lender. The main risk (eviction) can be avoided by obtaining the consent of the lender to the lease, including an acknowledgment that the lender will accept the validity of the lease.

W G Stark
Hayden Starke Chambers