Figgins Holdings Pty Ltd v SEAA Enterprises Pty Ltd

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
Melbourne No M13 of 1998

B e t w e e n -
FIGGINS HOLDINGS PTY LTD
Appellant
and
SEAA ENTERPRISES PTY LTD

Respondent

GAUDRON J
McHUGH J
GUMMOW J
KIRBY J
CALLINAN J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON THURSDAY, 1 OCTOBER 1998, AT 11.19 AM

MR A.R. CASTAN, QC: May it please the Court, I appear for the appellant with my learned friends, MR G.H. GOLVAN, QC, and MR A.I. STRUM. (instructed by Feingold Partners Pty Ltd)

MR A.J. MYERS, QC: May it please the Court, I appear with MR M.R. PEARCE on behalf of the respondent. (instructed by Phillips Fox)

GAUDRON J: Yes, Mr Castan.

MR CASTAN: Your Honours, I should mention that there is a motion returnable before the Court to amend the notice of appeal. We do not need to proceed with that, having given further consideration. It is more in the nature of a clarification of argument, we think, on a separate ground and we will be putting what is contained in that proposed amended ground. We do not think that it actually adds any separate ‑ ‑ ‑

GAUDRON J: Is it opposed?

MR MYERS: It is not.

GAUDRON J: It might be easier to treat it as an amended notice of appeal. At least it will not get lost that way.

MR CASTAN: If the Court pleases.

GAUDRON J: You will be given leave to amend.

MR CASTAN: If the Court pleases. Could I hand to the Court a summary of the chronology which has been condensed onto a single sheet of paper which simply may make it easier for your Honours to see the sequence of events without having to turn to various documents. The prescribed chronology has been filed and served but it is in perhaps a lengthy form. It seemed to us useful just to summarise the sequence of events and the dates in a shortened summarised form. Might I also make available to your Honours a document which is a table of statutory provisions that my learned friends have prepared and asked if we were willing to have placed before the Court.

GAUDRON J: Now, before you go to that, I am just looking at your chronology, that which appears by 23 December 1993, was that a sale of the reversion?

MR CASTAN: Yes, your Honour.

GUMMOW J: What, a sale by the Bank in exercise of its power of sale under its security, was it?

MR CASTAN: Yes, your Honour.

McHUGH J: So SEAA’s cause of action arises because it is the assignee of the reversion, is that ‑ ‑ ‑

MR CASTAN: Yes, your Honour.

McHUGH J: And the rent is attached?

MR CASTAN: It is, and it stands as privy to the mortgagee.

GUMMOW J: And this rent accrued before 23 December, is that?

MR CASTAN: No, the rent that is the subject of the action is rent between 1 February 1991 and 14 February 1994.

GUMMOW J: Yes, so it is before and after.

MR CASTAN: It is before and after that sale, but it is up to the date of actual transfer.

GUMMOW J: I see. Do we see that date, the date of ‑ ‑ ‑

MR CASTAN: The date is 14 February 1994, SEAA became registered proprietor.

GUMMOW J: I see, thank you.

MR CASTAN: So the actual transfer took place on that date. The sale summarises a contract of sale, executed.

GUMMOW J: Are the rents in respect of the period before 14 February 1994?

MR CASTAN: Yes, your Honour, and from 1 February 1991. Effectively, it is three years and two weeks is the period that is in issue. And perhaps I should also mention that the sale took place, the contract of sale was entered into by exercise of that mortgagee’s power of sale on 23 December 1993, but the mortgagee had not entered into possession at that point, and did not enter into possession itself. It exercised the power of sale and duly notified the tenant of the fact that ‑ ‑ ‑

GUMMOW J: Before that date the receiver was in possession.

MR CASTAN: The receiver was in possession of the income.

GUMMOW J: I see.

MR CASTAN: From 13 July 1993. We will be coming to that, and we say that properly, when one looks both to the statute and the position of the receiver, the receiver is an agent of the mortgagor. But, it does raise the question of whether that constitutes notice of some kind, notwithstanding that at that point the mortgagee did not, itself, go into possession of rents and profits.

GUMMOW J: You say you got a good discharge?

MR CASTAN: That is precisely the point, and if I can - in summary, what this case is about is the question of the discharge of the rent due under the original lease for that period of three years. And, during that period of three years, the appellant, the tenant, continued to pay the rent that had been agreed between it as a result of the variation; content to pay to the landlord, the building owner, and then to the receiver for the last six or seven months, the amount that had been agreed with the landlord at the time of the variation on 1 February 1991.

We would respectfully submit, much, of course, has been debated in this case in the various judgments and the various submissions and a great deal of analysis in the Court of Appeal below of various issues, but ultimately it turns on whether or not there was a good discharge for the rent. Or, putting it another way, whether there were really any arrears of rent for which the Bank, through SEAA, the purchaser from the Bank has been proceeding. What is before this Court is the question of whether or not anything is truly in the nature of arrears of rent given that there was a variation.

McHUGH J: That is one of the problems I have at the moment. Perhaps I have not grasped it sufficiently, but what I am puzzled by is the consequence of the finding of Justice Hayne in Commonwealth Bank v Figgins Holdings that the Bank was unaffected by the deed of variation and how that fits into the overall problem.

MR CASTAN: All that tells us, we respectfully submit, is that the banks are not affected by the variation and can step in at any time and assert, once it steps into possession of rents and profits, it can enforce the original terms of the lease from then on. The question, of course, the difficult question, is can it do so retrospectively? Can it do so with respect to the period prior to taking possession of rents and profits? The fact that it is not bound ‑ ‑ ‑

GUMMOW J: The word “retrospective” is misleading, is it not?

MR CASTAN: In our respectful submission, not, but we are content to deal with it on that basis.

GUMMOW J: Well, I mean, if there had been a discharge, there was nothing on which there could be any further operation.

MR CASTAN: Precisely, and that is the flaw, as we would submit, in the notion that somehow that finding - I think it is contended by our learned friends that the finding of Justice Hayne somehow resolves the rent question. Of course, it does not because the question of whether or not the landlord could give a good discharge in the meantime was not debated before him. It is necessary to see precisely what was canvassed before his Honour Justice Hayne at the time, particularly in relation to this question of rent. It might be useful to go straight to that because ‑ ‑ ‑

McHUGH J: Just before you do, could I just get this in my - the rent attaches to the reversion. If the Bank is not affected by the deed of variation, the rent must still attach to the reversion, must it not? You pay your money, so far as the Bank is concerned, under the variation and not under the lease.

MR CASTAN: No, we pay our rent and we do the other things that were the subject of the variation agreement. So that there is good consideration given, the landlord deals with its tenant and for good consideration reaches a method, or agrees on a method, by which rent can be discharged. In so far as the mortgagee chooses to step in, take possession of rents and profits, it is unaffected by those arrangements made between the landlord and the tenant but, if it stands by and does not do so, it leaves the landlord with the ‑ ‑ ‑

McHUGH J: Well, I understand that as a general principle but this is a rather unique case, or at least I think it is unique, because you have this deed of variation and you are paying money not in terms of the rent reserved under the lease but another sum of money which derives from the deed of variation and yet you have the finding that the Bank is unaffected by it. Now, there may be nothing in it but these are the sort of things that are ‑ ‑ ‑

MR CASTAN: These are the issues, but of course, in answering that question one is forced back to the question of granted that the Bank is unaffected by it, but if it does nothing can the landlord, in the meantime, give a good discharge for rent. It is conceded – it seems to be conceded by all concerned that the landlord can give a good discharge for all sorts of consideration, for exchange and for set off, by way of compromise. That seems to be conceded in the Court of Appeal. We can take your Honours to the passages, towards the end of the judgment of his Honour Justice Brooking below, where he, after a somewhat complex analysis of the cases, ultimately does come to the conclusion that it is within what we would say is probably not the contested position, that is to say, that until the mortgagee goes into possession the landlord is left not only in receipt of rents and profits, but able to deal with the property, manage it, as it is put.

In the old agricultural cases in the 19th Century there is much talk about the necessity for the landlord, the lessor, to be able to manage the property, to get the best rent, to make allowances for tenants to ensure that the property is managed. Somebody has to be in control of running a property where there are a multiplicity of tenants. In the old fashioned cases, of which there are many references here, of course, it was dealing with great agricultural estates and the complexities of those in England, but, of course, our current day analogy is that very large vast shopping centres, or the giant city buildings or commercial buildings with a multiplicity of tenants. Ultimately, there has got to be somebody, and what the common law has developed is a set of principles that enables somebody to actually run those buildings, run those tenants, let the property, deal with the tenants, make allowances where necessary and the situation is not unique, with the greatest of rest, your Honour. The situation inevitably occurs almost daily. It is occurring now, one would ‑ ‑ ‑

McHUGH J: What I had in mind when I spoke about being unique was that the deed of variation ‑ ‑ ‑

MR CASTAN: Well it happens to be by way of deed but if I could illustrate to your Honour. There are hundreds, if not thousands, of restaurant tenants in the State of Victoria who this week are in desperate difficulties about generating any cash flow, never mind making a profit, generating enough cash flow to pay their basic outgoings of which the most pressing, inevitably, because they cannot – they might be able to put off labour, but the one thing they cannot do is do anything about their rent. Now, one assumes that what happens in some of these situations - no doubt some landlords are saying, “Sorry, you pay and if you do not pay you are in trouble”. And some landlords, no doubt, particularly in the bigger shopping centres, as they do from time to time, where there is construction work which blocks access to a particular shop, they make allowances for rent. They say, “We will give you a two week break on the rent given these circumstances”. Some would not.

There is a case in New South Wales dealing with a greengrocer who sought a break on the rent because the shopping centre developer was putting in a new large powerful rival in the same shopping centre. The question was, was there sufficient consideration for the shopping centre proprietor to, in effect, do a deal and agree to a lesser rent; was that supported by consideration given the ancient doctrines about, a lesser sum in exchange for a larger sum.

The importance of this case, if I may say so, going back to what your Honour put to me is that it actually applies across a vast range of situations. As it happens, it is in a form of a deed here. The particular way in which landlords may manage their estate - to use the ancient English agricultural terminology - will vary. Some will enter into deeds and some will, perhaps, say, “Yes, well, you will be okay for a couple of weeks”, and perhaps send a note about it. But it is a very, very common situation and the practicality of the way the old English cases deal with it that are referred to in the written submissions is to say, “Well, there has to be somebody who can manage this, who can handle the tenants”.

Of course, the mortgagees frequently – it is a very undesirable thing to go into possession, or it may be a dangerous thing to go into possession, because of course the mortgagee then becomes liable to account, liable to manage the property in the best possible way, liable to go out and make sure there are tenants. So it is not simply a matter of saying mortgagees can go and step in. They are frequently reluctant to do so.

McHUGH J: My instinctive reaction, subject to hearing what Mr Myers says, is that you have the merits on your side but I do not know about the law.

MR CASTAN: It comes to a simple question of discharge, your Honour, on the law. The law goes with the merits, if I may say so with the greatest of respect, in this arena. The reason that it strikes one as having the merits to which your Honour refers is that any other result leads to chaos in reality as between landlord, tenant and mortgagees. The notion as it is put in opposition to us in our learned friend’s submissions when we explained some of the difficulties of the view that has been upheld by the court below, they say, “Well, you can always go and search the register and you could get the consent of the mortgagee”. We respond to that by saying the notion of individual tenants in perhaps hundreds of stores, shops within vast shopping centres going off in relation to, say, the Westfield Corporation, and speaking to a consortium of 20 bankers round the world for its multi‑billion dollar financing of vast numbers of shopping centres is ludicrous.

CALLINAN J: Mr Castan, what you have said raises a matter that I was going to ask you about. There is no reason why, subject to consents, the variation or a varied lease could not have been registered, is that right?

MR CASTAN: Could have been – sorry, your Honour?

CALLINAN J: It could have been registered under the Torrens system, is that right? The lease, itself, was registered, was it not?

MR CASTAN: Yes, it is.

GUMMOW J: And had to be registered. It was four years, is that ‑ ‑ ‑

MR CASTAN: Yes, it was four years.

GUMMOW J: Do you have to register a lease of that term?

MR CASTAN: I think the answer is no, your Honour, but you can.

GUMMOW J: You can, but you need not.

MR CASTAN: You can. It could have been registered. I think the correct answer is that, as a variation, I am not instantly familiar with the section.

CALLINAN J: And of course, had there been any move to register it then you would have had to have searched out the mortgagee and obtained the mortgagee’s consent, is that not right? Otherwise, clearly, it would not have been binding, or that may be the ultimate question, but, had you obtained the mortgagee’s consent to the registration of the variation, or a varied lease, then this case would not be before the Court, would it?

MR CASTAN: If we had obtained their consent, no.

GAUDRON J: But the question whether you would have needed their consent in that situation may be precisely the same question as you are arguing here today.

MR CASTAN: We say we do not need the consent.

CALLINAN J: I understand that.

MR CASTAN: The whole notion of introducing dealings between tenants and mortgagees in these situations cuts across the whole foundation of this area of the law over the last ‑ ‑ ‑

CALLINAN J: I do not know about that. I am not too sure that it may not be affected in some way by a system of registration. The mortgagee is on the title; it is obvious enough, if you want to search it, that there is a mortgagee.

MR CASTAN: The system that is developed, and the statutory provisions that embody the doctrine of notice as it developed out of the 17th century is oriented to the intensely practical result that the tenant, the lessee, does not have to deal with the mortgagee. It is the ‑ ‑ ‑

GUMMOW J: No, but there was no Torrens system then. That is the point.

MR CASTAN: But the notion of tenants under a Torrens system having to become - shopping centre tenants having to ‑ ‑ ‑

GUMMOW J: It gives rise to different questions; difficult questions marrying it all together. Was there a covenant in the mortgage that required consent for this sort of activity with tenants? Have we got the mortgage in evidence?

CALLINAN J: No, the mortgage did not get into evidence.

GUMMOW J:

Yes, that is what ‑ ‑ ‑

CALLINAN J: Curiously enough.

MR CASTAN: No, the mortgage has never been produced in the whole of this litigation.

CALLINAN J: Can I just ask you one other question, going to the facts, and it may not have a great deal of relevance, but was there any evidence that the Bank was aware of, or in any way supported, what I understand was the casino proposal?

MR CASTAN: Certainly aware of; certainly aware of. Aware of from an early point, and in fact, it appears on our chronology as at 19 December 1990, the fourth item picks up on something for which the references are given in our detailed chronology which we have supplied, and I do not have the immediate page to hand, but your Honours will see it in our material. The Bank was aware that that was all going on.

CALLINAN J: And of course, if that had come off, as it were, presumably the Bank would have been paid and everybody would have been paid. It was seen as the pot of gold at the end of the rainbow for everybody, I suppose.

MR CASTAN: Yes.

CALLINAN J: Was there evidence of that kind?

MR CASTAN: There is evidence of the fact that there was a strategy being implemented by Lamina. It is at page 2 of our chronology and I will read it in the terms that ‑ ‑ ‑

CALLINAN J: But in any event, the whole arcade was vacant, was it not? It was obvious that something was going on, I suppose.

MR CASTAN: It was. They knew that there was a negotiation – it was not only this tenant. Your Honour, what was happening was that the owner of the property, the landlord, had run into trouble with this property and was trying to redevelop it into something totally different, but was burdened with many leases. This case involves one particular lease, but the principal and the dealings involved numerous of the other tenants as well, and the landlord, the owner of the property, was dealing with all of them, and trying to get them all out. He needed them out in order to do a deal that he hoped would get the property back up and running in a different form, as a casino. Certainly the Bank was well aware of that, and we have given the references. It is at appeal book, page 181 to 182, and 184, and it is specifically referred to in the judgment of his Honour Justice Hayne. I take your Honours to the material. It is in the form of a summary of some of the evidence. It was evidence by the Bank, and at 1.2 ‑ ‑ ‑

CALLINAN J: What is the status of this summary of witnesses’ relevant evidence, 181?

MR CASTAN: It was an exhibit to an affidavit that was, I think, before the court below, or before the arbitrator, I think is where it came in. Would your Honour excuse me a moment. I am sorry, I have expressed that badly. It was a summary of the evidence before the arbitrator, that was handed to the arbitrator in the course of the arbitration.

CALLINAN J: And is it controversial? Perhaps you do not want to answer that now, but at some stage.

MR CASTAN: We will have a talk. I did not think so. My learned friend says it is not agreed. But, in any event, certainly I could take your Honours to the judgment of Justice Hayne and his findings on this matter, which perhaps provide the answer to your Honour’s question, at page 511 in Commonwealth Bank v Figgins Holdings (1994) 2 VR.

CALLINAN J I just wonder about looking at findings of fact in other cases, albeit reported cases, that are related cases. Can we regard those as the facts for the purposes of this case?

MR CASTAN: I think in this context your Honours, can. What has happened is that this case is the a case - Commonwealth Bank v Figgins Holdings was before his Honour Justice Hayne.

CALLINAN J: I know, and there was an Anshun point taken in relation to this case. I understand that.

MR CASTAN: Yes, but apart from that, I was going to say to your Honour that what happened was that ultimately the arbitration that took place emerged out of a claim at the very end of the hearing before Justice Hayne for a money sum arising ‑ ‑ ‑

CALLINAN J: Which was referred under the Retail Tenancy Act, yes.

MR CASTAN: Yes, so that it is, so the speak – it is not exactly part of a proceedings but it emerges directly from it and we would respectfully submit that the findings scan be accepted and I do not think anybody seeks to contest that these findings are the relevant findings. At line 27, in dealing with an argument by Figgins - his Honour deals with an argument by Figgins that the Bank had consent to the variation of 1 February and his Honour says at line 28:

It may be accepted that the bank knew of the transaction at least in March 1991 and I am prepared to assume that notwithstanding the fact that at least one later schedule of tenancies made no reference to the tenancy of shops G19 and G20 that the bank is to be taken as knowing at all times after March 1991 of the fact that Figgins Holdings and Lamina had agreed that thereafter rental should be paid at a nominal rate and that the tenancy may be surrendered upon the making of certain payments.

Your Honours should be aware that this variation did not just provide for a continuing basis on which there would be the dollar paid as, in effect, a peppercorn rental. It also contemplated certain other things happening which might bring about the situation in which the full rental would be resumed. It contemplated a payment. The reality, of course, of what was happening was that there was a lump sum payment that was to be made by the landlord, ultimately to the tenant, and pending the payment, the landlord needed the tenant out, so, he procured the tenant to depart by agreeing on vacant premises in the sense of not physically having a shop running there but a continuity of the relationship of landlord and tenant.

GUMMOW J: I am still lagging behind. The certificate of title, volume 9569, folio 716, was that in evidence because if it is I want to see ‑ ‑ ‑

MR CASTAN: We think not, your Honour.

GUMMOW J: Goodness, gracious.

GAUDRON J: Was there any evidence as to whether or not the lease was registered?

MR CASTAN: The original lease, yes?

GUMMOW J: Yes.

GAUDRON J: The lease, yes, between Lamina and Figgins?

MR CASTAN: It was not registered, your Honour.

GAUDRON J: Well, was there evidence? I am not asking you whether it was or was not?

MR CASTAN: I am sorry. I think there is evidence that it was not registered.

GAUDRON J: Where will we find that, do you think?

MR CASTAN: Would your Honours excuse me? I will seek ‑ ‑ ‑

GAUDRON J: You can turn it up in due course but we ‑ ‑ ‑

MR CASTAN: I will endeavour to - - -

CALLINAN J: I would like to know the provision in the conveyancing legislation which states what is the period of a lease that requires registration? I presume there is such ‑ ‑ ‑

GUMMOW J: Is it section 66?

MR CASTAN: It is 66.

GUMMOW J: That seems permissive. Now, in New South Wales, and it may be so in Queensland, too, in some respects it is mandatory in certain terms. Is there no mandatory provision in Victoria?

MR CASTAN: There is no mandatory provision as I understand it, and I do not think it has ever been suggested that there is, certainly by any of the parties in these proceedings.

GUMMOW J: There are a whole lot of decisions in States like New South Wales and Queensland on the effect of options. Leases for terms when you have to get it registered if it is a certain term and do you take into account the options.

MR CASTAN: I can say this your Honour, we are in agreement that it is optional in Victoria.

GUMMOW J: Right.

MR CASTAN: Whatever might occur in New South Wales, it is not ‑ ‑ ‑

GUMMOW J: Or Queensland.

MR CASTAN: Or Queensland. It is not the practice to register them and, as we would understand the position, it is the almost universal practice ‑ ‑ ‑

GUMMOW J: Is there any agreement about what the practice is?

MR CASTAN: We cannot agree on what the practice is.

GUMMOW J: Right.

MR CASTAN: I am not sure that we disagree.

CALLINAN J: It is pretty dangerous not to register them, is it not?

MR CASTAN: All I can say is that while there is no agreement about what the practice is, I am prepared to say that it would be commonly the case that leases are not registered in Victoria.

GUMMOW J: At all?

MR CASTAN: At all. I do not say none are ever.

GUMMOW J: No.

MR CASTAN: But it is commonly not the practice but my learned friend is not prepared to agree that that is necessarily the case but ‑ ‑ ‑

GUMMOW J: A caveat is lodged, is that the way of doing it? A caveat is put on by ‑ ‑ ‑

MR CASTAN: Again, from my own experience, I would venture that the answer is no, but I would seek again some instructions from those who handle those matters more often than I do.

McHUGH J: What do they call them in Victoria, a Queen’s caveat or something?

MR CASTAN: Well, by way of information in terms of practice, I am instructed that caveats are not lodged in shopping centre leases because the ordinary shopping centre lease, at least in Victoria, prohibits it or contains a clause by which it is agreed that a caveat will not be lodged. So, that is the context in which this arises but, ultimately, your Honours, while one can think of other ways in which these things might have happened or other sets of circumstances which may have occurred which might have avoided the problem, one can say, well, if the mortgagee had done something quickly rather than wait three years, it would not have happened, or if, perhaps, it had been registered and the tenant had gone and sought the mortgagee’s consent, it may have been different. But, in our respectful submission, in dealing with the events as they did occur, whether because the mortgagee did not step in for three years or because the tenant failed to register and did not seek the mortgagee’s consent, whatever reason, ultimately, the reality is that the landlord, the lessor, dealt with the tenant, was managing this property and was endeavouring, at least with the knowledge of the mortgagee, to redevelop the property into something else. It was a failed property from his point of view.

What, ultimately, we come down to is, does the capacity to deal in that way include the capacity to give a good discharge of rent and there is no contest and no disagreement in any of the judgments below, to the proposition that it is the landlord who has the capacity to receive rent and receives rent on its own account, is not liable to account to the mortgagee for that rent, and can accept compromises and can accept exchanges and engage in setoffs. Ultimately, below, in the Court of Appeal in the judgment of his Honour Justice Brooking, he comes to the conclusion towards the very end of his judgment, a position that is very much a position in common with the position of the learned arbitrator, Professor Pryles, and his Honour Justice Harper at first instance, because if one goes to the very end of the judgment at page 302 acknowledges, comes back, ultimately, having explored a number of issues to what this case is really about. It is at the top of page 302:

It is scarcely necessary to say that for the purpose of the statutory provisions and the common law principle payment can be made by any means which the law will, according to general principles, recognise.

And that is applying the concept that it is a matter for the landlord to receive that rent, and it is his rent and rent in his hands until such time as the mortgagee goes into possession of rents and profits. Then he says:

I cannot accept the argument of Mr Myers that money must change hands for payment to be made. Where rent is paid in advance, the previous advance becomes actual payment when the rent becomes due. In the same way, where, as in Municipal Permanent Investment Building Society v Smith, the tenant is to retain the rent as it falls due towards repayment of a loan made by him to the landlord, as the rent becomes due it is paid by being set off against part of the debt resulting from the loan. Where parties are mutually indebted and agree to set one demand against the other they need not hand the money backwards and forwards.

It refers to Spargo’s Case:

The result is the same if an account is struck between them and a payment made in satisfaction of the balance: Federal Commissioner of Taxation v Steeves Agnew & Co (Victoria) Pty Ltd….. Payment pursuant to a bona fide compromise stands in the same position: Stocks v Dobson –

which we say, ultimately, gives the answer to this present problem and I will take your Honours to it:

Contrary to the submission of Mr Myers, and to the example given by the judge of supposedly ineffectual payment by means of commodity, payment can be made in kind.

So, his Honour accepts that payment, the discharge of the amount due under the lease, the rental, the original $5,000‑odd per month, can be made in a variety of ways. He then goes on to consider on the next page whether or not payment has in fact been made, given the dealings that actually went on between the landlord and the tenant, the variation agreement. Towards the top of the next page he goes on:

Before the arbitrator the bank evidently argued that, whatever view might be taken on the other questions, after July 1993 the mortgagor could not give a good discharge for the rent.

That deals with that period of the six or eight months. Then at the second half of ‑ ‑ ‑

GAUDRON J: Could you remind me what is the significance of July 1993?

MR CASTAN: That is the point at which a receiver was appointed.

GAUDRON J: Thank you.

MR CASTAN: For the ensuing eight months‑odd, there was a receiver receiving the rent. That raises the interesting and difficult question of whether the receiver is the agent of the landlord, notwithstanding ‑ ‑ ‑

GUMMOW J: That would depend on the instrument. Was the instrument in evidence?

MR CASTAN: The instrument of?

GUMMOW J: Appointment of the receiver and the mortgage under which the receiver was appointed. It will all depend on the instrument.

MR CASTAN: I understand not, your Honour. The matter is really resolved by their Honours below in the next paragraph:

Mr Golvan argued that the mortgagor could do what it liked with the rent until notice from the mortgagee to pay the rent to it. Subject to the possible effect of the appointment of the receiver, no doubt this is in a sense true. The mortgagor could make a gift of the amount of an instalment of rent once that instalment had been paid to it. But as regards instalments of rent it could give the tenant a good discharge only by receiving payment of them, so as to bring into operation ss 138 and 151(1) and the common law principle which underlies them.

Payment without notice of an assignee is good payment.

Payment by some means known to the law was necessary if the tenant was to have a defence to a subsequent action by the mortgagee. Payment not having been made, and no argument having been put by Mr Golvan to suggest that a defence exists in relation to the other covenants, the appeal should be allowed.

It is that sentence that lies at the core of what this case is really about.

GUMMOW J: I am sorry, which sentence is that, Mr Castan?

MR CASTAN: “Payment not having been made” and the previous sentence:

Payment by some means known to the law was necessary if the tenant was to have a defence to a subsequent action by the mortgagee. Payment not having been made…..the appeal should be allowed.

We contend that payment was made. Good payment for good consideration was made by the monthly payments of a $1 sum which was accepted in full discharge by the landlord, by the lessor, during the period while the mortgagee permitted the landlord to retain rents and profits and to continue in possession. I think it is now suggested, but certainly was not suggested up until last week when we received our learned friend’s summary of argument submissions, that there was not good consideration flowing in this variation agreement. If it is now contended, then we would respectfully submit that should be rejected by the Court.

KIRBY J: This is the one dollar you are referring to?

MR CASTAN: The dollar plus the other components of the agreement under which the dollar was paid.

GAUDRON J: Did you release the landlord from certain of its covenants?

MR CASTAN: Yes, your Honour. It is perhaps best to go now to the variation because when one sees what was actually happening with the variation, one sees why we contend that it was good consideration and that there was a discharge. It is towards the end of the first volume of the book.

GUMMOW J: Page 155?

MR CASTAN: Page 155. Your Honours will see that the recital expresses Figgins to be the lessee of the premises, G19 and G20. It refers to the lease; recites that:

Lamina is the successor in title to Gembleng Pty. Ltd. and is the registered proprietor of the land and owner of the buildings.

And C:

Lamina has requested Figgins to vacate the demised premises upon the terms and conditions hereinafter set forth.

And clause 1:

1. Lamina hereby acknowledges that this Agreement is made for the convenience and benefit of Lamina –

that is the landlord -

and without prejudice to the rights of Figgins under the Lease of the demised premises and specifically reserving to Figgins all of its right and interest in and to the Lease and the demised premises.
2. In consideration of the premises and of Figgins at the request of Lamina agreeing to cease the conduct of its business from the demised premises and to vacate…..within seven (7) days of the date hereof, Lamina hereby agrees that it will:
(i) accept from Figgins rent for the demised premises at the rate of one dollar ($1.00) per calendar month (“the new rent”) in lieu of the rent and outgoings and all other payments of every description whatsoever payable by Figgins under the Lease; and
(ii)accept the new rent from Figgins in full satisfaction of the obligation of Figgins to pay rent outgoings and all other payments of every description…..and for so long as Figgins does not resume the conduct of its business in the demised premises or the surrender of the Lease by Figgins to Lamina in accordance with the provisions hereof or the expiration of the term…..or the expiration of the term of any renewed lease –

and 3:

Lamina acknowledges and agrees that in vacating the demised premises in accordance with….2 hereof, Figgins does so at the request and for the benefit of Lamina and does not abandon the demised premises and does not give up possession of the demised premises or its entitlement to possession of the demised premises –

Lamina then covenants, that is the landlord:

covenants and agrees with Figgins that for so long as Figgins remains Lessee of the demised premises and accedes to Lamina’s request to cease carrying on its business in and occupying the demised premises, Lamina will not, in any way, cause any damage to the shop front and/or to the shop fittings…..and will not allow any other person to damage the shop front –

and indemnifies Figgins from losses which Figgins might suffer:

from any cause whatsoever at any time during the currency of the Lease or any renewal thereof and during which time Figgins is adhering to lamina’s request to cease carrying on its business in and occupying the demised premises –

and:

Lamina agrees and undertakes that upon receiving from Figgins at any time during the currency of the Lease…..not less than fourteen (14) days notice in writing of Figgins’ intention to re‑commence the carrying on of its business…..Lamina shall forthwith do or cause to be done everything which might reasonably be required…..to make the building…..suitable for the public.

KIRBY J: Why are you reading all of this?

MR CASTAN: I was asked about the consideration.

KIRBY J: It is not an unreasonable question, one dollar a month for the shop of shops in Collins Street. It may be entirely relevant but it does not seem, if we are talking about the merits as Justice McHugh introduced to be, shall we say, a substantial rent.

MR CASTAN: No; it is a nominal rent, but the landlord is in the position where the landlord wants the tenant out, physically out, so that the landlord can do something with the property, and the tenant is saying “I have the right to carry on my business there”.

McHUGH J: You went out of business and therefore deprived yourself of your revenues for your business.

MR CASTAN: Yes.

CALLINAN J: And there is provision for the possibility of a payment of half a million dollars to Figgins.

MR CASTAN: Precisely.

CALLINAN J: That is how keen the landlord was to get vacant possession.

MR CASTAN: Yes, but was not able to pay it straight away. Was not able to pay it in cash, in effect, to buy out the lease, and the tenant has said, “At least while waiting on the payment of the moneys that have been paid to give vacant possession, to actually surrender the lease, which we will only do when we are paid the sums you want us to pay in order to vacate, we retain our rights as a tenant, and to maintain that we maintain the payment of a peppercorn rental”.

This is an agreement for substantial consideration passing both ways, that is why I responded to the question about the dollar; there is not just the dollar involved here. The dollar paid each month – the payment and acceptance of the dollar amounts to a discharge of the ongoing commitment under the original lease. There is no question that his Honour Justice Hayne has held that this variation does not bind the mortgagee. The question then becomes, what occurs each month progressively as this goes on over 36 ‑ ‑ ‑

GUMMOW J: Can I just put this to you: I think at common law you start with the proposition that the only party who could sue for the rent would be the landlord; that someone who took the reversion could only sue if there was an attornment. That is what the Statute of Queen Anne provided to facilitate no need for an attornment.

MR CASTAN: Precisely.

GUMMOW J: You dug up section 151. So, the only entitlement for the purchaser from the Bank to sue would have been by means of section 151. That is right, is it not?

MR CASTAN: We would say that until ‑ ‑ ‑

GUMMOW J: Because at common law they could not, because there had been no attornment.

MR CASTAN: But, at the point at which the tenant received notice from the mortgagee, that the mortgagee was going into possession of rents and profits, the authorities – and they are all set out in the submissions – going back to the early 17th century, make it quite clear that at that point the tenant is obliged to pay to the mortgagee, once the mortgagee goes into possession of rents and profits. But, that is a matter for the mortgagee to give notice and decide to go into possession of rents and profits. If the mortgagee leaves the landlord in possession of rents and profits, the landlord can receive the rent on his own account, and can receive payment of the rent by whatever means the landlord sees fit.

GUMMOW J: It is not a question of can, it is a question of he is the only person competent to demand.

MR CASTAN: He is the only person. I put it in the permissive, because the way it has been put against us has been ‑ ‑ ‑

GUMMOW J: Yes, I know.

MR CASTAN: ‑ ‑ ‑ as though there is something extraordinary about that, but the mortgagee has no right to any ‑ ‑ ‑

GUMMOW J: The benefit of these covenants run with the land, but we are talking about the burden passing here with reversions. But, there we are, you have the special regime, you rely on the statute.

MR CASTAN: But, the result of that, in our respectful submission, is that the matter comes down, ultimately, to a question of whether or not there has been an effective discharge of the rent of which only the landlord was entitled to receive, and which ‑ ‑ ‑

GUMMOW J: But whether there was an effective discharge depends upon – or may depend upon – who, at the time of the payment, is entitled to demand and receive it. Whether it is just one person or more than one person.

MR CASTAN: Well, in our respectful submission, that is, on the authorities, beyond – and on the statute – contest at the time, if that is the way in which your Honour put the question. At the time it is clear, given that the mortgagee did not go into possession of rents and profits and did not give notice, did not exercise that power, it is clear beyond argument, we would say, clear from passages in Halsbury and clear from cases going back to the 17th century that the only person entitled to receive the rents and profits is the landlord and the only person who can give an appropriate discharge is the landlord and that the tenant is entirely safe at common law, leaving aside the ‑ ‑ ‑

McHUGH J: But the problem for me in this case is I cannot get my mind completely around section 81 and it seems to me that that may change the whole nature of the common law position.

MR CASTAN: No, that really reasserts the common law position, with the great of respect, your Honour.

McHUGH J: Well, I am not sure. It seems to do more than that. The effect of it is is that the mortgagee becomes the landlord, upon default.

MR CASTAN: What happens is that upon default, if he does not go into possession of rents and profits, he permits the landlord to continue as a tenant at sufferance, otherwise you would have a problem – the way your Honours put it to me, if one – one contests your Honour’s proposition by imagining we had not had the variation and that the full rent had been paid, could the landlord have come along and said, “Pay me the rent. I am he landlord since the default three years ago.”?

McHUGH J: Well, maybe he could. Maybe that is the effect of section 81.

MR CASTAN: No, your Honour. No, in our respectful submission ‑ ‑ ‑

McHUGH J: All you seem to get out of it is a right of quiet enjoyment.

MR CASTAN: What is established – I would need to now perhaps go in some detail to the principles because what is established by the cases is that while and so long as the mortgagee permits the landlord to remain in possession and to continue to manage the property, as it is put in some of the cases, then that rent is payable by the tenant to the mortgagor, to the landlord, and the tenant is protected by the common law rules and then ultimately the Statute of Anne which finds its way into section 138 and 151 of the Victorian Property Law Act. The tenant is protected. The very hypothesis I put to your Honour about the double payment cannot occur because the tenant is protected by a common law rule that says, “If you pay your rent to an assignor without notice of the assignee, the payment is good”.

McHUGH J: Yes, but the common law is depending upon assignments of the reversion but the effect of section 81 of the Transfer of Land Act seems to be that as a matter of statute law the mortgagee is, in effect, substituted for the landlord. Now, that is the way I read it.

MR CASTAN: Yes.

McHUGH J: Am I reading it wrongly or ‑ ‑ ‑?

MR CASTAN: Your Honour is reading it partially wrongly, with respect, yes. Your Honour is reading it wrongly, but can I say, the first step ‑ ‑ ‑

McHUGH J: It is an unusual provision. We do not have it in New South Wales.

MR CASTAN: No, just in Western Australia, but it does not, in fact, achieve anything quite as dramatic as your Honour perhaps perceives, perhaps looking at it as relatively unfamiliar, given your Honour’s State of origin.

For a start, may I say one cannot look at that section in isolation from the sections in the Property Law Act which protect the tenant which specifically say in sections 138 and 151 that the tenant paying to an assignor without notice of the rights of the assignee is protected. That is the common law rule we were just debating a moment ago that your Honour suggested might be overridden by the statute but, given that the common law rule itself is enacted into another statute, one ‑ ‑ ‑

McHUGH J: But there is plenty of scope for the common law rule that is now enacted in the Victorian statute to operate in conjunction with section 81 dealing with a very special case of the mortgagee. The mortgagor, upon the execution of the mortgage or the registration of it, seems to be simply transferred into having a right of quiet enjoyment until default.

MR CASTAN: That is true.

McHUGH J: Upon default he is a tenant at sufferance.

MR CASTAN: And subsequently ‑ ‑ ‑

McHUGH J: But the mortgagor cannot bind the mortgagee in any way because he has no legal rights in respect of the reversion whatever.

MR CASTAN: When your Honour says he cannot bind him, that wraps up a number of different notions. By saying he cannot bind him, one is ‑ ‑ ‑

McHUGH J: To put it another way: cannot affect the reversion.

MR CASTAN: He does affect a reversion to this extent, that payment of rent made to the landlord, the mortgagor, is good as against the mortgagee. That is clear. That is because of those sections, because of the common law rule and because of the principles ‑ ‑ ‑

McHUGH J: That seems to me to be the big question, as to whether or not, by reason of section 81, those sections really work in this particular context.

MR CASTAN: Yes. It may be useful to take your Honour to the – in truth what your Honour has raised is the position that has not been contended for below or been accepted by any of their Honours.

McHUGH J: That probably means it is wrong, but it is just something that occurs to me and I would like to ‑ ‑ ‑

MR CASTAN: The difficulty with it is that if accepted it would lead to double payment of rent. It would not just apply in a case where there happens to have been a variation.

GUMMOW J: I am not sure that is right. Does not one have to ask if one is applying section 81(1) what would be the position at common law if the order of events was: owner grants a lease, owner grants common law mortgage which conveys the title to a mortgagee. What then is the position as regards the obligation of the tenant to pay rent thereafter before default and entry by the mortgagee?

MR CASTAN: Before default it is clear that the mortgagor, the owner, has a right of quiet enjoyment and is permitted to continue to ‑ ‑ ‑

GUMMOW J: What would the Statute of Anne do in that situation?

MR CASTAN: The Statute of Anne would make it clear that the tenant can pay - your Honour has posited a situation in which there has been no default?

GUMMOW J: Yes.

MR CASTAN: Well, no problem arises. The tenant pays, both under the common law rule and under the statute, to the building owner and is discharged and cannot be called upon to pay again. It is for that reason that I put to his Honour Justice McHugh that the proposition as he put it as a matter of interpretation of section 81(1) would lead inevitably to a liability to double rent because it would apply - if one took the proposition as his Honour had put it, it would mean that even payment would not satisfy ‑ ‑ ‑

McHUGH J: But the reason I say that, Mr Castan, is this, that apart from that proviso about quiet enjoyment, the effect of section 81 seems to be that it reverses the normal rule and gives the mortgagee the right to possession there and then. At common law, notwithstanding the transfer of the legal title, the mortgagor still has the right to possession. Am I right in my recollection?

MR CASTAN: He has a right to possession, being the right of quiet enjoyment. The reversion is vested in the mortgagee. There is then, in effect, a tenancy back, or a deemed leasing back of the reversion, back to the building owner, the landlord ‑ ‑ ‑

McHUGH J: Yes.

MR CASTAN: ‑ ‑ ‑ who then can deal with the tenants. The position on ‑ ‑ ‑

McHUGH J: Now, we have a statute, and leaving aside the proviso for quiet enjoyment, if that was not there, you would have no rights whatever to the rent or anything else, would you, possession or anything else, but you are given a right of quiet enjoyment. Now, does that carry with it the right to the rents?

MR CASTAN: Yes, it does, your Honour.

CALLINAN J: I was going to ask you that. Does quiet enjoyment in that context mean the same as it does in the context of the landlord and tenant?

MR CASTAN: It does, but the right of quiet enjoyment is the ‑ ‑ ‑

CALLINAN J: Are there any cases that say that?

MR CASTAN: Yes, your Honour, but perhaps the simplest way of ‑ ‑ ‑

CALLINAN J: I am not asking for them now, but there are?

MR CASTAN: They do, or perhaps I should say, perhaps the simplest way of referring to it is to take your Honours to passages which are referred to by their Honours below, where they deal with this precise problem, and I think it is fair to say there has been no controversy about that question in the various opinions that have been expressed on this matter below. The controversy ultimately comes down, as I pointed out to your Honours in those last pages of his Honour ‑ ‑ ‑

McHUGH J: At 302, 303, which you pointed to, I know. But to me, at the moment, there may be a deeper question involved.

MR CASTAN: Your Honour, in a number of the judgments below ‑ ‑ ‑

McHUGH J: For my part, this section is completely new and I am pulling out of the recesses of my mind my recollection of this area of law of many years ago.

MR CASTAN: Yes, well, the way it works, in summary, your Honour, is that the mortgagee gets the legal estate, but there is a ‑ ‑ ‑

GUMMOW J: It is only registered estates, that is the problem, is it not? They are only registered estates. But was this first mortgage registered?

MR CASTAN: Yes, your Honour.

GUMMOW J: We are at least confident of that, are we?

MR CASTAN: I think that is common ground.

GUMMOW J: So what it is saying is that this registered interest is to be treated as if it were an old style conveyance.

MR CASTAN: Yes, your Honour, that is precisely, that is why I said it does equate to the common law position when, I think, it was put to me that this is some unique statutory position. It is rather that what the statute does is take one back to the common law position.

GUMMOW J: And in common law, the mortgagor could stay there by either a contractual right or some lesser situation until default, is that not right?

MR CASTAN: Yes, and may I take your Honours ‑ ‑ ‑

GUMMOW J: But the legal estate was in the mortgagee.

MR CASTAN: May I take your Honours to the discussion of these matters, initially, at least in Professor Pryles’ award which deals with this in some detail and in our respectful submission in a way that is I think not the subject of any disapproval when the matter went before his Honour Justice Harper or the Court of Appeal. Towards the foot of page 80 of volume 1 of the appeal book your Honour will see at line 15 this discussion by Professor Pryles. This usefully, I think, will provide the answers to some of the matters that have been raised in the last 10 minutes and we would say, accurately. At line 15 Professor Pryles says:

It seems the purpose of section 81 of the Transfer of Land Act was to adopt the position ‑ ‑ ‑

McHUGH J: I am sorry, where are you reading from?

MR CASTAN: I am reading from page 80 of volume 1 of the appeal book.

McHUGH J: Line?

MR CASTAN: 15, “It seems that ‑ ‑ ‑“

McHUGH J: Yes. This is the Arbitrator, is it?

MR CASTAN: It is the Arbitrator’s award but he analyses the law in some depth, and we would respectfully submit accurately. He says:

It seems that the purpose of section 81 of the Transfer of Land Act was to adopt the position which appertained under the general law applicable to mortgages. Under this system, upon the execution of a conveyance of land by way of mortgage the legal estate passed to the mortgagee.

That is as your Honour put it to me, your Honour Justice McHugh.

The mortgagee then became entitled to possession and to evict the mortgagor without notice unless the mortgagor was given the right to quiet enjoyment. In such a case the mortgagor could only be evicted without notice after default. That section 81…..was intended to approximate the position applying under the general law seems to be borne out by the authorities, although there are not many cases on section 81.

He then refers to:

Farrington v Smith (1894) 20 VLR 90 F92 Holroyd J remarked of section…..‘The section is providing for the remedies of the mortgagee, and care is taken that he shall lose no advantage which he might have enjoyed under the old system of conveyancing. The reference to proceedings before Justices of the peace seems to show that the author of the section had in mind the provisions for summary ejectment –

And then Professor Pryles refers to:

City Mutual Life Assurance Society Ltd v Lance Creek Meatworks Pty Ltd (1976) VR 1 Newton J observed, at p 10: ‘but in fact s.81(1) in my opinion confers an independent right upon a first mortgagee to eject the mortgagor without notice after the default has been made. Section 81(1) gives to a first mortgagee in effect the same rights as a first mortgagee under the general law, and a first mortgagee under the general law can eject the mortgagor at any time without notice’.

And he cited Commercial Bank v Green and Coote to which we have referred to and rely on.

In both the Farrington and City Mutual cases the Court was concerned with applications to recover possession of land. Neither case dealt with the question before me, namely, whether a mortgagee has a right to receive rent from a tenant without giving the tenant notice as soon as the mortgagor defaults. As the object of section 81 is to preserve the remedies which existed under the general law, it is to the general law I should turn to see whether notice is required.

Now, that, we would respectfully submit, as an analysis, is not controversial and it is not the subject of any disapproval as this matter went further through the courts and it neatly, we would respectfully submit, summarises the matter. One then has a detailed discussion following over the next few pages which again is, we would submit, not really the subject of controversy. There is the reference to Coote. In fact it is, in view of your Honour’s questions, useful just to read that passage.

‘Before 1926 immediately upon the execution of a conveyance of land by way of mortgage, whereby the legal estate passed to the mortgagee, he became by virtue thereof the legal owner of the freehold and inheritance of the land, or of any lessor interest, such as a life estate or term of years conveyed by the deed. He was, therefore, as between himself and the mortgagor, entitled, so soon as any default had been made in payment of the principal or interest, if the deed contained a proviso for quiet enjoyment, or, if there was no such proviso, then immediately upon or at any time after the execution of the mortgage deed, to enter into possess of the land, or if the land was in lease or in the occupation of tenants, to give to them notice to pay the rents to him, and to receive the rents accordingly.’

It will be seen that the learned author of Coote states that where the mortgagor has a right to quiet enjoyment, as indeed a mortgagor does by virtue of section 81(1) of the Transfer of Land Act, it is only upon default that the mortgagee may enter into possession of the land…..may immediately, and without notice, enter into possession –

or give notice to pay the rents if the land is in lease:

Thus, the Editor of Coote is of the view that upon default the mortgagee becomes entitled to the rents upon giving the tenant notice.

Then he goes to the authorities referred to in Coote, and that takes us back to the series of rather ancient authorities that are referred to in the written submissions which I was not proposing to take your Honours to in detail. But, what they establish is that very basic doctrine of notice that lies at the heart of ‑ ‑ ‑

GUMMOW J: At page 82, about line 16 or 17 explains it, I think.

MR CASTAN: Yes.

GUMMOW J: “Before the Statute of Queen Anne, attornment was necessary”, et cetera.

MR CASTAN: Yes, on the principle of notice to the tenant:

But, when it took place, it certainly had relation back to the grant, and like other relative acts, they were to be taken together. Thus livery of seisin, though made afterwards, relates to the time of the feoffment. Since the statute, the conveyance is complete without attornment, but there is a provision, that the tenant shall not be prejudiced for any act done by him, as holding under the grantor, till he has had notice of the deed.

That is the effect of ‑ ‑ ‑

GUMMOW J: Section 151.

MR CASTAN: Section 151 and the combination of 138 and 151, both of which in substance lead to the result that without notice, until notice, the tenant is fully entitled to pay to the landlord. That is not a principle that is in any way impeded by or contradicted by anything that emerges from section 81 of the Transfer of Land Act relating to the mortgagors remedies. The two concepts sit neatly together. They are not in any way in conflict, in our respectful submission. That is to say, the concept of the implementation of the common law position, to which section 81 of the Transfer of Land Act equates a registered mortgage in Victoria, and the ancient common law rule then embodied in the Statute of Anne, which finds its way into the Property Law Act provisions - sections 138 and 151 of the Property law Act in Victoria - which embody the protection to the tenant.

That is a logical, if I may say so, and principled balance of those respective interests. There is protection to the mortgagee. The mortgagee is entitled to act without notice as against the landlord, and go into possession; and, in order to go into possession of rents and profits requires notice to the tenant. The tenant in turn is protected in the absence of notice in dealing with his mortgagor - the mortgagor, the landlord - unless he is given notice, in effect, of the assignment, of the transfer of the reversion, which is the effective ‑ ‑ ‑

McHUGH J: What has happened in Victoria to the old common law rule that the tenant could always defend an action by the landlord on the ground that the reversion had been assigned notwithstanding that the tenant had not been given notice of the assignment, or the attornment?

MR CASTAN: Is your Honour contemplating the situation in which action is brought by the landlord?

McHUGH J: Yes. In this case for example ‑ ‑ ‑

MR CASTAN: There is a problem for the landlord, of course.

McHUGH J: Problems for the landlord, but I am just looking at it from the other side of the coin to see how it is worked in. Although if the tenant had paid without notice, the tenant could not be sued by the assignee of the reversion, and yet it did not work the same way; the tenant could refuse to pay the rent to his landlord on the basis that there had been an assignment.

MR CASTAN: Once he has had notice.

McHUGH J: No, not once he has had notice, just full stop. I think you will find cases to that effect.

MR CASTAN: Yes, well, I am not sure whether that is not, perhaps, covered by, or sought to be covered by, section 81(3) which specifies that the mortgagor, the landlord, is not to commence proceedings in respect of matters for which the first mortgagee may sue without obtaining the consent of the mortgagee. Your Honour is referring to the tenant’s position, I am not sure if I am responding to the question as you posed it ‑ ‑ ‑

McHUGH J: Yes, I understand that.

MR CASTAN: But certainly the mortgagor does not have the capacity to sue without the approval of the mortgagee, and that is embodied in section 81(3). But can I complete the response to these matters that have been raised by just reading the further passage on page 82 in Professor Pryles’ award which, in our respectful submission, embodies what is, ultimately, the correct common law position and the correct effect of these statutory provisions. Having referred to the passage in Moss v Gallimore, in which Lord Mansfield set out these basic propositions that I earlier adverted to, Professor Pryles goes on:

This passage seems to suggest that notice to the tenant is required before the tenant is obliged to pay rent to the mortgagee. This seems to me, in principle and logic, to be the sound position. It is all very well to say that upon default a mortgagee may immediately institute proceedings for possession of the land without notice to the mortgagor. The mortgagor will, or should be aware, of his or her default. But when we consider the position of a tenant the situation is quite different. The tenant is a third person who may be totally unaware of the mortgage itself let alone of the existence of a default. It seems to me wrong for the tenant to become liable to pay rental to a mortgagee immediately upon a mortgagor’s default even though the tenant may have no notice of the default or even of the mortgage itself.

And he goes on then to hold:

Until notice was given to the tenant, the Tenant was obliged to pay rental to the Landlord.

Then he talks about what is the ultimate issue here and we would respectfully submit, the real issue here:

The amount of rental would depend on the agreement between the Landlord and Tenant and, because of the Deed of Variation, was probably the nominal rent of $1 per month. But had the Bank given notice to Figgins to pay rental to it, Figgins would have been obliged to pay rental to the Bank. Moreover, in view of the Order of Hayne J. in the Supreme Court proceedings, the amount of rental payable from the date of notice would be the amount payable pursuant to the lease unaffected by the Deed of Variation.

Now, those conclusions, in our respectful submission, accurately and properly, summarise what, in our respectful submission, flows from the statutory provisions, the common law position as summarised in the passage from Coote, and the effect of those provisions and the common law position applied to this case.

CALLINAN J: Mr Castan, in a system of registration - and assume an unregistered lease - what does the mortgagee do if the mortgagee is unaware that there is a lease? How does the mortgagee give notice then?

MR CASTAN: If the mortgagee is unaware, the mortgagee cannot give notice, but the mortgagee can find ‑ ‑ ‑

CALLINAN J: What happens in that situation? If through no fault of the mortgagee’s own, the mortgagee is totally unaware that there has been a lease on the premise.

MR CASTAN: Well, if he cannot become aware by reference to the register, he can become aware by inspection of the premises.

CALLINAN J: That may not disclose it at all.

MR CASTAN: It may not.

CALLINAN J: He may assume that it is the mortgagor.

MR CASTAN: It may. I cannot answer your Honour in the sense of providing what is the practical answer for the mortgagor other than notice, and in some of the cases what has happened is that instructions have been given by mortgagees to an agent, and it is said, well, if there are rents and profits, then please now pay them to me, where rents and profits or moneys are coming out of this property, pay them to me. While it is conceivable that that practical problem could arise, it would be our submission, I think, your Honour, that that is not the ‑ ‑ ‑

CALLINAN J: I know it is not this case.

MR CASTAN: Not this case, and in the general run of these multiple estate type cases, and that is much of what the older case is dealing with – the agricultural estates – and the modern cases dealing with the high rise city building situation or the vast shopping centre situation, that is not going to be the real world practical problem. It will not be the lack of knowledge of the existence of a lease though one can conceive of a situation where that could occur, but that is not where the majority of problems will arise.

The problem works the other way, if I may say so with respect, if one is looking at the actual practicalities. We are dealing with potentially vast numbers of small tenants in shopping centres. In this case it was a relatively small number – I think 15 or so – of the tenants in this particular building.

GUMMOW J: We do not know whether there was a covenant in the mortgage requiring consent to this and whether consent could be given on conditions.

MR CASTAN: No, we do not.

GUMMOW J: That is the mysterious thing about this case. It is difficult to talk about what general practice would be because one imagines there would be covenants in the mortgage.

MR CASTAN: That is true, your Honour. We do not have it but what we do have is what we would respectfully submit is ‑ ‑ ‑

GUMMOW J: And to produce a result whereby if there is a lease and the mortgagee has not been told about it, there is a default by the mortgagor that triggers the rights of the mortgagee.

MR CASTAN: That could not arise here because the mortgage was entered into here subsequent to the lease, so that could not be the difficulty here. This was not a lease subsequent to a mortgage. The property was leased at the time when Lamina bought it and secured finance for the purchase.

CALLINAN J: But if it is not a registered lease – this mortgagee knew about it apparently, but you could easily have a situation in which, absent registration, the subsequent mortgagee did not know about it.

MR CASTAN: That could occur. I would certainly accede to that, your Honour. In this case the evidence is clear that within a very short time after the grant of the mortgage the Bank received a schedule of tenancies and so on, including information that there was $1 rental payable in respect of these particular shops. So the question of lack of knowledge of that kind on the part of the Bank does not arise here.

But, your Honours, what we say is the fundamental structure of this body of law is, in our respectful submission, not really in controversy and has not really been in controversy at any point through the various analyses that have been undertaken of these questions by the various judges who have given consideration to it. It is only at the end point that one finds that their Honours have differed below and, in truth, on analysis, it is only at the end point that our learned friends differ from us.

GUMMOW J: But what is the end point?

MR CASTAN: The end point is the question of whether or not there was effective discharge here. The principles that lead one to accept that had – and one can illustrate that by hypothesising the situation had this been a case where everything else was the same, including the default in payment of land tax, but the tenant had paid the full rent to the landlord. Could the mortgagee be coming along and saying, “Pay it all again”, and assume that was the ‑ ‑ ‑

McHUGH J: But that seems to me to be the real question in the case. Does not the case really come down to this simple issue, whether or not there was any rent owing as at the date that you got notice?

MR CASTAN: Yes, we accept that. Were there really arrears of rental or had it been discharged? That is ultimately the only question. These underlying principles of these relationships, in our respectful submission, are not really in controversy. We say we effectively ‑ ‑ ‑

McHUGH J: Once the assignee gives notice, it is entitled to sue for all the rent from after the date of notice or any accrued rent.

MR CASTAN: Arrears.

McHUGH J: Arrears or accrued - - -

MR CASTAN: I would respectfully seek to stick to arrears of rent.

McHUGH J: Back to the date of the assignment?

MR CASTAN: Yes, your Honour.

McHUGH J: So the real question in the case is whether or not at the date of notice, you were in arrears?

MR CASTAN: Yes, your Honour.

McHUGH J: That is the question.

MR CASTAN: We would respectfully submit, that is what this ultimately comes back to, and ultimately, their Honours in the Court of Appeal below, despite some suggestions along the way that they were taking some different view, ultimately ‑ ‑ ‑

GUMMOW J: Well that makes the decision of Justice Hayne crucial, does it not, as to the effect of the variation there? Because that determines the quantum, whichever view you take of it, of what was growing out of ‑ ‑ ‑

MR CASTAN: No, because his Honour expressly deferred over, and did not determine the issues which emerge here about this question of notice and the entitlement of the landlord ‑ ‑ ‑

GUMMOW J: He took a view about the relationship between the deed of variation and the lease.

MR CASTAN: He did, but that totally leaves open the question of the point of time at which the mortgagee can commence to claim not to be bound. The general proposition that the mortgagee is not bound by the variation is fine, and obviously we do not demur from that, and that is the finding. But that does not answer the question of whether ‑ ‑ ‑

GUMMOW J: I do not know what “bound by” means.

MR CASTAN: The fact is that, while not bound by, it may cover a variety of meanings in a different context, but when it comes to the question of payment, there is a question of whether or not the landlord has effectively been able to receive payment of the rent, such that there is no longer any arrears. In our respectful submission, the question of whether or not, as a result of his findings, there were any arrears that could be collected by the mortgagee, was expressly not determined by his Honour, including the questions that have been since debated, and it is for that reason, we say, there is no estoppel. And I can take your Honours to the specific passages, and it is important isolate this – it is somewhat out of order – but it is important that your Honours what it was that Justice Hayne was actually doing when it came to this question of payment. For that purpose, could I take your Honours to pages 75 to 80 of the appeal book.

The reason I take your Honours to this is because it enables us to see what occurred before his Honour Justice Hayne. Perhaps the foot of page 74 is the appropriate starting point for this analysis. What the learned arbitrator says after quoting a lengthy passage from Justice Hayne’s judgment is:

His Honour was clearly of the view that upon default no notice on the part of the mortgagee is necessary to bring the mortgagor’s right to quiet enjoyment to an end and that the mortgagee was entitled to take action…..But the learned Judge did not decide that no notice was required before the tenant became obliged to pay the rent to the mortgagee. His Honour did not say this in his judgment nor was it necessary for the decision. The proceedings instituted by the Bank were for a declaration that it was not bound by the Lease…..and it sought an Order for removal of a caveat lodged on behalf of Figgins. The Bank did not, in the Supreme Court proceedings, seek an Order for payment of rent.

Then he goes to the transcript, and this is important, your Honours. He says:

The transcript of the Supreme Court proceedings indicates that the matter came on for hearing on 2 December 1993. Some substantial way into the hearing, on 7 December 1993, the matter of rent appears to have been first raised.

He then sets out an extract from the transcript:

Mr Myers: There are two other matters that I must mention, Your Honour. There is rent, if contrary to the bank’s submissions the bank is bound by the original lease but not the lease variation; there is a claim for the rent. That is one possible result.
His Honour: Until you mentioned it I had not thought that was a possible outcome. How does that remain a possible outcome?
Mr Myers: Well, if the lease variation doesn’t bind and for some reason Your Honour were to decide that the option had been validly exercised, I suppose it is not really a possible outcome. I withdraw it as a possible outcome, Your Honour. It is not really a possible outcome; it is so remote as not to make submissions.

Then he goes on to caveat. Then he goes on:

The hearing concluded on 7 December 1993. Subsequently, Figgins sought to raise a new argument. A written submission was filed in which it was sought to contend that the exercise by Figgins of the option to renew the Lease was effective because of the operation of s 14(5) of the Retail Tenancies Act 1986.

It was relisted and Mr Myers said, at line 39:

As to paragraph 6, Your Honour will recall that I began to address the unlikely hypothesis in the course of my submissions that it was found that the mortgagee was not bound by the variation but the option had been correctly exercised or the option had been exercised in a way that was effective. Paragraph 6 deals with that. It says what I was embarking upon saying there that if the variation doesn’t bind the mortgagee and the submissions on behalf of Figgins, the defendants are correct, then they owe $185,000 rent together with outgoings to be assessed. I don’t have any other submissions, Your Honour.

Then:

His Honour summoned counsel to again address him on 20 December. Mr Pearce appeared for the Plaintiff Bank and Mr Archibald for Defendant Figgins. At this hearing, the possibility of Figgins being liable for arrears of rent in a substantial sum was discussed. His Honour asked Mr Archibald whether Figgins desired to contend that it was entitled to hold the terms of the lease as not varied by the Deed of Variation. Mr Archibald for Figgins responded with a positive answer. His Honour then said to Mr Archibald:
‘and thus, inevitably it would follow, would it not, that it was in arrears of rent in a considerable sum?’

Mr Archibald responded in the affirmative. The transcript continues as follows:
‘His Honour: Thank you, Mr Archibald. Mr Pearce, in the written submission put in on behalf of the bank it was said that arrears of rent would be payable by Figgens Holdings to the plaintiff if the variation agreement did not bind the plaintiff, but so far as I am aware there is no present claim for any order for those arrears or the like. All there is is an originating motion seeking a determination of a couple of questions and consequent declarations; am I right?

Mr Pearce: There is our statement of claim. Your Honour is correct in saying there is no specific prayer for relief, although we considered amending that…..I think Your Honour will recall Mr Myers started addressing that issue and then it fell away.

His Honour: Yes, it did.

Mr Pearce: If it is necessary for us to make an amendment, I would obviously seek leave to do that. But it is not my understanding…..

His Honour: The reason that emerged is neither here nor there, but the present form of the statement of claim seeks only declarations…..

Mr Pearce says: We do not seek any other order.
His Honour: Even if there was a prayer for consequential relief, I for my part would not have thought that was sufficient to carry you to a claim for a judgment for a money sum.
I think in the light of what has been said there is no considerable doubt that I will be in a position to give judgment in this matter before I rise for Christmas…..I will not deliver judgment tomorrow as originally I had intended in this matter. I shall content myself with –

another matter:

But, Mr Pearce, I would simply invite attention to the fact that there is no prayer for a money claim. If that is to be pursued, at least as at present advised, I would not regard the pleadings as sufficient to found a money claim and I am not even sure that the proof – perhaps the proofs might have gone far enough, I don’t know – but it does leave us in a rather untidy position…..largely –

because of the injection of this Retail Tenancies Act.

Could I seek leave to make that amendment…..
His Honour: I think we would need to have it formulated; I think we would need to have it to the other side and…..I won’t sit beyond tomorrow.
Mr Archibald: We would suggest on this issue, if it became germane in your Honour’s reasons, it may be better to leave open the final resolution of that position because of the money part of the reason being addressed in the course of the hearing and there may be arguments of one kind or another that turn on it.
His Honour: Just quantification, Mr Archibald, or more substantive matters are you thinking of?

Mr Archibald: I am thinking that there may be a question as to the title of the bank to recover what I will call the whole of the arrears.

Now here is the point at which this question that is now before this Court is specifically adverted to:

How far back it would go, I simply haven’t thought it through, your Honour, but it may not automatically follow that the bank would be entitled to recover the entirety of what would be the arrears. There may be a question as to what the commencing point of arrears really is.

And what he is really adverting to, we would respectfully submit, is this question of notice:

His Honour: Plus, of course, questions of quantification of outgoings and the like.
Mr Archibald: Yes, there would be that, yes.
His Honour: On which I think there has been absolutely no evidence.
Mr Archibald: No attention.
We seem to be getting into a considerable tangle –

His Honour says at line 19:

What do you say is the better way to now deal with it?

GUMMOW J: There was no pleading, was there?

MR CASTAN: Not on this, there were pleadings.

GUMMOW J: What was the relief sought? A declaration and an order for removal of a caveat.

MR CASTAN: Declarations and removal of the caveat. Then his Honour says:

The easiest way is to shut you out of arguing on this retail tenancies point –

GUMMOW J: Well you would not make a declaration in terms that it was not bound by, because that would be ambiguous. It can mean, not bound by, in terms of physical occupation of the land; they can be thrown out. Whether you can sue to recover money is another question.

MR CASTAN: Precisely, your Honour.

GUMMOW J: And that is what Mr Archibald has got in his mind in this passage.

MR CASTAN: And that is why that is, we submit, totally left open by his Honour’s decision. Mr Archibald at line 26 says, your Honour:

If your Honour would bring in reasons and leave the parties to address your Honour upon what course should be followed – no doubt certain declarations could and should be made. Whether there are other aspects of the relationships between the parties that should be pursued in this proceeding, or possibly some other proceeding, might depend upon exactly what your Honour finds.

His Honour says:

Well, the parties might give considerations to the matter and give consideration to whether their positions would be prejudiced or arguably prejudiced were I to follow that course. They will now, I think, have an opportunity to consider those matters.
There was then an exchange between his Honour and Counsel on the date on which the matter should be listed –

And then at the top of the page the most critical passage of all, as we would submit. Mr Pearce, on behalf of the Bank then says:

Could I just add one point: I think I am in a position to consent to a deferral of liability of rent and we could get judgment before Christmas on that basis. Obviously our concern is an estoppel arising on that issue.

Now that is a significant concern, expressed the other way. In other words, my learned friend, Mr Pearce, is expressing a concern that the estoppel may go against his client, but obviously an awareness of the problem of an estoppel and not wanting to be prejudiced by it. His Honour says:

Exactly.

Then Mr Pearce says:

If your Honour made it clear that by agreement between the parties that issue was preferred –

the word presumably is deferred –

I would be quite happy to proceed on that basis.

His Honour says:

I am by no means certain that even doing that it would be possible for me to give reasons close to this side of close of business tomorrow. I will see what can be done. Is it agreed, Mr Archibald, that the matter be sent over and -

perhaps “set over on” –

the question of liability of rent, if any, and the like?

Mr Archibald is then asked, do we defer that over.

GUMMOW J: Have we got the orders that were eventually made; that is the starting point in all this, to see what actually came of it. I cannot find ‑ ‑ ‑

MR CASTAN: Mr Archibald says he will take instructions.

GUMMOW J: The law report does not set out the orders.

MR CASTAN: No, it does not and I do not think they are in the application. I do not think they are.

CALLINAN J: Mr Pearce does not seem to have been thinking simply in terms of a conventional issue estoppel. He was also, I think, thinking in terms of an Anshun estoppel as well.

MR CASTAN: Yes.

CALLINAN J: So he was trying to embrace the field to protect himself.

MR CASTAN: Counsel for the parties had not, at that stage, put their minds to the questions that have since been debated at such great length before the arbitrator, before Justice Harper and before the Court of Appeal. The orders are available. They are at page 65. They are set out in the course of the arbitrator’s reasonings.

GUMMOW J: They are set out in the course of the argument.

MR CASTAN: Page 65, your Honour will see that ‑ ‑ ‑

GUMMOW J: Well, that says “the principal order”.

MR CASTAN: Yes, I do not think there is anything else that sets out the orders made by his Honour Justice Hayne. Your Honour will see also the orders ultimately were made on 18 March 1994 although judgment – perhaps I should also mention this. The reference to close down for the long vacation and so on in the course of those comments by his Honour Justice Hayne has all taken place on the 20th.

GAUDRON J: The 23rd.

KIRBY J: The 20th, I think.

MR CASTAN: Yes, the 20th.

KIRBY J: The report in the Victorian Law Reports suggests that his Honour’s judgment was given on the 21st. Is that correct?

MR CASTAN: That is the position as I am instructed. That is exactly ‑ ‑ ‑

KIRBY J: Justice Hayne rarely allows water to run unnecessarily under the bridge.

MR CASTAN: Quite so.

KIRBY J: Were the instructions received that Mr Archibald reserved.

MR CASTAN: Nothing appears ‑ ‑ ‑

KIRBY J: Presumably that was communicated to his Honour’s chambers.

MR CASTAN: It is not clear whether that is so and that is commented on by the arbitrator who says there is nothing before him to indicate whether or not those instructions ultimately were conveyed.

KIRBY J: Well, in view of the way in which the matter developed it would seem unlikely that his Honour would have proceeded to give his decision without that having been communicated.

MR CASTAN: Precisely, your Honour, and we would say that is the appropriate inference but we say that the way in which his Honour Justice Hayne’s judgment and the orders should be read in relation to the issues now before this Court and that have come through through the arbitrator, it very much must be read in the light of those exchanges where the parties were at pains to say, “We do not want matters now determining these questions which, in effect, amount to estoppels on other issues which we have not yet put our minds to” which, of course, include the whole notice issue and the very matters we have been debating here this morning.

CALLINAN J: And perhaps the value of the abstention from occupying. It was not merely a matter of one dollar a month. There was an abstention which might arguably be very valuable.

MR CASTAN: Potentially so, or certainly thought to be so by the landlord.

GAUDRON J: Is that a convenient time, Mr Castan?

MR CASTAN: Yes, if your Honours please.

GAUDRON J: The Court will adjourn until 2.15.

AT 12.48 PM LUNCHEON ADJOURNMENT

UPON RESUMING AT 2.18PM:

GAUDRON J: Yes, thank you, Mr Castan.

MR CASTAN: If the Court pleases. Your Honours, I believe that copies have been made of the order that was made by his Honour Justice Hayne that was a request, I think, from the Court that that might be obtained and we would seek to make available copies of that order which, I think, is in the form that ‑ ‑ ‑

KIRBY J: I have not heard a word you have said since 2.15 pm, Mr Castans.

MR CASTAN: I am sorry, your Honour.

KIRBY J: I have not heard you. There is a very dead area in this Court and I would hate to miss a single word.

MR CASTAN: What I said, your Honour, was that we have had copies made of the order of his Honour Justice Hayne.

KIRBY J: Thank you.

MR CASTAN: Which we make available to the Court. There are a couple of other matters that emerged this morning, or questions, that I did not respond to fully that I would simply seek to take up. The first was that there was a question as to the status of a summary of the Bank’s evidence – a document that appears at page 180 of the appeal book – and I was asked what status it has. Its status is that it was accepted in evidence before his Honour Justice Harper on appeal from the arbitrator and when tendered in evidence - there was no transcript before the arbitrator and, so, that was made available to his Honour Justice Harper on the appeal from the arbitrator as a summary of evidence. It was not objected to by the Bank in terms of its reception as a document though it does not necessarily mean that it was necessarily acceded to as necessarily accurate in every respect in terms of the evidence but it was certainly not the subject of any objection as a means of conveying to his Honour Justice Harper, on appeal, some portion, at least, of the evidence that had been before the arbitrator.

In response to one of the questions put by your Honour Justice McHugh this morning about the defence that is available to a tenant who might say to his landlord that the landlord is not entitled, given that there has been an assignment of the reversion to a mortgagee, I failed to respond to that by pointing out to your Honour that, of course, that kind of defence could not be raised if the tenant had not had notice either of the mortgage, and did not know of it or, alternatively, did not know of the default so as to raise the bar to the capacity of the landlord to bring suit. So, by definition ‑ ‑ ‑

McHUGH J: Not necessarily; by the time action is commenced the tenant may be aware that there has been an anterior assignment.

MR CASTAN: Yes, but all I was seeking to say was that he has to know about it.

McHUGH J: Yes, that will do.

MR CASTAN: And if he does not know of it, whether by formal notice or otherwise, the defence does not arise – cannot be raised.

In terms of the general common law position that emerges on this relationship that prevails in terms of the relationship between tenant, landlord and mortgagee, may I take your Honours to just two of the passages in Halsbury’s Laws of England (4th ed), which I think form part of the material annexed to the submissions. In particular, under mortgages, at paragraph 617, volume 32 of Halsbury. I am sorry, I meant to take your Honours to paragraph 608 and then to 617. In paragraph 608 the way the matter is expressed is:

Prior to demand for possession, no occupation rent may be charged against the mortgagor for that part of the mortgaged land which is in his occupation, nor may the mortgagee claim back rents or profits accrued due and received before his demand for possession. Back rents received by a sequestrator are in the custody of the law, and can be recovered from him by a mortgagee. Rents received by a receiver do not belong to a mortgagee unless they were originally received on his behalf; the mortgagee’s remedy is to move to discharge the receiver and enter into possession.

Then it goes on to deal with misappropriation.

And then, at paragraph 617, dealing with the mortgagor in possession, it is expressed in this way:

So long as the mortgagee allows the mortgagor to remain in possession, that is so long as the mortgagee does not give notice to the lessee to pay the rent to him, the mortgagor continues to be entitled to receive the rent, and he is also entitled to enforce and take advantage of the lessee’s covenants, and, in the absence of any special agreement, damages recovered belong to the mortgagor. Thus as the mortgagor, while he remains in possession, is entitled to the income of the land leased, he can enforce the covenants either by action or re-entry. These rights of the mortgagor exist, however, by tacit agreement with the mortgagee, and the mortgagee can terminate this agreement when he pleases and the appointment of a receiver by the mortgagee will have this effect. On the mortgagee terminating the agreement by giving notice to the lessee to pay the rent to him, the mortgagee becomes entitled to all the rents accrued due since the execution of the mortgage and remaining unpaid, and the claim of the mortgagee will prevail over the claim of persons to whom the rents have been assigned by the mortgagor.

Now, those principles are the principles that we rely on.

GUMMOW J: Well, one of the authorities referred to as Moss Gilmore, which was referred to at page 82 of the record by the arbitrator, that extract you read us from Lord Mansfield, it is relied on in Halsbury for some of these propositions.

MR CASTAN: Yes, it is, and some of the other, Noyes v Pollock, I was going to take your Honours briefly to Noyes v Pollock, which is one of the principal authorities relied on.

McHUGH J: Moss v Gallimore is authority for the proposition that upon matters of assignment, the assignee becomes entitled to all rent which accrues after the notice, and all rent that is owing as at that date as well.

MR CASTAN: Yes, your Honour, that is the basis of the propositions that we were putting as the underlying principles which govern the resolution of this case, and it is because of those principles that we have ‑ ‑ ‑

McHUGH J: Mr Castan, if the true issue is whether or not any rent was owing as at the date of the notice would there be anything to stop you from relying on the High Trees principle, for example? As between you and the landlord it seems rather difficult to see how your landlord could enforce the rent against you for a variety of reasons, one of them being High Trees.

MR CASTAN: As against the landlord?

McHUGH J: And the deed.

MR CASTAN: As against the landlord we have a contractual relationship and we do not have to go to that. But, undoubtedly, that would also apply but we have a contractual relationship.

McHUGH J: You have got a deed. You have got the deed.

MR CASTAN: We have a deed, more than a contractual relationship. We have a deed. And what we have – what is termed, the kind of title we have, as a tenant, is what is termed the precarious title. That terminology comes from Corbett v Plowden (1884) 25 Ch D 678, one of the cases that we have referred in our written submissions, and similar principles to those which are summarised in the Halsbury passages to which I have taken the Court appear towards the foot of page 681 in the speech of the Earl of Selborne, Lord Chancellor, about three-quarter way down the page at page 681 his Lordship says:

The only question is, whether the tenancy was well determined by Mr Plowden, and that depends upon well understood principles of law. If a mortgagor left in possession grants a lease without the concurrence of the mortgagees (and for this purpose it makes no difference whether it is an equitable lease by an agreement under which possession is taken, or a legal lease by actual demise) the lessee has a precarious title, inasmuch as, although the lease is good as between himself and the mortgagor who granted it, the paramount title of the mortgagees may be asserted against both of them. The question is, whether in this case it was asserted.

They go on to discuss that issue which does not concern us for present purposes.

I wanted to take your Honours briefly to Noyes v Pollock (1881) 32 Ch 51. Noyes v Pollock was adverted to and relied on significantly both by his Honour Justice Harper below and then by his Honour Justice Brooking in the judgment of the Court of Appeal. The passages to which I would seek to draw your Honours’ attention commence at page 61 in the judgment of his Lordship Lord Justice Cotton. Towards the top of page 61 his Lordship says:

There is no difficulty in ascertaining whether there has been actual taking possession of an estate by the mortgages; but there has been a great deal of argument here as to whether what took place in the present case did not amount to an entering into a receipt of the rents and profits by the mortgagees. I think a consideration of what is the consequence of holding that the mortgagee is in receipt of the rents and profits, will throw light upon what is meant by such receipt. If the mortgagee is in receipt of the rents and profits the account is taken against him as if he were in possession, and he is answerable not only for what the tenants pay, but for not letting the property if he could have done so, and for not getting the full rents from the tenants if they could have paid them; and he is looked upon as if he had taken upon himself the control and management of the estate as between those in actual occupation and the mortgagor, so as to put an end to any right which the mortgagor has of dealing with the estate in the way of management, including letting and making allowances to tenants, and getting the best rent from them he can.

Now, that passage, in our respectful submission, again neatly summarises what is the common law position and the position that prevails under the relevant statutory provisions with which the Court is concerned.

GUMMOW J: If you could just go back to Corbett v Plowden for a minute at 681. I thought the lease in this case preceded the execution of the registered mortgage.

MR CASTAN: It did.

GUMMOW J: Well, it is not the same situation as Lord Selborne’s.

MR CASTAN: I know. The precariousness arises here, not by reason of the grant of the lease. The equivalent precariousness, if I can coin that term, arises by reason of the default. What occurred, of course, is a lease, a mortgage, a default, a variation, and it is that which creates the precarious nature. Because as from default, by reason of section 81 and the operation of the principles that we have been expounding and debating here, there is the capacity for the mortgagee.

GUMMOW J: To eject you.

MR CASTAN: Well, to step in. Not to eject, but to take possession of rents and profits. To eject the mortgagor, not to eject the tenant.

GUMMOW J: Yes, to eject the mortgagor.

MR CASTAN: To take possession of the rents and profits, and in relation to the variation of what has occurred here is that that is subsequent to the breach and so eject in the sense of renounce - the equivalent of eject in the case of a subsequent lease, would be renounce the variation.

GUMMOW J: Why would you have a right to possession which was stronger than the right of the mortgagee to recover possession?

MR CASTAN: If there had been no variation, we would. What the mortgagee has is a right to possession of rents and profits if there be a subsisting lease, leaving aside the variation for the moment. If there be a subsisting lease the mortgagee’s rights, once there is a breach on the part of the mortgagor, is possession of the rents and profits. The lessee is not deprived of his tenancy. In the case of the subsequent variation, of course, after a breach by the mortgagor under his mortgage then, of course, we are in a precarious position in relation to that variation and, thus, as we concede his Honour Justice Hayne held, the lease subsists as against the mortgagee, the variation does not. But our rights under the variation remain until avoided. We have a precarious, so to speak, set of entitlements. They exist in contract as against the mortgagor but the moment that the mortgagee steps in and takes possession of rents and profits, we cannot ‑ ‑ ‑

GUMMOW J: I know you keep saying takes possession of rents and profits, but assume the mortgagor exercises the power of sale?

MR CASTAN: Equally so. The moment he exercises the power of sale ‑ ‑ ‑

GUMMOW J: Which is what happened here.

MR CASTAN: Yes, and a new reversioner becomes entitled to rents and profits, and as his Honour Justice Hayne has held, in substance, in accordance with the lease as originally – but the period after is of no significance in this case. Post 14 February 1994 situation is irrelevant.

CALLINAN J: Mr Castan, I wonder if I can just mention a totally unrelated matter? I only adverted to it at lunch time, I am sorry. I have a superannuation fund in which there are some Commonwealth Bank shares and it only just occurred to me that the Commonwealth Bank has an interest in this matter, of course, is really the party. I mention that for the information of both parties.

MR CASTAN: If your Honour pleases. The other authority to which I would seek to briefly take the Court, a more modern case expounding the similar principles to the 19th century cases, which is Rhodes v Allied Dunbar Pension Services (1989) 1 All ER 1161 and in particular to passages at pages 1166 to 1167. In the Court of Appeal, in dealing with the question under a mortgage and a breach, at the very foot of page 1166 in the last two lines the court says this:

However, a mortgagee may permit the mortgagor to remain in possession.

This is following a breach.

If he does so, even though the mortgagor remains in possession only by leave and licence of the mortgagee, the mortgagor remains entitled to receive and retain the income of the mortgaged property without any liability to account at law or in equity. That means, where the mortgaged property is leasehold and subject to underleases, that so long as he is so entitled to the income of the mortgaged property, the mortgagor may recover the rent payable by the undertenants despite the existence of the mortgagee’s reversionary interest –

and he refers to various provisions of the Law of Property Act and goes on:

In the present case, the bank never went into possession of the property and thus, in accordance with these established principles, the company remained entitled to receive the rents from the undertenants notwithstanding the charge by way of legal mortgage.

And that is, again, a simple restatement of the similar principles. I am reminded that I did not complete my references to Noyes v Pollock, perhaps inadvertently addressing another issue, and I would ask your Honours just to go back to Noyes v Pollock. There is another passage I wish to draw your Honours’ attention to at page 64. That is (1881) 32 Ch D 53 and in particular at page 64 of the report, about eight lines down in the long paragraph on page 64 Lord Justice Bowen says:

When the estate is in hand, so to speak, and the mortgagor has been left in occupation of the estate by the mortgagee, the mortgagor is either tenant at will or tenant by sufferance to the mortgagee, and any act which puts an end constructively or by express agreement between the parties, to the tenancy at will or by sufferance, whichever it is, determines the occupation of the mortgagor and leaves the occupation in the hands of the mortgagee. But in the case where an estate is let to tenants, of course the mortgagee does not enter upon actual occupation of the demised premises. He may fall under the principle as a person who enters and takes possession of the rents and profits; but only, as it seems to me, if he does something which goes beyond the mere receipt of sums of money to which the rents and profits may amount, and reaches a point at which he displaces, for the purpose of realizing the security, the mortgagor from the control and dominion of the reversion of the estate which is demised. Unless the dominion and control is taken in that sense, the mere receipt of the produce of the management may be taken by the mortgagee, and yet he may stop short of taking the management itself. He may take the rents; that is not enough unless he takes the rent in such a way as to take upon himself, and out of the hands of the mortgagor, the business and the duty of collecting and being diligent in that respect.

And that again emphasises the principle to which we referred and upon which we rely.

McHUGH J: The legal analysis must be this, must it not, if there is a tenant at will or a tenant by sufferance, it has to be a concurrent lease?

MR CASTAN: Yes, or a lease of the reversion.

McHUGH J: Yes, and it is the concurrent lessee who is entitled to the rents from the primary lease. So, unless the mortgagee goes into possession, there is interpose, in terms of his rights, the concurrent lease and the entitlement to the ‑ ‑ ‑

MR CASTAN: Precisely, and going into possession in the case of a property previously let involves going to possession, as I have said, of rents and profits.

McHUGH J: Yes. The legal theory seems to be that the mortgagor must be a concurrent lessee.

MR CASTAN: Concurrent lessee and is a lessee of the reversion, the tenant’s interest continuing all the while, assuming it is otherwise persisting and particularly in the case of a pre-existing lease.

McHUGH J: So, on that basis the concurrent lessee is entitled to the rents and profits, at least concurrent lease and sufferance is put to an end.

MR CASTAN: Precisely.

McHUGH J: Therefore, he must be able to come to some arrangement with the tenant in possession as to how that rent is discharged, whether by payment, by compromise or otherwise.

MR CASTAN: That is precisely the way in which we say the principles work and that is the way in which your Honour Justice Harper analysed the matter below, and that appears from pages 257 to 258. Your Honour will see that analysis applied.

At 257 his Honour has just completed an analysis of some lengthy passages from Noyes v Pollock including some of the passages that I have just taken your Honours to, which commenced at page 255. After completing those references to Noyes v Pollock at page 257, his Honour said:

I have quoted at length from these judgments because they make a point which has, in the history of the litigation arising out of Lamina’s mortgage to the bank, been somewhat overlooked. Indeed, the point has almost disappeared under the flood of words devoted to the proposition that the deed of variation made between Lamina and the respondent in February 1991 did not bind the bank as mortgagee. That proposition is correct. It is also true, however, that the power to manage a property carried with it (to adapt the words of Cotton, L.J.) the power to “make allowances to tenants”. This is the power, very important when one is dealing with a large manorial estate of many tenant farmers (or when one is dealing with a large city building), which Lamina properly exercised in making its agreement with the respondent to accept rent of $1 per month in consideration of the respondent not remaining in actual occupation of shops G19 and G20. It is not a power derived from Lamina’s position as a tenant of the bank pursuant to s.81 of the Transfer of Land Act; –

that is the current tenancy that your Honour was just positing to me –

for, after default, that tenancy came to an end. I have already noted that, at the same time, Lamina lost any title or interest in the land sufficient to vary covenants touching and concerning the land. Lamina’s power, therefore, had as its only source the fact that, after default, the bank allowed it to remain in possession of the rent payable by the tenants of 167-171 Collins Street, Melbourne. In other words, the bank was content to allow Lamina to exercise the powers of management to which the respondent, as tenant, was subject. Although it had the right to do so, the bank neither gave any notice, nor otherwise took any step, directed to assuming for itself, and thus relieving Lamina of, those powers.

The power to manage is of course a strictly limited power. It is neither necessary nor appropriate that, in this judgment, I should seek to define those limits. It is sufficient to say that they extended to making the arrangements upon which the present respondent thereafter relied; that is the arrangements which were incorporated into the deed of variation. Those arrangements thereafter (until 14 February 1994) governed the relationship between Lamina and the respondent, not because the variation itself bound the bank, but because the variation bound the parties to it and because (while Lamina remained possessed of the rents and the bank did not) Lamina was entitled to manage the property by giving a good discharge for rent paid pursuant to the terms of the deed of variation.

McHUGH J: I know this term “powers of management” and so on is to be found in a number of the cases, but I am not sure that it really explains the true principle. I mean, if Lamina is the concurrent lessee, then it is entitled to the rent. His Honour talks as if it is an agent managing.

GAUDRON J: It looks like an ostensible authority-type situation.

McHUGH J: Yes, but I do not ‑ ‑ ‑

GAUDRON J: And, perhaps, an estoppel.

MR CASTAN: Yes, because it is a tenancy at sufferance only in so far as its concurrent tenancy. It is transposed from a tenancy at will to a tenancy at sufferance after default, if it is permitted to remain in possession of rents and profits. The tangle arises because it has ‑ ‑ ‑

GUMMOW J: The tangle arises partly from not differentiating the lease as a proprietary matter and the lease as containing convenants to pay. The question is who has a covenant to pay and who can sue on it?

MR CASTAN: Yes.

GUMMOW J: It is not a question of who is entitled to be in possession or not to be in possession. They are interesting questions. But the question immediately is, who could sue for what, when?

MR CASTAN: But with respect, your Honour, the Bank has a choice. The Bank can choose to go into ‑ ‑ ‑

GUMMOW J: I understand that, yes, of course.

MR CASTAN: And the Bank can choose ‑ ‑ ‑

GUMMOW J: That is beside the point. There was never a covenant to pay the Bank, was there?

MR CASTAN: No, there is no covenant to pay the Bank and there is no attempt to – and ultimately as his Honour has held below, his Honour Justice Hayne in the ‑ ‑ ‑

GUMMOW J: Now, the Bank could only claim the rent in so far as it had the benefit of these doctrines about the covenant running with the reversion.

MR CASTAN: Yes, your Honour.

GUMMOW J: That is right. Why do we get enmeshed in all these other things?

McHUGH J: And if there was no rent running because the rent was paid, or otherwise discharged – see, the difficulty in the respondent’s ‑ ‑ ‑

MR CASTAN: With respect, yes, but what has been said against us is well, no, they, in effect, did not have the capacity to accept the discharge.

McHUGH J: I know. But the other side of that coin is this, that immediately before notice was given, the respondent could not sue for the rent. By virtue of the deed Lamina could not sue for the rent. And yet it is said that once notice is given, the Bank then gets the right to sue for the rent which neither it nor Lamina had immediately beforehand.

GAUDRON J: Is there not statutory provision in that regard, that the mortgagor cannot sue without the permission of the mortgagee?

MR CASTAN: That is so, the mortgagor cannot sue.

GUMMOW J: Yes, but the question is for how much.

MR CASTAN: It does come down to a question of – one can characterise it as management or the capacity to deal with the tenants. One has to give it some title or characterisation or label because there has to be somebody who is actually in effect dealing with the land.

GUMMOW J: But I thought you had agreed with Justice McHugh that your complaint was that what was being put on your clients was an obligation to pay to this third party a sum which it would never have been liable to its lessor because of the variation. You ask: how does that come about?

MR CASTAN: We do ask that and we say that it cannot come about, there cannot be any liability to pay. Then in return it is put that that variation does not bind the mortgagee. Our answer to that is: so be it. We do not have to pay the mortgagee. We do not have an obligation to pay. Once they go into possession though, the situation changes. There is a point at which the mortgagee can exercise the right to go into possession of rents and profits. If it does so, the tenant is obliged to pay to the mortgagee. We concede that at that point the tenant becomes obliged to pay the mortgagee. Because the mortgagee has gone into possession of rents and profits, there is no reversion.

GUMMOW J: Yes, but to pay how much?

MR CASTAN: In our respectful submission, the answer to that must lie in the capacity of the mortgagor, the property owner, to give a good discharge if there is payment in consideration. If there has been full payment of rent up to that point or discharge of rent up to that point, then, whatever else one has to pay, one does not have to pay back rent that one has already paid in substance. You do not have to pay twice, to put it in summary terms, and pay twice whether paid in terms of cash or otherwise set off or compromised or otherwise negotiated for full consideration. That, in our respectful submission, is the proper analysis.

Can I take your Honours to a passage in which his Honour Justice Brooking deals with a similar question arising from Noyes v Pollock and which we would respectfully submit is too narrow an approach and is in error.

In dealing with the passage to which I have just taken your Honours, in the judgment of Justice Harper, at page 292, his Honour Justice Brooking, with whom the other of their Honours agreed, said, at line 3:

In the present case the primary judge relied especially on what Cotton, L.J. said at 61 about the mortgagee’s taking upon himself the control and management of the estate “so as to put an end to any right which the mortgagor has of dealing with the estate in the way of management, including letting and making allowances to tenants and getting the best rent from them he can”. His Honour referred in particular to the phrase “making allowances to tenants” and held that the making of the deed of variation should be viewed as an example of the making of allowances to tenants. I am strongly disposed to think that the phrase used by Cotton, L.J. was intended to refer to allowances to be made by custom to the tenants of agricultural holdings in respect of such matters as tillage or straw and manure. See, for example, Oxenham v Ellis (1854) 18 Beav.5943; 52 E.R. 233; Alloway v Steere (1882) 10 Q.B.D. 22. Counsel were unable to suggest anything else that Cotton. L.J. might have had in mind.

In our respectful submission, that is much too narrow a perspective to put as a way of analysis of the most basic principles that, in a practical way, have to operate so as to enable the management of tenancies to continue. We are talking about, in this particular case, a period of three years. One can posit any number of instances where there might be a variety of circumstances where it would be necessary for all sorts of allowances to be made in all sorts of different circumstances, where that notion of management, that is discussed by his Honour Justice Harper below, would need to be applied.

Can I take your Honours now, briefly, on the question of discharge, to some matters which are summarised in our written submissions at page 12, paragraph 21, and your Honours will see a reference at page 12, towards the foot of the page to the case of Musumeci v Winadell Pty Ltd (1994) 34 NSWLR 723. The case is a useful one by way of analogy, dealing with the question of consideration. The case involves a modern-day large shopping centre, and the question that was there considered by his Honour Justice Santow in the Equity Division of the Supreme Court of New South Wales was the question that from time to time arises as to acceptance of a lesser sum in exchange for what is, in substance, a greater sum, and whether there is consideration ‑ ‑ ‑

GUMMOW J: But there was a deed here. In your case there was a deed.

MR CASTAN: There was.

GUMMOW J: Foakes v Beer has nothing to do with the price of fish.

CALLINAN J: You had more than a nominal sum; you had the abstention from trading.

MR CASTAN: Undoubtedly that is so. We have sought to, perhaps, go further than we need in establishing that there is full consideration, and perhaps it is not necessary for me to do more than point out that there are analogous cases in which the lesser sum has been – and some interesting discussion of the ancient doctrine of Foakes v Beer, Stilk v Myrick, and the like, those sorts of cases.

GUMMOW J: They are all about simple contracts. You have a deed here.

MR CASTAN: Perhaps it is not necessary for us to ‑ ‑ ‑

GUMMOW J: That is why people used to have deeds so they did not get entangled with all this sort of stuff. That is why conveyances had deeds. You can get entangled with all this sort of learning if you had a deed.

MR CASTAN: We would have hoped that the clarity of that might have been seen earlier than this in the complexity of this litigation, but it still seems to be the contention, as we understand it. We will, perhaps, hear more. There still seems to be the contention that there was not some kind of bona fide consideration. It is worth, also, perhaps, adverting briefly to ‑ ‑ ‑

GUMMOW J: It is not a case of a deed being set aside in a bankruptcy administration, for example.

MR CASTAN: No, there is nothing of that kind. The other case that I was going to briefly mention to your Honours is a case which again is referred to briefly on page 13 of our submission – I will not take your Honours to it in detail, but it is an interesting example of the way in which, in that case, in a non‑property context, a mortgagee who had not given notice to a debtor was held unable to enforce the totality of the debt when it had already been the subject of a discharge by, I think also, as it was put, a bona fide settlement of accounts between a debtor and his creditor. At page 13 we refer in particular to the passage in the judgment of Lord Justice Turner, who asked:

“Is there, then, any distinction between actual payment and a bona fide settlement of accounts…..I see no substantial ground of distinction between actual payment and a release to the debtor founded upon a fair and bona fide arrangement.”

Your Honours, I have already adverted to what we say is the response to the question of estoppel which is raised in relation to the judgment of his Honour Justice Hayne, and taking your Honour to those passages. Can I briefly deal with the question of the appointment of a receiver which covers a period of some seven or eight months from July 1993 until February 1994. That is adverted to by his Honour Justice Brooking in the Court of Appeal below, although the matter was not decided upon that basis, and in the notice of contention our learned friends seek to say that at the very least they are entitled to recover the full rent at the $5,000 a month rate from the time of the appointment of the receiver. In our respectful submission, that misconceives ‑ ‑ ‑

GAUDRON J: The deed pursuant to which the receiver was appointed is not in evidence.

CALLINAN J: It was the mortgage.

GAUDRON J: It was the mortgage, that is right, but it is not in evidence.

MR CASTAN: It is not in evidence.

GAUDRON J: We do not know that it is the mortgage. I mean, you tell me, but as a matter of evidence, we do not know, do we?

MR CASTAN: I think there was an agreed statement of facts that would conclude – I do not think the fact that the receiver was appointed pursuant to the mortgage is contested, although the precise terms of the clause were not before the court.

GUMMOW J: Nor the deed of appointment. We do not have that either, do we?

MR CASTAN: The deed of appointment? I think not. Nothing was raised on that. All that was sought to say was that – and I should mention in relation to this matter, your Honour - this is a notice of contention that has been raised – it has not been, as we understand it, contended at any point below that there is this separate eight month period in respect of which there is an entitlement to recover rent at $5,000‑odd a month if ‑ ‑ ‑

GAUDRON J: If there is, the onus is on Mr Myers’ client, is it not, to prove the facts? That is why I asked about the deed.

CALLINAN J: I cannot see a reference to it in the statement of facts that was agreed before the arbitrator, Mr Castan - that is, anything about the appointment of a receiver pursuant to the mortgage. I am looking at pages 61 to 63 which I think was the agreed statement of facts, is that right?

MR CASTAN: I am reminded that it is at page 110 also, your Honour. Yes, it is set out at page 111.

CALLINAN J: Yes.

MR CASTAN: There are two paragraphs that are relevant as agreed statements of fact. That is paragraph 17 at the foot of page 113:

On 13 July 1993 the Bank appointed Christopher Thomas Daly receiver of the income of the property.
18.On or about 16 July 1993 Christopher Thomas Daly engaged Baillieu Knight Frank as managing agents for the property and receipt of rent from tenants.

It is not contested that the amounts of $1 continued to be paid per month to Baillieu Knight Frank - that was found as a fact by the arbitrator - acting on behalf of that receiver up till 14 February 1994.

CALLINAN J: But that is not an answer to her Honour’s question whether there is evidence that there was an appointment pursuant to the mortgage, is it?

MR CASTAN: No.

CALLINAN J: There may have been a charge, for example, that crystallised. There may have been a ‑ ‑ ‑

MR CASTAN: Yes, there is no evidence of ‑ ‑ ‑

CALLINAN J: Because the mortgagor was a company and a charge over the stock, perhaps, as well as over the interest as lessee.

MR CASTAN: It is my learned friend’s contentions. I sought to save some time by dealing with it in advance but I am content to respond to it, assuming I would be able to reserve the right ‑ ‑ ‑

GAUDRON J: Yes, I think that might be more satisfactory. Yes, your right to reply will be reserved.

MR CASTAN: Would your Honours excuse me for a moment? If your Honours please. That is the submissions for the appellant

GAUDRON J: Yes, thank you, Mr Castan. Yes, Mr Myers.

MR MYERS: Thank you, your Honour. When Mr Castan began his submissions he said that – what I will describe as a crib sheet of the references to the statutory provisions and their origins would be handed up. It was handed as far as your Honours’ associates and was not handed any further. Could I invite the next step to be taken?

GAUDRON J: We have got that.

MR MYERS: You have got it, have you?

GUMMOW J: Yes.

MR MYERS: I beg your pardon. I thought it did not go all the way.

GUMMOW J: You would like to borrow mine?

MR MYERS: No, I have got one, thank you, your Honour. It is very courteous of you. Crucial to this appeal are the provisions of section 81 of the Transfer of Land Act and I should like to begin by just directing attention to them again. One is concerned with subparagraph (1) and subparagraph (3). Subparagraph (1) provides:

In addition to and concurrently with any rights and powers aforesaid a first mortgagee –

and we have a first mortgage, that is not in doubt –

shall, until a discharge from the whole of the money secured or a transfer upon a sale or an order for foreclosure has been registered, have the same rights and remedies at law and in equity as he would have had if the legal estate in the mortgaged land had been vested in him as mortgagee –

Now, simply stopping there, that provision which is found only in the Victorian legislation and in section 116 of the Western Australian legislation ‑ ‑ ‑

GUMMOW J: Does not one begin with section 74?

MR MYERS: One does begin with section 74 but ‑ ‑ ‑

GUMMOW J: Which says that the mortgage shall have effect as a security in interest in land, but not operate as a transfer of the land.

MR MYERS: Yes, but in the case of a first mortgage that is qualified by section 81, so a second mortgage, though it is created by registration and, in a sense, is a legal mortgage, does not operate in the same way as the first mortgage. Most of the learning about old title mortgages and, if I may use the expression “old type” - that is the expression Professor Sykes uses in his book rather than common law or anything of that sort – flows from the circumstance that as soon as the mortgage is granted the mortgagee holds the legal estate, whether it be a fee simple estate or some lesser interest. So, it is said that before the ink is dry on the mortgage the mortgagee can take possession. He does not have to wait for default, and some of my learned friend’s answers to your Honour Mr Justice McHugh in that regard were, in our submission, incorrect. There is no question about waiting for default. In the case of an old title mortgage, in virtue of having the legal estate, the mortgagee is entitled at once to possession regardless of default.

Now, further in the case of an old title mortgage, the mortgagee has any of the other rights and remedies which attach to the legal estate. In some cases, by reason of contract, express or implied, as your Honour Justice Gummow has said, the mortgagor has rights which intervene between the mortgagee’s rights and the rights of any third party. So, for example, there might be an express creation of a tenancy by the mortgage, a tenancy back to the mortgagor. The most common case was the implied creation of the tenancy where there was a covenant for quiet enjoyment. If there is a covenant for quiet enjoyment and the mortgage is for a fixed period, there was an implied redemise back to the mortgagor. It had to be for a fixed period because there could not otherwise be a tenancy.

McHUGH J: Mr Myers, in the case of a concurrent lease by deed, if my recollection was right, the concurrent lessee then got all the rights as against the primary lessee, for instance, could give the notice to quit, could sue for breach of the covenant, but what is the position of concurrent leases which are made orally or arising out of these implied demises, as they are talked about?

MR MYERS: If there is in truth a concurrent lease, we accept that the reversioner is the concurrent lessee and not the first mortgagee in the case we are dealing with. It is a question of who has the reversion immediately expectant upon determination of the original lease. You just look and see who would have the possession if the lease, which is the subject of discussion, who would be entitled to possession if that terminated, for any reason, just then and there. In the case of a concurrent lease, it will be the concurrent lessee, the concurrent tenant.

Now, in a passage between your Honour and my friend, Mr Casten, this afternoon, it was suggested to your Honour that a so-called tenant at sufferance is a tenant. A tenant at sufferance is not, and in due course I will take you to some authorities for that. That is elementary because the tenant at sufferance does not have a legal estate of any kind. He does not have a legal estate which is a freehold estate. He does not have a legal estate as a tenant. A tenant at sufferance is just a colourful expression, a simile as, I think, Lord Mansfield describes it.

McHUGH J: I think that was my mistake. I overlooked the fact that there is a distinction between tenants at sufferance and a tenants at will.

MR MYERS: Yes. So in considering the position of a mortgagee and a mortgagor, one looks at who has the legal rights. This is their position as regards third parties. There are some rights that arise in equity, we are not concerned with them in this case, which continue to belong to the mortgagor, notwithstanding that he has passed the legal estate. So the mortgagor could always enforce a restrictive convenant because he was regarded in equity as the owner. But these legal rights that one is concerned with in this appeal, attach to the reversion. They belong to the reversioner from time to time, whoever that may be.

In the case of section 81, we have a position where the first mortgagee is treated as if he is the legal reversioner, and the privity of estate is with him, subject to these concluding words:

with a right in the mortgagor of quiet enjoyment until default –

et cetera. Now, do those words create a statutory redemise until default so that the privity of estate between the tenant and the first mortgagee is broken by reason of a concurrent lease created by the statutory redemise or not? In this case it does not matter because it is undoubted that the fault has occurred before any of the relevant events.

McHUGH J: So the critical question is: what is the state of “the concurrent lessee” after default?

MR MYERS: Yes. After default he no longer has a right of quiet enjoyment. We know that. He no longer has any rights under this statute and we have a position where it is as if the mortgaged land were vested in the first mortgagee as mortgagee. The question that does not arise in this case whether the right in the mortgagor of quiet enjoyment until default constitutes a statutory redemise was raised and left open in Connolly v Ryan (1922) 30 CLR 498. There are some interesting issues because does this statute exactly assimilate the position with the common law where, if the mortgage is not for a fixed term, the right of quiet enjoyment cannot be for a fixed term and hence there could not be an implied lease because it would not be for a fixed term.

If I could just go to Connolly v Ryan. There is no need to trouble your Honours with all of it but there is a bit towards the end. It is pages 506 to 507. This case concerned section 116 of the Western Australian legislation which is the same as 81(1).

During the argument it has been assumed on both sides that the doctrine of Doe d. Parsley v Day is applicable to sec 116 of the Transfer of Land Act 1893. The same assumption was made by the Full Supreme Court of Victoria in the cases of Commercial Bank v Breen and Farrington v Smith in relation to the Victorian section which corresponds with sec 116. According to that doctrine, if there is a covenant for quiet enjoyment until default, that covenant does not operate as a demise of the land to the mortgagor unless some definite, certain date is fixed for payment.

Otherwise you could not have a lease.

Under the common law a demise for years must be for a term certain. The words of sec 116, however, are that the mortgagee shall have the same rights and remedies at law and in equity as he would have had or been entitled to if the legal estate in the land mortgaged had been actually vested in him with a right in the mortgagor of quiet enjoyment until default &c. There is no express reference in sec 116 to a fixed day for payment, or even to demise; the words are simply “with a right in the mortgagor of quiet enjoyment until default” – not “with a covenant on the part of the mortgagee for quiet enjoyment.” The common law Courts in 1842 would not treat a covenant for quiet enjoyment as giving a right to possession unless the words operated as a demise in themselves; a mere covenant or other agreement was ignored for the purposes of an action in ejectment. But now, in all States where the provisions of the English Judicature Act of 1873 have been copied, the rules of equity are to prevail; and equity, in considering the rights of the parties to an agreement, treats the agreement (if capable of specific performance) as having the same force as between the parties as if the agreement had been carried out (see Walsh v Lonsdale and other cases). It may be that the words of sec 116 exclude the doctrine of Doe d. Parsley v Day. But we do not decide the point, as it is unnecessary to do so for the purpose of this case; we assume, in favour of the respondent, that the doctrine applies. The point has not been argued; and as great weight is justly due to the views of the Judges who decided the Victorian cases, it seems better to leave the point open until it has to be decided, while we guard ourselves against the inference that we accept the assumption as valid.

Now, in the present case it does not have to be decided because undoubtedly there was a default and the rights, whatever they be, whether they be of a tenancy character or something less because of this old rule, in the mortgagor, had come to an end and they come to an end under the statute automatically. There is no notice required to be given. The mortgagee does not need to step in. The mortgagee does not need to say or do anything. The next subsection of section 81 to which I draw particular attention is subsection (3):

A mortgagor shall not, either before or after default or breach as aforesaid –

I come back to those words –

commence in his own name any action for or in respect of any cause of action for which a first mortgagee may sue under the foregoing provisions of this section without obtaining the consent in writing of such mortgagee or his agent to such action, which consent may be obtained whether before or after the commencement of the action; and after the giving of such consent such mortgagee shall not be entitled to bring in his name any action -

So that, in the facts that are before the Court, the mortgagor could not sue for the rent whether it be $1 or $5,000. The mortgagor could not sue without getting the consent of the mortgagee. So, what the appellant’s case amounts to, in the end, is that a person who could not sue for the rent without the mortgagee’s consent, can nonetheless compromise the mortgagee’s right to the rent. It was the mortgagee’s right to the rent because the mortgagee is entitled to the reversion. The right to the rent was undoubtedly the right that existed under the lease as not varied because the lease did not affect the mortgagee. That is what Mr Justice Hayne declared.

GUMMOW J: I do not understand that. I do not understand what is being said.

MR MYERS: You will have to help me a bit, your Honour.

GUMMOW J: You say “did not affect” the mortgagee?

MR MYERS: They are the words of the declaration.

GUMMOW J: Yes, I know that but what does it mean?

MR MYERS: What it means is that that lease is not binding upon the mortgagee. It does not alter ‑ ‑ ‑

GUMMOW J: Well, binding in – that it gives the mortgagee right to recover more than…..by the mortgagor on an action to recover the rent?

MR MYERS: Yes, it does.

GUMMOW J: Why is that?

MR MYERS: Because the mortgagee is entitled to the reversion.

GUMMOW J: Yes. Under what - - -

MR MYERS: The rights under the reversion include a lease which provides for a rent of $5,000 per month, and an instrument between third parties which purported, which maybe did reduce that rent to $1 per month, did not affect, did not bind, the mortgagee.

GAUDRON J: It may be that it did not of itself bind, but I am concerned not with any of the kinds of estoppel to which reference was made in the course of argument, but an estoppel which equity would recognise which would make it unconscionable for the mortgagee to take action if it does not give notice of the default. I am wondering if that is not the principle that underlies some of those cases. The mortgagee leaves the mortgagor with ostensible authority, takes not action to give notice, and is it not then unconscionable for it to seek to go behind what is done by the mortgagor.

MR MYERS: Your Honour, no such case has ever been put.

GAUDRON J: I am wondering if that is not the principle behind the various decisions under what we might call the old law. The rationale is not well exposed to the decisions to which we have been taken to. If that is the rationale, and it is now exposed, it may be that it works against you, whether or not that was the way in which the case was put before.

MR MYERS: In my submission, the principles that underlie the cases to which I will take your Honours, and to which my friend has taken your Honours, are very clear. They proceed from the starting point that the mortgage, an old title, legal mortgage, is an assignment of the reversion. There is no equity involved, there is no principles of unconscionability; those principles are not mentioned ‑ ‑ ‑

GAUDRON J: They are not exposed either in relation to the doctrine of ostensible authority, but they may well be what explains that doctrine.

MR MYERS: I will deal with the question of authority in due course. But it would be remarkable, in my submission, if one assumed that a person who cannot sue for the rent has authority to compromise the amount for which he cannot sue.

GAUDRON J: Ostensible.

MR MYERS: Well, it may be, but that really gets back to the question of whether there has been reliance upon the authority and there is no evidence, it has not been contended.

GAUDRON J: I doubt an occupation. We do not have to look very far for reliance.

MR MYERS: With respect, no. One might assume that by looking at the document, but it has been the subject of evidence. These estoppel arguments were put before the learned arbitrator, and he rejected them all. He did not accept the suggestions that were advanced on behalf of the tenant, that the tenant in some way or another had been unfairly prejudiced, and they have not surfaced since.

McHUGH J: But quite independently of the - in the equitable doctrine, there was a common law rule that so long as the mortgagee allowed the mortgagor to remain in possession, the mortgagor was entitled to continue to receive the rents. Why does that rule not still apply in a section 81 situation?

MR MYERS: It does, your Honour.

McHUGH J: It does. But even after default?

MR MYERS: If the mortgagor is allowed to remain in possession, and the mortgagor receives the rents, the mortgagor is entitled to do with the rents what he will, we have to accept that.

GAUDRON J: And what is the basis of that?

McHUGH J: And you accept that, but once you accept that is that the end of your case?

McHUGH J: Because the rent has been received as being paid. There is no rent owing, and so there are no arrears of rent as at the time you give your notice.

MR MYERS: It depends what the rent is, your Honour, and the rent is what is payable under the lease. The variation does not bind the mortgagee. That has been decided, and, with respect, correctly decided.

GUMMOW J: Why do you say it does not bind the mortgagee? Because, you say, there was a default in December, and the deed of variation was in February.

MR MYERS: That is right. But, in the end, I say it because Mr Justice Hayne so decided.

GUMMOW J: Yes, quite, but that does not bind us.

MR MYERS: But it binds the parties before the Court.

GUMMOW J: Yes. I am talking about propositions of law. Why is this so?

MR MYERS: Because the ‑ ‑ ‑

GUMMOW J: Why does the process of the default change everything?

MR MYERS: Because as soon as the default occurs ‑ ‑ ‑

GUMMOW J: Why does that destroy the covenant, to put it in practical terms? Why does it destroy the covenant in the hands of the mortgagor and translate it into something in the hands of the mortgagee that only the mortgagee can sue on?

MR MYERS: Because upon default, whatever may have been the position before, the reversioner, the person entitled to the benefit of the covenant is the mortgagee. It is the mortgagee who has the ‑ ‑ ‑

GUMMOW J: No, the person entitled to the benefit of the covenant is the covenantee and only becomes – you do not seem to get to section 151, that is what mystifies we a little bit.

MR MYERS: But the effect of the mortgage has been an assignment of the reversion.

GUMMOW J: Yes.

MR MYERS: The mortgagor has assigned the reversion and the reversion carries the benefit of the covenants. That is the point of it being a legal mortgage.

GUMMOW J: Mr Myer, I must say that I think from what you have just said in the last few minutes that your case really comes down to this that there had to be a payment in effect in cash or its equivalent.

MR MYERS: There had to be a payment of the rent, whatever that means.

GUMMOW J: Well, yes, I know. Well, you seem to accept that if the rent had been paid in Australian dollars that would have just been a discharge of the rent. Why could not the mortgagor have taken payment in tomtits, to use Sir George Jessel’s expression? Why would not that have been acceptable as payment of rent and if that would be acceptable why was not whatever was given under the deed sufficient to discharge the obligation in respect of the rent?

MR MYERS: In the end the answer is because there is a registered mortgage and the mortgagee has rights and the mortgagor cannot unilaterally vary those rights or give a discharge to any person in respect of those rights except upon performance.

GUMMOW J: But on your hypothesis it is the mortgagor who is entitled to the rents.

MR MYERS: No, your Honour, no.

GUMMOW J: Well, they are entitled to receive them. They are not discharged on behalf of – or do you assert they are discharged ‑ ‑ ‑

MR MYERS: It is the mortgagee who is entitled to the rents but if the mortgagor receives the rents the tenant is discharged, and if the mortgagee receives the rents the mortgagee can do what he will with the rents. That follows from the equitable character of the mortgage.

McHUGH J: Yes, I understand how you put it. It is a very subtle argument depending on form, is it not?

MR MYERS: With respect, your Honour, it is not subtle so much as just straight up and down black letter law of mortgages that has been established for a couple of hundred years.

GAUDRON J: Well, I was just going to ask you about that couple of hundred years. You accepted in answer to Justice McHugh, that if there was payment of money - default, payment of money, no notice, that was good discharge – payment of rent reserved.

MR MYERS: The tenant is discharged.

GAUDRON J: The tenant is discharged. I take it for that proposition you rely on section 151(1) of the Property Law Act?

MR MYERS: Yes, or section 138 or the law which the judges have said for so long they really declare.

GUMMOW J: That is not correct. They did not declare the common law. That is what I was putting to you. They are wrong when they say that.

GAUDRON J: Now, I want to know what was the position before the Statute of Anne in 1705?

MR MYERS: The position before the Statute of Anne would depend upon whether - your Honour is putting to me the case where there is a legal mortgage and there is no redemise to the mortgagor but the mortgagee suffers the mortgagor to remain in receipt of the rents and profits. In that case, if the mortgagor receives those rents the tenant will not be obliged to pay again.

GAUDRON J: Why not?

MR MYERS: Because it would be unfair to the tenant ‑ ‑ ‑

GAUDRON J: Yes, but what is the principle? What is the legal principle that operates?

MR MYERS: The legal principle that operates is that the mortgagor recipient is entitled to the equity of redemption and is not obliged to account ‑ ‑ ‑

GAUDRON J: No, he is not entitled to the equity of redemption, is he?

MR MYERS: The mortgagor is?

GAUDRON J: The mortgagor recipient.

MR MYERS: Is entitled to the equity of redemption.

GAUDRON J: Sorry, yes, entitled to the equity of redemption.

MR MYERS: And is not obliged to account.

GAUDRON J: You say that. We can accept that he is entitled to the equity of redemption, but why is he not obliged to account? What is the legal principle, even if he is entitled to the equity of redemption, which means in that situation he can give a good discharge to the tenant?

MR MYERS: The tenant is discharged. Whether one says that the mortgagor gives a good discharge, the tenant is treated as discharged.

GAUDRON J: Yes, but what principle of law was then operating to bring about that result?

MR MYERS: Because there was a debt owing by the tenant and the ‑ ‑ ‑

GUMMOW J: To whom?

MR MYERS: The person with whom he covenanted.

GAUDRON J: And not to the person entitled to the reversion at that stage?

GUMMOW J: Had to have an attornment. That is what Lord Mansfield says at page 82.

MR MYERS: There had to be an attornment before the Statute of Anne, there is no question of that.

GUMMOW J: That is right.

GAUDRON J: So that before the Statute of Anne the mortgagee had no right to the rent?

MR MYERS: No, the mortgagee ‑ ‑ ‑

GUMMOW J: That is what Lord Mansfield said at page 82 of the record.

MR MYERS: It depends whether there is an attornment or not.

GUMMOW J: Exactly. Big step actually, not one present here. So therefore, you have to rely on the statute, 151, plus 138.

MR MYERS: But the crucial thing is that the right now inheres in the reversion, whatever it was before the Statute of Anne.

GAUDRON J: Section 151 ‑ ‑ ‑

GUMMOW J: It says it is valid without an attornment.

GAUDRON J: - - - does not affect an attornment. Does anything else affect an attornment by the tenant?

MR MYERS: I am sorry, your Honour, I missed what your Honour said.

GAUDRON J: Section 151 of the Property Law Act, although headed Attornment by Tenants, does not affect any attornment. It says it is valid without an attornment.

MR MYERS: Valid without an attornment, yes.

GAUDRON J: That seems to be ‑ ‑ ‑

MR MYERS: That is why I say that ‑ ‑ ‑

GAUDRON J: But it says what is valid, and that is:

(a) the conveyance of a reversion in the land…..

(b) the creation or conveyance of a rentcharge to issue or issuing out of the land –

shall be valid without any attornment of the lessee.

Are there any other statutory provisions which might affect an attornment in the situation with which we are now concerned?

MR MYERS: No, your Honour. What section 151(1) says is that by reason of the conveyance of the reversion, say to the mortgagee, the mortgagee is entitled to the benefit of the covenants of the lease, including the payment of the rent. He can sue, in virtue of that privity of estate.

GUMMOW J: Yes, the theory is that to that extent it runs with the land, I suppose.

MR MYERS: Yes, that is what it is, with respect, your Honour, about.

GUMMOW J: Is one of the cases on the list, Horn v Beard (1912) 3 KB 181?

MR MYERS: I do not think so, your Honour. It is not. I will have to look at that overnight.

GUMMOW J: Because in the second edition of Stuckey’s Conveyancing Act the New South Wales equivalent to section 125 and Stuckey treats this provision as entitling an assignee who gives notice to sue, but after he has given the notice.

MR MYERS: There is no requirement of notice here, undoubtedly, your Honour.

GUMMOW J: No, that is right.

MR MYERS: It has never been so suggested. It is the very assignment of the reversion. It is a question of who is in privity of estate with whom, and the person in privity of estate with the tenant is the person who has the benefit of the covenants. In any event, section 81(3), which I was dealing with, makes it very clear that the mortgagor is not entitled to sue upon any of the covenants without the consent of the mortgagee, in the circumstances that exist in the present case. Before default it would be different. Those words, “either before or after default or breach as aforesaid” would not mean that before default a mortgagor would have to get the mortgagee’s consent to sue on the covenants of the lease because it is not an:

action for or in respect of any cause of action for which a first mortgagee may sue –

assuming the statutory redemise theory of subsection (1).

McHUGH J: Could I just put this to you so I can understand what your argument – I think I understand it – but, is this that, after default and before notice is given, the tenant can discharge his liability by paying rent to the mortgagor. The mortgagor is entitled to keep the rent but that is all. If the rent is not paid as required under the lease, the tenant is liable, and the mortgagor has no right to vary the mortgagee’s rights under the reversion. Is that it?

MR MYERS: He cannot even sue for the rent. It is like the case that your Honour was putting to me of the smart defences in the Magistrates Court, or whatever, under old title mortgages at least, where the consent of the mortgagee had not been obtained. The consent of the mortgagee had to be obtained because he was the person entitled to the rent. He was the person entitled to sue. It could only be sued in his name. Well, this subsection allows a suit by the mortgagor with consent.

McHUGH J: It is probably a bit before your time, but for those that came to the Bar when I did, our first few years at the Bar we lived off the Landlord and Tenant Act and all its variations and concurrent leases.

MR MYERS: Well, that certainly was not so in my time, your Honour, but I have heard of these times. In a sense the beginning and end of the matter is section 81. I will go to some of the cases in due course, but if I can just put some propositions and then say what I have understood Mr Castan’s argument to be today.

In our submission, the starting point for consideration of the matter before the Court is that the deed of variation does not bind the respondent or the Bank. This was decided by Justice Hayne and furthermore, his Honour was undoubtedly correct because it follows inexorably from the terms of section 81. It is not a question of that instrument being voidable as against ‑ ‑ ‑

GUMMOW J: I am sorry to come back to this, you say “bind the Bank”, bind in the sense of does not take away rights it otherwise would have.

MR MYERS: Yes, it does. That is the sense I mean, your Honour. Yes, I am not being exact.

GUMMOW J: And one has to therefore identify those rights it otherwise has.

MR MYERS: Those rights it otherwise has, for present purposes, are the right to be paid the rent at $5,000-odd a month, the right to be paid the outgoings and the right to be paid penalty interest in default of rent.

GUMMOW J: And then we have to find the source of that right in the hands of the purchaser from the Bank.

MR MYERS: The source of that right in the hands of the purchaser from the Bank is the assignment of the reversion by the Bank to that purchaser.

GUMMOW J: And in the hands of the Bank?

MR MYERS: In the hands of the Bank, by reason of the assignment of the reversion constituted by the operation of section 81(1) and the giving of the mortgage.

GUMMOW J: At the time of the mortgage in September 1989?

MR MYERS: Yes.

GUMMOW J: Which was later than the lease?

MR MYERS: Later than the lease. So, the Bank, subject to the statutory redemise issue, the Bank was the reversioner. It was the landlord, to use the word that Mr Castan so often used this morning. The Bank was the person who was entitled to the reversion immediately expectant upon determination of the lease.

GUMMOW J: But why was that?

MR MYERS: Because of section 81(1). Section 81(1) is ‑ ‑ ‑

GUMMOW J: It assimilates it to an old system mortgagee.

MR MYERS: Yes, it does. It has the same rights and remedies at law and in equity as you would have had if the legal estate in the mortgaged land had been vested in him as mortgagee.

GUMMOW J: Now, the old system mortgagee – what would have been the old system mortgagee’s source of its right that you say it would have had?

MR MYERS: The assignment of the reversion.

GUMMOW J: To these rents.

MR MYERS: The assignment of the reversion and by operation of section 151, there is no need for an attornment. We say, therefore, that the rent payable under the lease was the 5,300 and not $1. Who was the landlord? To whom was the rent payable? It was payable to the assignee of the reversion. So the question ‑ ‑ ‑

GUMMOW J: You say, by reason of the chronology, a necessary party to any variation of the lease at any time after September 1989 was your client and it was not there.

MR MYERS: So, the question is, did the landlord, that is, the mortgagee, allow the mortgagor to accept in satisfaction of the obligation owed to the landlord less than the rent due under the lease. The suggestion is that merely by allowing the mortgagor to receive the rent, the landlord was so allowing or authorising.

McHUGH J: Well, subject to what Mr Castan says in reply, I think you have convinced me that your argument is right legally at the moment, anyway, but I think the merits of this case are so much against you that why is not the case for replying grunt or estoppel?

MR MYERS: May I deal with the merits? There are a few levels on which the merits can be dealt with.

GAUDRON J: Well, before you come to the merits do not assume that the rest of us are convinced that you are correct.

MR MYERS: Your Honour, I am assuming nothing. I am just battling along as occasion requires. Dealing with the merits. The first thing about the merits is that we are dealing here with property law and the merits in issues of property law are to be found at the level of the formulation and application of clear rules, not to be mucked up – they are rules that have been around for a couple of hundred years - and the merits are not found at the level of the justice of the individual case. Now, that is a very sort of lofty jurisprudential – well, perhaps it is not but one might think it is of that character. What are the merits in this case? There is a mortgagee who has the benefit of a mortgage and the benefit of the mortgage includes the rights under the lease. If the tenant wants to vary the lease the tenant can go to the mortgagee and say, “Do you agree to a variation of the lease?”

McHUGH J: Well, it may be a case in which you cannot raise these points because of the evidentiary matters but one does get the impression that the Bank knew about this, that a schedule was sent to it, and no doubt hoped that there would be this sale or a development as a casino in which everybody would be much better off.

MR MYERS: Your Honour’s question implicitly appeals to other doctrines of law that were not put in issue in this case.

McHUGH J: Yes.

MR MYERS: This case was argued – one can see how it was argued before Mr Justice Hayne and how the matter was revived again in the Landlord and Tenant or the Fair Rents Tribunal or whatever it is called, the Small Tenancies Tribunal.

McHUGH J: Yes.

MR MYERS: The Commercial Tenancies Arbitration, yes. But, the fact of it is this is a mortgage and it is on the register. The Torrens system is about having notice of mortgages on registers or other interests that are registered and if a person who wants to affect the rights, vary the rights of the person who has a registered interest, has to along and get consent. That did not happen. There is no hardship caused to this tenant.

When you actually go even deeper into the merits of the case - and this really is irrelevant - this is just an attempt at a bit of greenmail against the Bank that did not come off. It is no more than that. The idea was that we are going to say that, “We have got this lease and it is only a dollar a month and it will make your property difficult to sell, if you want to sell it as mortgagee”. That is what the case before Mr Justice Hayne was about, to clear the title, to get rid of the caveat and to get a declaration that if there is a lease it is one that is at a commercial rent.

McHUGH J: Yes, but even if that proposition was accepted, once Justice Hayne made the declaration, the fact is that the Bank is now free‑riding on the terms of the lease. They are after rent that was in arrears, which they were not interested in collecting at any previous stage. The tenants moved out, now the Bank comes in and says, “We want that back rent”.

MR MYERS: The tenant wanted to say, “We are a tenant, but we only have to pay a dollar a month”. The justice? The Bank says, “Either you are not a tenant, or you pay us the rent”.

McHUGH J: That is all right for the future, but what about these arrears, and in your argument, if the mortgagor had received the rent in cash, the Bank could have done nothing about it, but because the mortgagor entered into another arrangement seeking to discharge the tenant’s liability, the Bank says, “We want the money”. It seems like a - - -

MR MYERS: That is true. But the question is, is the Bank entitled to the money? And our submission is that ‑ ‑ ‑

McHUGH J: Well, subject to doctrines of estoppel, having heard the argument for the appellant, and your argument, I think there is a lot to be said for your argument.

MR MYERS: But there is no contention of estoppel being put. It was estoppel put before the arbitrator and it was not accepted.

GAUDRON J: I think what we are talking about is estoppel at a different level. We are talking about a principle of estoppel which, quite independently of section 151, allows a mortgagor to give a good discharge prior to any notice being given by the mortgagee that the rent is to be paid to him or it or her.

MR MYERS: One asks, from what does the estoppel arise. It is really, with respect, your Honour, an argument about authority and the question is whether there is an implied authority given to ‑ ‑ ‑

GAUDRON J: Or ostensible authority.

MR MYERS: Ostensible authority. And the answer must, very clearly, be no. Everyone knows, and has for 200 years, what the position is in law. Section 81(3) makes it even clearer by saying that the mortgagor cannot even sue.

GAUDRON J: It does not say he cannot collect the rents.

McHUGH J: No, and what is more, I do not even think it is a question of authority to receive it, because the mortgagor can keep the money, can spend it. He is under no obligation to account.

GAUDRON J: He could give it back.

MR MYERS: Of course. Your Honour is really asking what is the merit of this rule that we rely upon.

McHUGH J: No, what is its rationale?

MR MYERS: Yes, or the rationale.

McHUGH J: And can one develop it so that it will do justice in the case.

MR MYERS: It was Lord Mansfield, or one of the judges, perhaps Trent v Hunt, one of the early cases, is a good expression of it. That is Trent v Hunt (1853) 9 Ex 14.

GUMMOW J: 156 ER 7.

MR MYERS: I have the Exchequer.

McHUGH J: Well, that does not matter.

MR MYERS: But that probably does not matter, but yes, it has the page references, does it not?

McHUGH J: It is 9 Ex 14.

MR MYERS: This is an interesting case. It is ‑ ‑ ‑

McHUGH J: You are talking about Trent v Hunt or this case?

MR MYERS: Yes, it is a seminal case. I perhaps should not be so enthusiastic, maybe it is not interesting, but it was an important case in its day in 1853. In that case there was a question whether a mortgagor could distrain for rent, and the mortgagor of course could not distrain in his own right because distress is a legal remedy and the legal estate is with the mortgagee. The court said that for the purposes of this action for distress, the mortgagor will be treated as the bailiff of the mortgagee. Your Honour, the presiding Judge, will say, “Ha, ha, this is a case of some sort of authority”. I am looking at the reasons of Baron Alderson and it is on pages 524 to 525.

GAUDRON J: Is it the passage which begins, “The relation of the mortgagee and mortgagor and of persons ‑ ‑ ‑

MR MYERS: Yes, your Honour. I do not want to take too long a run at it.

CALLINAN J: Page 10 of the ‑ ‑ ‑

MR MYERS: Perhaps it is sufficient if I start at the top of page 525:

But, instead of giving notice to the tenant to pay the rent to himself, he permits the mortgagor to go on receiving the rent as before, never interferes with the tenancy at all, but receives the interest upon his mortgage money as on an unsecured debt. It is quite clear that the tenant, under such circumstances, is perfectly secure in paying his rent to the mortgagor. It is also quite clear that the mortgagor, when he receives the rent, does so for his own absolute use, and not for the use of the mortgagee. And the question is, whether, under such circumstances, there is evidence to go to the jury that, in the event of the rent being in arrear, the mortgagor has authority from the mortgagee to make a lawful distress in his (the mortgagee’s) name for the rent due. The circumstances show that the real owner of the rent (the mortgagee) is willing that the mortgagor should receive the rent, and have it for his own absolute use. He also expects, of course, that the interest due to him will be regularly paid; and one most obvious and natural source for the mortgagor to obtain funds to enable him to pay this interest is the rent of the mortgaged property; and we therefore think that it is the reasonable and proper inference to draw from these facts, that the mortgagee gives (in order to the due payment of the interest to himself) authority to the mortgagor, if the rent be not paid, to make a lawful distress to enforce its payment. this would assist in enabling him to pay the interest to the mortgagee. Indeed, we think this is one of the inferences or presumptions which the Judge, in the absence of evidence to the contrary, ought to advise or direct the jury to make –

and so on. So the rationale of it is that the mortgagor is allowed to receive the rent, the better able to pay his interest. It is not in the interests ‑ ‑ ‑

GAUDRON J: In this case you might think the better able to pay the principal. I mean, if you are reasoning by analogy, you could say vacating the premises was so that they would be better able to pay the principal.

MR MYERS: In this case, your Honour, the tenant did not vacate the premises. The tenant vacated the premises in the sense that the tenant continued no longer to carry on business but the tenant expressly retained possession. All that happened is that the tenant retained possession and had to pay only $1 a month. The effect of this deed of variation was not to bring to an end the tenancy, it was to enable it to continue as long as it did before but at the rent of $1. There is nothing in that that is apparently in the interests of the mortgagee. But, in any event, the question your Honour Justice McHugh asked me is, “Well, what is the rationale?”, and, as it appears in the cases, it is to enable the mortgagor the better to pay the interest.

Now, one asks what possible basis is there for saying that the mortgagee, by allowing the tenant to collect the rent, has authorised and given ostensible authority – I said the tenant, I mean the mortgagor to collect the rent - what possible basis is there for saying that the mortgagee has thereby authorised the mortgagor to vary the covenant or to give a discharge when there has not been payment?

McHUGH J: No doubt it would be a new step in legal doctrine but I am not sure it would be a large step, Mr Myers.

MR MYERS: It would certainly be a new step. It would enable the mortgagor while in possession to affect the covenants that exist for the benefit of the mortgagee which belong to the mortgagee as the real owner ‑ ‑ ‑

McHUGH J: No, because the declaration in this case shows that they cannot do it and the mortgagee’s remedy is simply to give notice, and then it is all over. But we are really talking about what happens before the notice is given, rents owing before that point of time.

MR MYERS: Yes. As a matter of legal analysis, it seems that the case the appellant is putting is one of discharge. It cannot be discharged by release because that is inconsistent with Mr Justice Hayne's decision. So, there is a qualification to that that I will come to. It cannot be discharged by performance because ex hypothesi, there is not performance. There is not payment of the rent. It is payable under the lease which the mortgagee is landlord of, or under which the mortgagee is landlord by reason of the assignment.

McHUGH J: But if the mortgagor is entitled to receive the rent, give a discharge and use the rent for its own purposes, is it not but a short step to say that the mortgagor is also entitled to accept some variation of the method of payment, either in time or place or in amount or in manner?

MR MYERS: The mortgagor must have that by the authority of the mortgagee. I will just leave aside ostensible authority for the moment – must have it by the authority of the mortgagee. And where does that authority spring from? The mortgagee has not expressly given it. There is no reason to imply it. To imply it is contrary to all this law. It is contrary, in a sense, to section 151 itself.

McHUGH J: Yes, and I am having trouble with the idea that there is any authority here. It seems to me that it is a rule of law that the common lawyers have imposed on parties in this situation because of the justice of the case and to protect the tenant. If that be its rationale, then why should not a court take this further step and protect the tenant in the situation this appellant finds himself in?

MR MYERS: Because if the tenant has notice of the mortgage, the tenant should not agree to a variation of the lease without the consent of the mortgagee. The tenant has notice of the mortgage in this case. That is the very point about the Torrens legislation, and if the tenant goes ahead ‑ ‑ ‑

GAUDRON J: Are you talking actual notice or constructive notice?

MR MYERS: Notice. It does not matter whether it be actual or constructive.

GAUDRON J: Well, it may.

MR MYERS: But the Torrens legislation operates on the basis that registration is notice to the world and it cannot operate on any other basis.

CALLINAN J: But, Mr Myers, does that mean a tenant has to go and search every week to see if a mortgage has been put on the title if his lease predates the mortgage?

MR MYERS: If the tenant is going to vary the lease without the mortgagee’s consent, yes.

CALLINAN J: And, of course, the mortgagee has really acquiesced – and I do not use that in a technical sense – in the mortgagor’s allowing the premises to be occupied upon a basis over which the mortgagee has no practical control or is not exercising a practical control.

MR MYERS: But, with respect, the mortgagee has not done that. All the mortgagee has done in a case like this is to do nothing. The mortgagee is the registered proprietor of an estate which gives the mortgagee the benefit of the covenants under the lease and the mortgagor and the tenant go and reach a private agreement which purports to take those rights away.

CALLINAN J: It is not a private agreement in this case, is it?

MR MYERS: It is an agreement that does not include the mortgagee. The mortgagee was not a party to the agreement. If, as your Honour was saying this morning, the elementary step of getting consent had been taken, one would not be here. The problem in this case is that the tenant and the mortgagor purported to do things that varied or affected the rights of the mortgagee, having notice of the mortgage, by virtue of it being a registered mortgage – probably actual knowledge, but I do not have to go beyond notice – without the consent of the mortgagee. And there is no hardship involved in requiring tenants to act on the basis of the register. That is what the Torrens system is about.

McHUGH J: Supposing the lease provided that the rent was to be paid on the first day of each month, and the time was of the essence, and the mortgagor allowed the tenant to pay 14 or 15 days later. Would you still say in those circumstances that there had been no proper payment?

MR MYERS: No, there has been a payment. The only question would be whether there is forfeiture, and relief against forfeiture would be available under section 141 of the Property Law Act.

CALLINAN J: Mr Myers, there is really an air unreality about this because the whole arcade, as I understand it, would have been completely vacant. And there is a suggestion, I do not know whether we can look at it or not, in that document that I asked about the status of this morning, that the Bank was well aware of this, and well aware that Lamina was negotiating with the tenants, and that obviously those negotiations had matured into some agreements, otherwise the tenants would not have vacated the premises.

MR MYERS: The tenants vacated the premises because the Shop of Shops was a disaster.

CALLINAN J: That may be true too, but they everybody wanted to retrieve that disaster by redevelopment for a casino.

MR MYERS: Yes, except that, in this case, the tenant wanted to continue for the full term of the lease, but obliged only to pay a dollar a month. And the only thing the tenant was wanting to do, therefore, as far as the mortgagee is concerned, is to prevent the mortgagee exercising its powers, effectively, by burdening the mortgage with this lease for a nominal rental and I said before, it is a case of greenmail gone wrong.

McHUGH J: It did not bind them, and from the moment, on any view, once notice was given then the tenant has to pay the full rent, does it not?

MR MYERS: Yes.

McHUGH J: It is the arrears you are after.

MR MYERS: Of course. We are after the arrears today and the question is whether the arrears were payable. That is the question and they were payable.

McHUGH J: They were payable ‑ ‑ ‑

GAUDRON J: The question is whether there were arrears. That is the first question.

MR MYERS: Well, there were certainly arrears because the lease was unaffected – I use it in a shorthand sense ‑ ‑ ‑

GUMMOW J: The question is whether there is not some wholesome principle that so long as the mortgagor is allowed to remain there and there is no notice, and the rents can be received, there is a tacit permission also for a variation of the lease between the lessor and lessee.

MR MYERS: The wholesome principle is that the mortgagee’s rights are not to be derogated from in any way by the mortgagor. If they are to be derogated from, they are to be derogated from with the mortgagee’s consent. There is no injustice, with respect, at any level, in maintaining this decision. One upholds ‑ ‑ ‑

GUMMOW J: The question is, where it comes down to, whether if they want to vary the lease they have to seek out the mortgagee and seek the mortgagee’s consent or whether the mortgagee has to forestall them by giving notice. That is what it comes down to.

MR MYERS: Well, it has never ‑ ‑ ‑

GUMMOW J: But you say the laws have resolved it by way ‑ ‑ ‑

MR MYERS: Yes, it has, your Honour, and I will look, probably – certainly it is going to be tomorrow now – at some of the cases that – they are not precisely in point but they deal with ‑ ‑ ‑

GUMMOW J: Is there any case on variation? There does not seem to be.

MR MYERS: Yes, there are cases on variation. At least variation that involves payment in advance.

GUMMOW J: I know there are prepayment cases but apart from those?

MR MYERS: Yes – I am not sure, your Honour.

GUMMOW J: I am not sure either but I have not found them.

CALLINAN J: Mr Myers, you are talking about the ‑ ‑ ‑

MR MYERS: Yes, there is a surrender case, your Honour – I am sorry.

CALLINAN J: Your are talking about the merits but the Bank is only looking for the arrears when it has become apparent that the casino project has failed. Is that not right?

MR MYERS: All the Bank is seeking to do, neither more nor less, is to enforce its legal rights.

CALLINAN J: You are putting the tenant in a position of wanting to have its cake and eat it too but the tenant says, “Well, you were happy enough to go along with this when there was the possibility of a casino project” – let me finish – “you did nothing about it and when that failed, I mean, and in respect of that we vacated the premises, we abstained from occupying them, we would have to re-establish a business there”, why is it so unreasonable for the tenant to say at this stage, well, legally it has been held against them but morally, why should they not be entitled to, at least to urge, that it is fair enough that the rent only be $1.

MR MYERS: If your Honour pleases, they are not the facts, and it was not the case that was run. If the tenant had wanted to run a case involving equities and estoppels and the like that your Honour is impliedly suggesting, then it could have done so. The case was run on a very simple basis, and that is the way it has come to the Court.

CALLINAN J: There seems to have been a lot of evidence about these sorts of things before the arbitrator though.

MR MYERS: Yes; that evidence was largely objected to. The arbitrator did not ever rule on the objections but he dismissed the case based upon estoppel, acquiescence and waiver and never went any further. So that the sort of case that your Honour is putting to me, although it was maintained at the first level, has not been maintained since.

CALLINAN J: There was no – well, of course, the appellant won at first instance before the arbitrator, before his Honour at first instance.

MR MYERS: Yes, before Mr Justice Harper. I can only speak in a second‑hand way of those things, because I did not appear either before Mr Justice Harper or before ‑ ‑ ‑

CALLINAN J: Is there provision about contentions and matters of that kind? Are there rules about that in the Victorian Court of Appeal? What I am asking you is did the appellant try to revive ‑ ‑ ‑

MR MYERS: No, the appellant ran the case that the appellant has run here today in substance. I do not discern any material difference between the submissions that were put below and the submissions that are put now.

CALLINAN J: I think you are right. I do not think there is a submission of that kind, certainly in the written outline, anyway.

MR MYERS: In the end, the question is whether there was performance of the covenant, and Mr Castan put it this way before lunch. He said, “My argument is that the rent was paid. The covenant was performed; the rent

was accepted in full discharge”. They were the phrases that he put, but it is palpably not so. Given Justice Hayne’s decision, it cannot be seriously contended that there was performance of the covenant in the lease. So, the question is whether there was authority to give a discharge other than by performance. That could only be by release, and Justice Hayne’s decision cuts off that line of escape, as it were, and then one ‑ ‑ ‑

GAUDRON J: Well, does it, completely? Does it cut off release of the debt due?

MR MYERS: Your Honour is putting it that there is not release by variation of the lease but release on each occasion when the time comes for performance?

GAUDRON J: Yes.

MR MYERS: Yes, well it is certainly a way it can be put. It has not been put that way but if it were put that way my answer is simply that is no authority to release in that way can be implied from the circumstance that the mortgagor is entitled to receive the rent. In fact, there is no case advanced where this sort of thing has happened.

The actual authority that is given, if there be any authority rather than a mere silence which is the true position, is that it is to receive the rent, not not to receive the rent but to receive something else. At most, it is an authority to receive the rent and section 81(3), in our submission, stands four‑square in the way of it. How can it be that a person who cannot even sue for the rent is authorised to give a good discharge for something less than the rent?

Would it be convenient, your Honour, if I dealt with some of the cases tomorrow.

GAUDRON J: Yes, certainly.

MR MYERS: I will perhaps be another half hour or hour.

GAUDRON J: Yes. We will adjourn until 10.15 am tomorrow.

AT 4.15 PM THE MATTER WAS ADJOURNED

UNTIL FRIDAY, 2 OCTOBER 1998

[1998] HCATrans 343

Key Legal Topics

Areas of Law

Civil Procedure

Commercial Law

Legal Concepts

Appeal

Jurisdiction

Res Judicata

Abuse of Process