Who will win in priority dispute between a mortgagee and a tenant (Part 5)?

Readers will recall my recent post about another priority dispute between a registered mortgagee and a tenant. If you wish to refresh your memory, see here: 
http://bit.ly/2nbmFNa 

In Galloway v National Australia Bank Ltd [2016] VSCA 330, Osborn and Santamaria JJA dealt with another urgent application to restrain the sale of mortgaged property by an alleged residential landlord, pursuant to a tenancy granted without mortgagee’s consent. 

The Court of Appeal dismissed the application for an injunction. 

Galloway granted to the National Australia Bank Ltd (‘the Bank’) a mortgage to secure a loan in April 2008 over 9 Henry Street, Fitzroy (‘Henry Street’). 

Galloway defaulted in respect of the loan, and the Bank obtained an order for possession in November 2013.

After the judgment the parties continued negotiations concerning Henry Street and another property.

In April 2015, Galloway purported to grant a residential tenancy to a person named Fagan in respect of Henry Street.

Then, in September 2015, the Bank took possession of Henry Street.

After a series of attempted re-entries by Galloway, he sought a restraining order against the Bank in the County Court preventing it from selling Henry Street. 

On 25 November 2016, his Honour Judge Cosgrave dismissed the application for a restraining order.

The Bank proposed to sell Henry Street at public auction on 10 December 2016.

On 9 December 2016 Galloway:

(a)   Made an application to the Court of Appeal for that sale to be stayed; and

(b)   Filed an application for leave to appeal against Judge Cosgrave’s orders.

Galloway was still substantially in debt to the Bank, and the Bank held a valid order for possession of Henry Street.

The application for a stay was based on an argument under the Residential Tenancies Act 1997.

S 216 provides that ‘despite any Act or law to the contrary, a tenancy agreement does not terminate and must not be terminated except in accordance with this Division or Part 7 or 8’. 

S 223 provides as follows: 

A tenancy agreement terminates if a mortgagee in respect of rented premises gives a notice to vacate under section 268 and—(a)   the tenant vacates the rented premises on or after the termination date specified in the notice; or
(b)   the tenancy agreement terminates in accordance with section 334.

Section 268(1) provides that:

If a mortgagee in respect of rental premises under a mortgage entered into before the tenancy agreement was entered into becomes entitled to possession of, or to exercise a power of sale in respect of, the premises under a mortgage, the mortgagee may give the tenant a notice a notice to vacate the premises.

Mr Fagan gave evidence that he had not been given a notice in accordance with the provisions of the Residential Tenancies Act 1997. 

It was submitted that, unless such a notice was given, the tenancy agreement remained on foot and the Bank was not entitled to sell the land with vacant possession.

The Bank submitted that there were three fundamental answers to the applicant’s case.

The first is that at the date of the purported tenancy agreement, the Court had ordered the applicant to provide possession of the premises to the Bank. As a matter of basic principle, it followed that, although Galloway remained in bare possession of Henry Street, he was not able to grant a right of exclusive possession to the tenant as he purported to do for a term of three years.

Secondly, Clause 5 of the mortgage provides that, without the Bank's consent, the mortgagor may not grant a lease concerning the land which purported to convey any interest inconsistent with the limitation of interest created by the mortgage itself. Galloway sought to rely on his own breach of that mortgage. 

Thirdly, s 87C of the Transfer of Land Act 1958 provides in substance that a lease is not valid or binding against the mortgagee unless the mortgagee has consented in writing to the creating of the lease. The mortgagee did not consent to the creation of the lease; it follows that the purported lease is not valid or binding against the Bank.

The solicitor for Galloway submitted that the provisions of the Residential Tenancies Act 1997 overlay the provisions of the Transfer of Land Act 1958.

The Court of Appeal rejected this submission. If the lease is not valid against the mortgagee, then there is no lease upon which the notice provisions can operate. It noted that similar reasoning applied to the arguments relating to the capacity of Galloway to grant a lease when the land was subject to an order for possession made by the County Court, and subject to a mortgage containing the limitations upon which the Bank relies. 

The Court of Appeal was not persuaded that the fundamental point of law on which Galloway relied was seriously arguable or had any real prospects of success. 

In addition, the point taken was one which went essentially not to the interest of Galloway, but to the interest of the tenant Fagan. Fagan was not before the court. He had not sought to restrain the sale, and he had not sought himself to institute any challenge to the taking of possession by the Bank in September 2015. He had not been in possession of Henry Street for an extended period of time and his whereabouts were uncertain. 

Finally, the Court of Appeal noted that on the face of it, such complaints as Fagan may have sounded in damages, and the balance of convenience favoured the sale proceeding the next day. 

If the sale did not proceed, substantial costs would be thrown away and the interest payable under the mortgage would continue to accrue. 

The Court accepted that Henry Street had some apparent special value to Galloway because of its heritage characteristics, but this was not sufficient to outweigh the matters referred to above.

Conclusion 

This is another example of the difficulties faced when trying to litigate against a Bank which holds a registered mortgage. 

To remain safely in possession, a tenant should obtain the written consent of the Bank to the lease. Most lenders are unlikely to agree to such an arrangement, leaving tenants at risk of losing their occupancy rights if the landlord defaults in repaying the loan. 

WG Stark 

Hayden Starke Chambers