Judgment Title: Fennell & Anor -v- N17 Electrics Ltd
Neutral Citation: 2012 IEHC 228
High Court Record Number: 2011 21COS
Date of Delivery: 11/05/2012
Court: High Court
Composition of Court:
Judgment by: Dunne J.
Status of Judgment: Approved
Neutral Citation Number:  IEHC 228
THE HIGH COURT
[2011 No. 21 COS]
IN THE MATTER OF N17 ELECTRICS LIMITED (IN LIQUIDATION) AND IN THE MATTER OF THE COMPANIES ACTS 1963 TO 2009
KENNETH FENNELL AND ACC BANK PLC.
N17 ELECTRICS LIMITED (IN LIQUIDATION)
JUDGMENT of Ms. Justice Dunne delivered on the 11th day of May 2012
1. This is an application by Kenneth Fennell and ACC Bank plc. (the applicants) for a declaration pursuant to s. 236 of the Companies Act 1963 to 2009, that a business lease agreement dated 1st April, 2005, in respect of "N17 Electrics Superstore in Milltown and Terryland Retail Park" is not binding on the applicants and is not an asset of the company for the purposes of the winding up. Other related relief is also sought.
2. The basis of the applicants' contention is that as a result of entering into four charges with ACC Bank plc, Mr. Tom Naughton, the owner of the retail units, was unable to avail of the statutory power of leasing conferred by s. 18 of the Conveyancing Act 1881, which power was expressly excluded in the four charges.
3. The respondent contends that it is entitled to rely on the business lease agreement as the basis for its occupation of the properties known as the Terryland units and the Milltown premises and asserts that the lease is an asset of the respondent.
4. It is not in dispute between the parties that as the four charges concerned predate the coming into force of the Land and Conveyancing Law Reform Act 2009, that Act has no bearing upon the issues that arise in this case.
(b) The second mortgage/charge was dated 12th September, 2002 ("the Second Terryland Mortgage"). The borrower, as security for monies advanced by the bank, charged the premises known as Unit 2 (registered under Folio No. 43758F County Galway to the bank.
(c) The third mortgage/charge was dated 30th May, 2003 ("the Third Terryland Mortgage") whereby the borrower, as security for the monies advanced by the bank on foot of same, charged the premises known as Unit A1 registered under Folio No. 65397F County Galway to the bank.
(a) create, extend or permit to subsist any encumbrance over the secured assets or any of them ranking in priority to or pari passu with or after the security hereby created, or
(b) part with, sell, convey, assign, transfer, lend, lease or otherwise dispose of, whether by means of one or of a number of transactions related or not and whether at one time or over a period of time, the whole or any part of the secured assets or any interest therein."
The various mortgages/charges provided for the bank to appoint a receiver in the event that an act of default under the terms of the respective mortgages/charges occurred and in consequence of such an act of default occurring, the receiver was, by deed of appointment dated 20th January, 2011, appointed by the bank as receiver over the three Terryland retail units, and by a similar deed, was appointed as receiver over the Milltown premises on the same date. No issue arises in relation to the appointment of the receiver.
8. The position in relation to the company is that it was wound up by order of the Court on 31st January, 2011, a petition having been presented to the Court in the first instance on 11th January, 2011.
The Business Lease Agreement
10. The longest part of the Memorandum of Agreement is the final paragraph which states as follows:
The Conveyancing Act 1881
18(6) Every such lease shall reserve the best rent that can be reasonably be obtained, regard being had to the circumstances of the case, but without any fine being taken.
18(7) Every such lease shall contain a covenant by the lessee for payment of the rent and a condition of re-entry on the rent not being paid within a time therein specified not exceeding 30 days.
18(8) A counterpart of every such lease shall be executed by the lessee and delivered to the lessor, of which execution and delivery, the execution of the lease by the lessor shall, in favour of the lessee and all persons deriving title under him, be sufficient evidence.
18(13) This section applies only if and as far as a contrary intention is not expressed by the mortgagor and the 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."
12. The applicants in this case make the point that the terms of the charges expressly reflect such a contrary intention and, accordingly, the statutory power of leasing contained in the 1881 Act has been excluded and replaced by a conditional power to grant a lease subject to the prior written consent of the bank being obtained, which has not been satisfied in this case. Very simply put, the bank's case is that as there was no prior written consent in accordance with the terms of the charges, the 2005 business lease agreement is not binding on the bank.
13. In the course of submissions, I was referred to some of the leading textbooks on this topic. Wiley, in 'Law of Landlord and Tenant' (2nd Ed.), stated at para. 6.10 as follows:
15. It was also submitted that although it is the contention that the statutory power had been excluded, that even if that were not the case, then, notwithstanding that, the statutory conditions which permit the grant of a lease had not been complied with. That being so, it was argued that the business lease agreement still could not bind the bank, one of the obligations of the lessor created by s. 18 of the 1881 Act being to obtain the best rent that can reasonably be obtained. Reliance was placed on English authority in that regard and I was referred to a passage from Megarry and Wade, 'Law of Real Property', 7th Ed., at para. 25-080, a passage which referred to leases granted outside the statutory power, wherein it was stated as follows:
17. Further reliance was placed on a passage from Fisher and Lightwood's 'Law of Mortgage' at para. 29.18, in which it is stated:
(e) Where the mortgagee received rent under an express authority from the mortgagor."
20. It was pointed out on behalf of the bank and the receiver that the explanation for the legal position contended for was quite simple, namely, if the position were not so, a mortgagee would simply not be able to enforce its security by obtaining its right to possession, and thus, the value of the security would be rendered pointless or nonexistent.
21. I now want to look at a number of authorities that were opened in the course of the submissions on behalf of the applicants. The first of those is the decision in the case of Iron Trades Employers Assurance Association Ltd. v. Union Land and House Investors Ltd.  Ch. 313. In that case, there was a legal mortgage and the defendants had covenanted with the plaintiffs that they would not, except with the previous written consent of the plaintiffs, exercise the power of leasing. By a tenancy agreement, the defendants granted a lease of part of premises included in the legal charge upon a yearly tenancy. The plaintiffs were not asked for and did not give their consent to the execution of the tenancy agreement. In those circumstances, it was held that the defendants, in granting the lease, were not exercising their statutory power and, consequently, they did not commit any breach of the covenant contained in the legal charge. Judgment in that case was opened extensively and I want to refer to a number of short passages from it. It was pointed out in the judgment that the purpose of the proceedings was to have the question determined by the Court as to the respective rights of the parties as to whether the granting of a lease was not a breach of the covenant contained in the charge. Farwell J. stated at p. 317 of his judgment as follows:
23. Farwell J. continued at p. 323 to state:
24. The next case to which I want to refer is the case of In Re O'Rourke's Estate  23 LR Ir. 497. As appears from the head note in that case, where, subsequently to a mortgage, the mortgagor creates new tenancies, and submits rental to mortgagee, who raises no objection, such tacit acquiescence does not suffice to create a new tenancy as against the mortgagee. The act of the solicitor having carriage, in approving the rental which sets out such tenancies, will not create a new tenancy. The act of the receiver, in accepting rent from such tenants, and paying interest there out to the mortgagee, will not create a new tenancy. At p. 500 of the judgment, Monroe J. stated:
is absolutely void as against the mortgagee. He can treat the tenant as a trespasser, and evict him without notice. It is open, however, to the mortgagee and the tenant by agreement, express or implied, to create a new tenancy; and the question which always arises is the mere question of fact, whether such an agreement has been made in the particular case. If the mortgagee enters into the receipt of the rents and continues to take them from the tenants, this is almost conclusive evidence of an agreement between the mortgagee and the tenant for a new tenancy from year to year on the terms of the old tenancy; or, if the mortgagee served notice on the tenant, requiring him to pay his rents direct to the mortgagee, and the tenants do not dissent, these are facts from which a jury may, and probably ought, to infer the existence of such a contract of tenancy :... I have therefore to enquire in this case whether there are facts proved from which I ought to infer the existence of such an agreement. Three matters were relied upon not to set up the leases, but to create a tenancy from year to year on the terms of those leases, respectively:-
(i) The actions of Judge Lefroy [a party to the proceedings] who was all through representing the mortgagee;
(ii) the action of the solicitor having carriage who filed the petition for the mortgagee, and approved of the rental furnished by the agent; and
(iii) the action of the receiver in receiving the rents and paying the interest thereto to the mortgagee.
As regards the action of Judge Lefroy, which applies to M'Breen's case alone, what is said is this:- He was furnished with the rentals; he knew that at the date of sale to the O'Rourkes, the lands were in the owner's hands; he saw the name of M'Breen included in the list of tenants; he saw that rent was being paid by him; he knew that out of that rent his interest was being paid; and as he took no steps to object to such a tenancy, he must now be presumed to have adopted it. I certainly cannot infer the creation of a new tenancy between the tenant and the mortgagee merely because the mortgagee takes no active steps to disavow a tenancy created by the mortgagor. The mortgagor, while in possession, and bound to keep down the interest on his mortgage, is at liberty to manage the lands as he pleases. It is not for the mortgagee to interfere with that management unless he chooses to go into possession. He treats the tenancy as one binding on the mortgagor, but in no way binding upon himself if he find it afterwards for his interest to repudiate it."
(ii) that the tenancy had not become binding on the mortgagee by reason of the events subsequent to the grant of the tenancy, for it would be wrong to infer merely from the facts that the mortgagee, having knowledge of the tenancy, allowed the tenant to remain in possession, and that no interest had been paid for nine years, that the mortgagee had consented to take the tenant as his tenant. The plaintiff, accordingly, was entitled to possession against the tenant.
27. In the course of his judgment in that case, Cross J. commented on the evidence in relation to the issue of consent and stated as follows:
On those facts, the point that has been argued is on whom does the onus lie that the establish that the mortgagee either gave or did not give his consent in writing.
I think the matter can best be decided how the point would be pleaded in an action of ejectment. It seems to me that the mortgagee, in his statement of claim against anybody in possession of the land, would have to do no more than set out the mortgage, which showed that he had the immediate legal estate, and claimed possession. It would not be necessary for him to allege that the defendant claimed to be in possession as a tenant, but that the tenancy was not binding on him: it would be sufficient for him to say that he had the legal estate as mortgagee, and that he claimed possession."
Apart from the second point, it does not seem to me that the fact that the tenant of the mortgagor, who could have been treated by the mortgagee as a trespasser, was allowed to remain in possession for a long period could itself in any way preclude the mortgagee from treating him as a trespasser if and when he desired to do so. After all, as long as the mortgage interest is being paid, the mortgagee may perfectly well be content to allow the tenant to remain in possession. The only way in which he can turn him out of possession is by going into possession himself, which is a thing a mortgagee is very unwilling to do. I think that it would be quite wrong to infer, merely from the fact that the mortgagee allowed the tenant to remain in possession, having knowledge of the tenancy - there is no doubt in this case, and it is accepted, that Thomas Taylor knew of the tenancy - that the mortgagee consented to take the tenant as his tenant."
30. A number of useful observations can be made from the authorities referred to above. I think, first of all, that it is clear that a mortgagor and 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.
31. I think it is clear from the affidavits sworn herein, and in particular, from the affidavit of Michael McEvoy, the official liquidator of the respondent herein, and from the affidavit of Tom Naughton, the borrower, that no prior written consent of the bank had been obtained to the creation of the business lease agreement. The most that is asserted by Mr. Naughton, the borrower, is that he believed that he had delivered a copy of the agreement to the bank himself. Equally, I think it is fair to say that the bank was at all times aware of the fact that the respondent was in occupation of the premises, although there is a dispute as to whether or not the bank was aware of the existence of the business lease agreement.
32. The approach of the respondent as set out in the Points of Defence has been to assert that the building lease agreement constitutes a valid and binding tenancy agreement between the parties, presumably, that is the company and Mr. Naughton, the borrower. It is further pleaded that the company is a stranger to the allegation that the borrower did not seek the prior written consent of the bank to the business lease agreement, and insofar as that is alleged, it is asserted that it was not incumbent upon the company to seek any such written consent from the bank. It was also denied that the borrower had no power to grant the business lease agreement and that the negative covenants contained in the charges did not have the effect contended for by the bank. It was also pleaded in the points of claim as follows:
33. I now want to look at the submissions of the respondent in support of those pleas.
34. Mr. Redmond S.C. on behalf of the respondent referred to a number of factual matters. First of all, he pointed out that N17 Electrics Limited was in occupation of some of the premises prior to the first mortgage. Therefore, in those circumstances, he submitted it would not have been possible for the mortgagor to get prior written consent given that the tenancy was already in existence. It was further noted that the aim of the bank in dealing with Mr. Naughton was at all times to ensure that the rentals being paid by N17 Electrics Limited was sufficient to defray the payments required by the bank from Mr. Naughton. There was also a submission made on behalf of the respondent to the effect that the bank knowingly facilitated the non payment of tax by Mr. Naughton. This assertion was made on the basis that the business lease agreement provided for rent in the amount of €30,000 per annum in circumstances were the bank was aware that the rent actually being paid was a multiple of this figure. The point was made that the bank facilitated or acquiesced in this arrangement because the less tax paid to the Revenue, the more money would have been available to the bank to repay the amount due to the bank. This allegation was hotly contested on behalf of the applicant herein and I note that there is nothing in the affidavit sworn by Mr. Naughton on behalf of the respondent herein to support such a contention.
35. The main point made by Mr. Redmond on behalf of the respondent was that at all times, the bank was aware of the occupation by N17 Electrics Limited of the relevant units at Terryland and Milltown and that the rent payable by N17 Electrics was used by Mr. Naughton to make the repayments due by him to the bank on foot of the various charges. It was further submitted that the bank was aware of the arrangements between the company and Mr. Naughton and expressed no dissatisfaction and is therefore estopped from relying on the negative pledge clauses contained in the various charges. To put it simply, it was submitted that the bank had taken the benefit of the arrangements between the company and Mr. Naughton and therefore the bank had to take the "flip side" of the arrangement.
36. There was also an issue raised as to the apparently inconsistent approach of the receiver in seeking to serve notice pursuant to s.290 of the Companies Act 1963. While this was done, I do not think that this fact in any way assists me to determine the issue in controversy between the parties which relates to the question as to the status of the 2005 Business Lease Agreement.
38. Mr. Gavigan in an affidavit sworn herein on the 26th January 2012 on behalf of the bank accepted that a copy of the business lease agreement was found in the bank files but pointed out that there was no prior request for the bank's consent to that agreement and he stated that the bank had not furnished its consent to it.
39. I have also looked at the various letters of sanction relating to the provision of further facilities to Mr. Naughton. The various letters of sanction speak of the bank's requirement that leases be put in place with "rental payments sufficient to meet repayments" or "in an amount not less than the monthly repayment". The letters of sanction further required that "no lettings or renewal... are to be made without the bank's prior consent in writing".
40. I have read carefully the affidavit of Mr. McEvoy, the official liquidator and that of Mr. Naughton in regard to the issue of consent. I note that an issue is raised as to a 2002 tenancy agreement executed by Mr. Naughton and the company which Mr. Gavigan states was never on the bank's file but which was on the bank's solicitors file. I also note the criticism of the bank's dealings with Mr. Naughton contained in Mr. McEvoy's affidavit. It does appear that the bank was somewhat lax in its approach to the question as to whether appropriate formal leasing arrangements were in place as between the borrower, Mr Naughton, and the company, given the requirements contained in the various letters of sanction. Having said that I am satisfied on the evidence before me that no prior consent, written or otherwise, was furnished by the bank to the 2005 business lease agreement. The fact that the company was in occupation of the premises did not mean that that a formal lease could not be put in place on terms which would have met the bank's requirements and therefore, presumably, would have received it's consent.
41. That leaves the question as to how it can be asserted the bank is estopped from denying the validity of the 2005 business lease agreement. The high point of the arguments made on the respondent's behalf in this regard is to be found in para 30 and 31 of the affidavit of Mr. Naughton. Mr. Naughton averred that he was at "at loss to understand the bank's contention... that it was not aware or did not consent to the creation of the business lease agreement of the 1st April 2005". Mr. Naughton went on to say:-
44. I have already indicated that I am satisfied that there was never any prior consent to the 2005 business lease agreement. When one considers its terms, it is not difficult to see the reason why the bank would not agree to be bound by a lease without its prior consent. The 2005 business lease agreement provided for a rent payable of €30,000. The terms of that agreement are somewhat unclear as to whether that was intended to be a payment of €30,000 per month or per annum but by and large it appears to be accepted by all parties that what was to be understood by the phrase in the business lease agreement was that the sum was payable per annum. The other unsatisfactory aspect of the business lease agreement relied on by the respondent herein is the reference in that business lease agreement to the fact that "each of the parties further agree and accept the terms and conditions on their respective parts to be observed and performed and which are set out in the schedule and general conditions attached to this agreement". It is a matter of significance that no term and conditions were attached to the agreement. It is accepted the rent payable by the company to the borrower was in multiples of the figure set out in the business lease agreement. It seems to be me to be inconceivable that the bank would ever have agreed to a lease of the various premises in those terms. In addition, it is extremely unusual to have one lease of separate properties at different locations. It would have I been entirely contrary to the bank's interests. There is nothing in the papers before me to indicate that any representatives of the bank conveyed to Mr. Naughton or the company in any way that it accepted the validity of the lease or that it was in any way binding on the bank.
45. I was referred also by the respondent to the decision in First Energy (UK.) v. Hungarian International Bank Limited,  B 3 LV1409, a decision of the Court of Appeal in the United Kingdom, which concerned the issue of ostensible and actual authority and whether or not an official of a bank had ostensible or actual authority to sanction a credit facility and had authority to communicate the offer of credit facility and in that regard it was held in construing a letter of the 2nd August 1990, enclosing draft hire purchase agreements in respect of a number of contracts that "the Court would take into account the surrounding circumstances which reasonable persons in the position of the parties would have in mind. On the facts, a reasonable business man placed in the same objective setting as C would have read the letter as communicating an unconditional and firm offer. That offer was capable upon acceptance of being converted into a binding contract." The Court went on to indicate that on the facts, J.'s position as senior manager clothed him with ostensible authority to communicate that head office approval had been given for the facility offered in the letter of the 2nd August 1990. That decision was relied on to argue that while the bank's employees may not have had an authority to commit the bank they were in a position to communicate a decision made by the bank in relation to sanction of loans and to that extent it was argued that they had ostensible authority to bind the bank. That may be so but it does not seem to me that the fact that loans having been sanctioned on certain terms and then advanced to the borrower without those terms being fully implemented assists the respondent in this case.
46. I have already set out a number of authorities relied on by the applicant in support of the case made by the them to the effect that whilst a lease entered into between the borrower and its tenant, in this case the company, may be binding as between them, it is not binding on the mortgagee. The facts and circumstances described in the various authorities referred to above clearly establish that to be the case. I cannot see any basis for suggesting that the bank is, in any shape or form, estopped from denying the validity of the business lease agreement. It seems to me that the respondent has simply failed to engage with the principles to be found in the authorities.
47. There might be an argument to be made that modem commercial realities are somewhat different to the facts and circumstances outlined in those authorities which are of some vintage. However, the answer to that argument may be simply that those principles have stood the test of time because the logic of the principles is unassailable; the one thing I am sure of is that on the facts of this case no commercial reality would justify departing from those well established authorities. It is essential from a lender's point of view that the secured property is available as security in the event of default by the borrower. It is therefore important to ensure from the lender's point of view that any impediment to the realisation of it's security by reason of a lease binding on the mortgagee should be one in respect of which the mortgagee had furnished it's consent. That is the importance and the function of the negative pledge clause contained in the various mortgages/charges. 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. It's conduct in granting loans from time to time without appropriate leases having been put in place does not alter the position.