McDONALD'S Australia Limited v Bendigo and Adelaide Bank Limited and Benalla Retail Investments Pty Ltd
[2014] VSCA 209
•10 September 2014
SUPREME COURT OF VICTORIA
COURT OF APPEAL
S APCI 2013 0193
| McDONALD’S AUSTRALIA LIMITED | Appellant |
| V | |
| BENDIGO AND ADELAIDE BANK LIMITED | First Respondent |
| And | |
| BENALLA RETAIL INVESTMENTS PTY LTD | Second Respondent |
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| JUDGES: | HANSEN and BEACH JJA and GARDE AJA |
| WHERE HELD: | MELBOURNE |
| DATE OF HEARING: | 29 July 2014 |
| DATE OF JUDGMENT: | 10 September 2014 |
| MEDIUM NEUTRAL CITATION: | [2014] VSCA 209 |
| JUDGMENT APPEALED FROM: | [2013] VSC 639 (Judd J) |
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Landlord And Tenant – Agreement for lease with attached draft lease – Tenant to construct works to enable use as a restaurant – Lessor to pay tenant costs of construction – In default of payment right to set off unpaid costs against rent – Works completed and lease entered into – Right of set off not included in lease – Lease required payment of rent without deduction – Whether mortgagee bound by right of set off – Whether covenant ran with the land – Whether right personal to parties.
Lien – Equitable – Agreement for lease – Lessee to carry out construction works – Lessor to reimburse agreed amount – Lessee delayed in seeking payment – Lessor obtained mortgage funding to pay but did not pay – Land sold – Mortgagee in possession – Whether lien to be implied over proceeds of sale in priority to mortgagee.
Right Of Recoupment – Whether applicable to costs incurred by prospective lessee under agreement for lease with right of reimbursement by lessor – Works neither necessary repairs required by landlord nor an amount due by landlord to a third party but paid by tenant at landlord’s request.
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| APPEARANCES: | Counsel | Solicitors |
| For the Appellant | Mr P W Collinson QC with Mr J D S Barber | Norton Rose Fulbright |
| For the First Respondent | Mr R M Garratt QC with Ms A M Folie | Hall & Wilcox |
| For the Second Respondent | No appearance |
HANSEN JA:
This is an appeal from the judgment and orders of a judge in the Commercial Court whereby the proceeding of the appellant, McDonald’s Australia Limited (‘McDonald’s’) against Bendigo & Adelaide Bank Ltd (‘Bendigo’) was dismissed with costs.[1]
[1]McDonald’s Australia Ltd v Bendigo and Adelaide Bank Ltd [2013] VSC 639 (Reasons).
Background facts
In October 2006, a subsidiary (‘the mortgagee’)[2] of Bendigo agreed to lend Bendigo Retail Investments Pty Ltd (‘BRI’) $1,000,000 to finance the purchase of a property at 127-129 Bridge Road, Benalla. The property consisted of Lots 1, 2 and 3 on an unregistered plan of subdivision. On 16 October 2006, the mortgagee advanced $978,000 on the security of a first mortgage of the property.
[2]The subsidiary, Victorian Securities Corporation Ltd, assigned its rights under the mortgage to Bendigo on 30 April 2012, and was not joined in the proceeding.
At this time BRI was negotiating with McDonald’s with a view to a lease of Lot 1. On 14 May 2007, McDonald’s and BRI entered into an Agreement for Lease (to which the proposed lease was attached as a schedule) for the purpose of enabling McDonald’s to develop the site, and use it, as a McDonald’s Family Restaurant.[3]
[3]The Agreement for Lease and the attached draft lease were prepared by McDonald’s.
The Agreement for Lease included provision that BRI pay to McDonald’s its costs of construction of the restaurant and an easement of way. BRI’s obligation did not arise until the later of the date when the lease commenced or 14 days after McDonald’s verified (by the production of invoices and receipts) its construction costs. It further provided that in default of payment of such costs McDonald’s may set off such amounts against rent otherwise payable under the Lease. The lease provided for a term of 15 years with four further terms each of five years.
On 15 May 2007, the mortgagee received from BRI a copy of the Agreement for Lease for its records. The mortgagee was not asked to consent to it.
On 6 August 2007, BRI wrote to the mortgagee confirming that BRI wished to borrow 70 per cent of the valuation of the completed development for three to five years.
On 2 October 2007, the mortgagee offered BRI further finance of $2,069,500 to include an amount of $1,400,000 to ‘reimburse McDonald’s landowners’ contribution for construction costs of new McDonald’s restaurant’. The offer included a special condition that:
[The mortgagee] requires to hold full copies of signed and dated Lease Agreements for the McDonald’s restaurant …, upon completion of construction/refurbishment to [the mortgagee’s] satisfaction.
BRI accepted the offer.
On 14 November 2007, the mortgagee’s solicitors, BJT Legal, received from BRI a copy of the Agreement for Lease and other documents. On 15 November 2007, the solicitors wrote to Shane Lenahan, a manager of lending operations employed by the mortgagee, noting receipt of the documents and asking whether the mortgagee wanted them and requesting confirmation that they ‘meet with your approval’.
On 16 November 2007, Peter Barry, lending manager employed by the mortgagee, emailed the solicitors with a copy to Lenahan, noting that the solicitors had a copy of the Agreement for Lease and the proposed lease ‘and that you will forward us a copy for us to confirm that they are acceptable to the mortgagee’. On the same day, the mortgagee advanced $365,000 to BRI, being part of the second advance. His Honour found that:
Lenehan satisfied himself, at some time before the second advance, that there was an executed Agreement for Lease. He may not have reviewed every clause in the documents, identifying the unusual commercial arrangements under which [McDonald’s] would construct the restaurant and the right of set off. But the terms of the draft lease were important. A condition for the further advance was an executed Lease, not merely an Agreement for Lease. Furthermore, the mortgagee well knew that [McDonald’s] was constructing the restaurant at its cost, and that BRI was obliged to reimburse [McDonald’s] up to $1.4 million.[4]
[4]Reasons [50].
During the second half of 2007, McDonald’s constructed a restaurant and easement of way on Lot 1.
On 12 December 2007, the mortgagee wrote to BRI stating that it was expected that the loan drawdown to fund the construction costs would be required shortly, and that the following was required for loan approval: a letter from the valuer confirming completion of construction and valuation, and ‘Full and signed copies of Lease Agreements for McDonald’s … We have a signed copy of the Agreement to Lease and an unsigned copy of the lease. Please provide a signed copy of the McDonald’s lease …’.
In December 2007, McDonald’s completed construction of the restaurant and easement of way. The cost exceeded $1,400,000. The restaurant opened for trading on 22 December 2007.
On 1 February 2008, the mortgagee advanced to BRI under the security of the mortgage the balance of the second advance to enable BRI to meet its liability to McDonald’s under the Agreement for Lease. Unfortunately, McDonald’s delayed in seeking reimbursement.
The Lease was entered into on 29 February 2008 in the same form and terms as that contained in the schedule to the Agreement for Lease, with the exception only of the insertion of a commencement date of 22 December 2007 and a figure for the annual rent of $169,000.
The Lease provided that rent be paid without deduction. It did not include the right of set off contained in the Agreement for Lease.
BRI did not request the mortgagee to consent to the Lease and the mortgagee never provided a written consent. However, at the trial Bendigo conceded that the mortgagee must be taken to have consented to the Lease because its execution was made a condition of the second advance.
On about 22 April 2008, McDonald’s lodged a caveat over Lot 1 claiming an interest under the Agreement for Lease. The caveat came to the attention of the mortgagee in 2009.
On 23 April 2008, BRI entered into a contract of sale of Lot 1 for $2,800,000. The sale required the plan of subdivision to be registered, which occurred on 5 June 2009.
On 20 August 2008, McDonald’s produced documentation verifying the costs of the easement of way, the amount of which was later fixed at $10,233.30. BRI did not make payment.
In December 2008, BRI entered into a contract to sell Lot 3. On 23 February 2009, McDonald’s lodged a caveat over Lots 1, 2 and 3 claiming an interest under the Agreement for Lease. In March 2009, BRI entered into a contract to sell Lot 2.
On 9 April 2009, McDonald’s provided verification of the cost of construction of the restaurant, which was $1,540,000, being $1,400,000 plus GST. BRI did not make payment.
On 1 June 2009, BRI sued McDonald’s seeking McDonald’s consent to the registration of the plan of subdivision. On 2 June 2009, the Supreme Court ordered that BRI cause the purchaser of Lot 1 to pay McDonald’s at settlement of the sale the sum of $1,540,000 and $10,233.30 plus interest. McDonald’s was ordered to provide signed consents to registration of the plan of subdivision. On 5 June 2009, the plan of subdivision was registered.
On 9 June 2009, McDonald’s sent a copy of the order made on 2 June to the mortgagee. It was on receipt of that order that the mortgagee became aware that BRI had not paid McDonald’s the costs of construction of the restaurant and easement of way.
On 2 July 2009, Lenahan wrote to BRI; he advised that the payout figure for the loan was $2,019,000 and expressed great concern that ‘the funds advanced… on 01/02/08 to enable you to reimburse McDonald’s for payments made to the builder were diverted elsewhere and you now have a court order against you in favour of McDonald’s far in excess of $1,550,000’.
On 12 August 2009, Lenahan wrote to McDonald’s solicitors; he advised that the amount due under the mortgage was approximately $2,300,000, and that Lot 1 had been sold for $2,800,000 under a contract dated April 2008. The letter stated that the shortfall in funds available to pay the debt to McDonald’s was a matter to be resolved between McDonald’s and BRI.
From 1 September 2009, McDonald’s ceased paying rent under the Lease, relying on the right of set off in the Agreement for Lease.
On 16 September 2009, the mortgagee’s solicitors wrote to McDonald’s demanding withdrawal of McDonald’s caveats.
On 21 February 2011, Lenahan met with Thompson of BRI to discuss the sale of the properties. Thompson told Lenahan that McDonald’s was not paying the full rent, but offsetting the amount BRI owed against rent. As interest was being paid and the mortgage stood, the mortgagee allowed the loan to continue.
On 17 June 2011, the mortgagee wrote to BRI concerning an offer to provide the Benalla property, including Lot 1, as security for a debt owed to the mortgagee by Shepparton Retail Investments Pty Ltd, a subsidiary of BRI. The letter contained security documents which BRI duly executed. The effect was to encumber Lot 1 with a new liability.
On 27 July 2011, the mortgagee served on BRI a notice of default and on 8 August 2011 took possession of Lot 1 by giving notice to McDonald’s to direct rent to the mortgagee.
On 6 February 2012, the mortgagee sent McDonald’s a notice pursuant to s 146 of the Property Law Act 1958 for unpaid rent, and threatening termination of the Lease. On 21 February 2012, McDonald’s agreed to pay the rent without deduction from the time when the mortgagee took possession, but under protest claiming that it was entitled to set off its costs of construction against rent.
On 7 March 2012, McDonald’s commenced the proceeding against Bendigo and BRI. BRI has taken no part in the proceeding. As against Bendigo, McDonald’s sought a declaration that Bendigo was bound by, and held its interest as mortgagee subject to, the Agreement for Lease and Lease, and other relief to the effect that it was entitled to recover and/or set off the sums payable by BRI for construction and easement of way costs against its liability for rent, or that it had an equitable lien over Lot 1 (and the proceeds of sale thereof) for such sums, or that it was entitled to rectification of the Lease to reflect the right of set off.
For its part, Bendigo by counterclaim sought a declaration that it was not bound by the Agreement for Lease, alternatively that McDonald’s was not entitled to set off any amount against the rent by reason of any term in the Agreement for Lease.
The Agreement for Lease
It is now convenient to refer to relevant provisions in the Agreement for Lease.
Clause 1 included the following definitions:
Clause 9.1:
“Landlord” includes each natural person or corporation for the time being entitled to the reversion of the Premises immediately expectant on the termination or expiration of this Agreement and unless a contrary intention is apparent includes any servant or agent of the Landlord.
“Lease” means the lease to be executed pursuant to this Agreement in the form of the lease set out in the Third Schedule to be completed in accordance with the provisions of Clause 9.1.
“Rent” means the rent defined in clause 1.1 of the Lease.
“Tenant” includes the successors and permitted assigns of the Tenant.
Clause 3 provided that the Lease would commence on the first day of trading from the premises. On that date BRI was to grant, and McDonald’s was to take, a lease of the premises ‘on the terms set out in the Lease completed in accordance with this Agreement’ (cl 2). In the period between the Commencement Date and the execution and delivery by the Tenant to the Landlord of the Lease, the Tenant and the Landlord were bound by the Lease, as if it had been duly executed and signed (cl 10.3).
Clause 9.1 provided that ‘the Lease shall be in the form of the lease set out in the Third Schedule to this Agreement and shall be prepared by the Tenant’s solicitors and completed by the insertion of:
(a) the Commencement Date;
(b) the Rent…; and
(c)any other insertion or correction reasonably deemed necessary to enable the completion of the Lease”.
Clause 11 concerned the Landlord’s Contribution. It provided:
11. Landlord’s Contribution
11.1The Landlord shall pay to the Tenant an amount equal to the cost of construction of the McDonald’s Development, including all consultant’s costs and expenses relating thereto and all costs and expenses incurred by the Tenant to obtain the permits, consents and approvals sought by the Tenant pursuant to Clause 5, (“Landlord’s Contribution”) subject to Clause 11.2.
11.2The Landlord’s Contribution shall not exceed $1,400,000.00 (exclusive of GST).
11.3The Landlord shall pay the Landlord’s Contribution to the Tenant on the later of:
(a)the Commencement Date of the Lease; and
(b)14 days after production by the Tenant to the Landlord of all relevant invoices and receipts relating to the cost of construction of the McDonald’s Development and a certificate from a quantity surveyor certifying that the amount claimed by the Tenant has been spent by the Tenant on the construction of the McDonald’s Development.
11.4Notwithstanding any provision of the Lease to the contrary, the Tenant shall be entitled to set off and deduct the Landlord’s Contribution against and from the Rent payable under the Lease.
Clause 13 provided that the Landlord must obtain the unconditional consent to the Agreement of all relevant mortgagees.
Assignment was dealt with by cl 21 which provided:
21. Assignment
Neither party shall have the right to assign or transfer any interest under this Agreement without the prior consent in writing of the other. This Clause 21 shall not prevent the Tenant from assigning, transferring, subletting or parting with its interest in the Lease pursuant to the terms of the Lease.
Clause 27, a no merger clause, provided:
27. No Merger
The provisions of this Agreement shall not merge on the execution of the Lease but shall continue in full force and effect after such execution until they have been fully complied with.
Clause 28, an entire agreement clause, provided:
28. Entire Agreement
It is expressly acknowledged by and between the parties that the terms and conditions set out in this Agreement contain the entire agreement as concluded between the parties notwithstanding any negotiations or discussions prior to the execution of this Agreement.
Finally, cl 30 provided for the Landlord to pay the Tenant the Easements of Way Contribution, as follows:
30. Easements of Way Contribution
30.1The Landlord shall pay to the Tenant the Easements of Way Contribution on the later of:
(a)the Commencement Date of the Lease; and
(b)14 days after production by the Tenant to the Landlord of all relevant invoices and receipts relating to the cost of construction of the Easements of Way and a certificate from a quantity surveyor certifying that the amount claimed by the Tenant has been spent by the Tenant on the construction of the Easements of Way.
30.2Notwithstanding any provision of the Lease to the contrary, the Tenant shall be entitled to set off and deduct the Easements of Way Contribution against and from the Rent payable under the Lease.
The lease
Clause 1 was a definitions clause and relevantly provided:
1. Definitions and Interpretation
This lease is to be interpreted according to the following rules.
1.1 The listed expressions have the meaning set out opposite them:
…
landlordthe person named in item 1, or any other person who will be entitled to possession of the premises when this lease ends
Rentthe amount in item 6, or as varied in accordance with this lease
tenantthe person named in item 2, or any person to whom the lease has been transferred.
…
Items 1 and 2 were contained in a Schedule to the Lease; they referred simply to BRI and McDonald’s respectively. Item 6 stated the rent for year 1 as $169,000 per annum, and for each subsequent year as the rent in the previous year varied by CPI, with the exception that in year 10 it was ‘Market review pursuant to clause 11’. There was no reference to the right of set off.
McDonald’s obligation as to rent was stated in cl 2.1 thus:
2.1 The tenant must:
2.1.1pay the rent without any deductions to the landlord on the days and in the way stated in Item 9. No demand for rent is necessary and the landlord may direct in writing that the rent be paid to another person.
Item 9, which is contained in the Schedule, states that rent is paid:
Monthly in advance on the first day of the month.
In addition to rent, cl 2 listed a number of matters McDonald’s was obliged to pay.
Clause 4 provided:
4.1The tenant must not transfer this lease or sublet the premises without the landlord’s written consent, and section 144 of the Property Law Act 1958 and clause 9.1 do not apply.
Clause 7, headed Events of Default and Landlord’s Rights, provided when the landlord may re-enter the premises and end the Lease. It is necessary only to refer to the first two events. They are:
7.1 The landlord may re-enter the premises and end this lease if –
7.1.1the tenant does not pay the rent for 14 days after demand for payment is made in writing; or
7.1.2the tenant does not meet its obligations under this lease; or …
Disposition at trial
The agreed summary provided by the parties for the appeal conveniently describes the major issues dealt with at trial and their disposition as follows:
(a)Construction: McDonald’s contended that the agreement for lease and the lease should be construed as one document, and accordingly the rent clause of the lease ought to be construed in the same way as that in the agreement for lease, such that McDonald’s was entitled to set off against rent the sum of $1.4million on account of the amount expended by McDonald’s in construction of the improvements on Lot 1. [Bendigo] contended that the Court had to give effect to the words ‘without deduction’ in the rent clause in the lease and that the parties to the lease intended, first, that the personal rights under the agreement for lease should differ from the rights granted under the lease and, secondly, that the terms of the grant would not contain a right of set off. The Judge found for [Bendigo], holding that the intention of the parties evident from the terms of the agreement for lease and of the lease granted were that the terms of the grant would not contain a right of set off;
(b)Rectification: McDonald’s contended, alternatively, that the rent clause in the lease did not record the true bargain between landlord and tenant and ought to be rectified. [Bendigo] contended that there was no evidence capable of supporting rectification whether based on common intention or unilateral mistake. The Judge held that the intention of the parties to the agreement for lease was that the obligation to pay rent under the lease was not to be qualified by the right of set off given to McDonald’s under the agreement for lease;
(c)Consent: McDonald’s contended that the Mortgagee had consented to the incorporation into the lease of a right of set off. [Bendigo] admitted that the Mortgagee had consented to the lease but not to the agreement for lease. The Judge held that the Mortgagee received and satisfied itself that there was an executed agreement for lease but had not ever given written consent to it;
(d)Estoppel and waiver: McDonald’s contended that the Mortgagee was estopped from denying its consent to the agreement for lease, or had waived its right to withhold consent to the agreement for lease. [Bendigo] contended that there was no evidence of reliance. The Judge held that the factual bases for the alleged assumption and reliance were not made out and relied on his conclusion on the construction question;
(e)Equitable set-off: McDonald’s contended that it was entitled in equity to set off the sum of $1.4million expended in construction of the improvements on Lot 1 against its liability to pay rent under the lease. [Bendigo] contended that the right of set off was not a covenant nor did it touch and concern Lot 1, and was of no value to an assignee of the lease as the assignee had not expended the money, McDonald’s had. The Judge found that the Mortgagee knew that part of its advance to the landlord was for the express purpose of reimbursing McDonald’s for the construction costs, but in reliance on his Honour’s conclusion on the construction question held that the right of set off could not run with the Lot 1;
(f)Equitable lien: McDonald’s contended that Lot 1 and, upon sale of the reversion, the proceeds of sale received by the Mortgagee, were subject to an equitable lien for the costs of construction. McDonald’s contended that it was able to satisfy the criteria identified as sufficient for an equitable lien by Deane J in Hewett v Court (1983) 149 CLR 639 at 668. [Bendigo] contended that McDonald’s failed the first criterion because [Bendigo] was not indebted to McDonald’s and the third criterion because [Bendigo] was not acting unconscionably by retaining the rental stream and the proceeds of sale when it had advanced the amount of the construction costs to BRI. The Judge dismissed the claim to an equitable lien because:
(i)his Honour found that McDonald’s might have, but had not advanced a case based on the application of the rule in Hopkinson v Rolt (1861) 9 HL Cas 514; 11 ER 829; and its failure to plead such a case could not be remedied by calling for further submissions;
(ii)on his Honour’s construction of the terms of the agreement for lease he was not satisfied that BRI would be acting unconscientiously or unfairly towards McDonald’s if BRI were to dispose of Lot 1 without the consent of McDonald’s or without having discharged the liability to McDonald’s;
(iii)‘… the equity is not readily apparent, and may not even be recognised by the beneficiary until long after it arises, or … depends upon the implication by a court of its very existence’; and
(iv)the Mortgagee was entitled to accept its customer’s position, communicated shortly before drawdown of the second advance, that the liability to McDonald’s had been discharged or would be discharged forthwith.
It followed that McDonald’s entirely failed in its claim and, accordingly, that the proceeding be dismissed. In these circumstances it was not necessary to grant relief on the counterclaim.
Notice of Appeal
By its Notice of Appeal, McDonald’s sought the setting aside of his Honour’s orders on the grounds that his conclusions on construction, rectification, equitable set off and equitable lien were wrong.
Subsequently, McDonald’s abandoned rectification and equitable set off.
However, by leave of the Judicial Registrar, McDonald’s has added a ground that it -
had and has a right of recoupment for the amount owing by BRI on account of the Landlord’s Contribution and the Easement of Way Contribution.
Leave was given to add this ground, notwithstanding that it was neither pleaded nor argued at the trial and that Bendigo objected that it was both futile and raised new issues of fact.
But the Judicial Registrar refused leave to amend the existing equitable lien ground by the addition of the following italicized words:
7.Further, such equitable lien held by the Appellant has priority over the amounts secured by the mortgage, alternatively over the second advance and/or the amount owing under BRI’s guarantee of the liabilities of Shepparton Retail Investments Pty Ltd.
The Judicial Registrar refused leave on the basis that the italicized words raised issues that were neither pleaded nor litigated at the trial and raised new matters of fact. By a summons returnable on the hearing of the appeal, McDonald’s seeks leave for the italicized words to be added to Ground 7 above.
The result is that the issues for determination on the appeal have narrowed to construction, equitable lien and the now claimed right of recoupment.
Construction
On the appeal, the appellant relied on arguments that were neither pleaded nor relied on before the judge below.
As mentioned, McDonald’s sought a declaration. This was based on the allegations in the further amended statement of claim, which followed the pleading of terms of the Agreement for Lease and the Lease, and historical facts, that:
(a)McDonalds was entitled under the terms of the Agreement for Lease and the Lease to set off against the rent otherwise payable, the amount of the Landlord’s Contribution ($1,540,000 inclusive of GST) and the Easement of Way Contribution ($10,233.30 inclusive of GST).[5]
(b)Further, on its true construction, the covenant to pay rent without deduction in cl 2.1.1 of the Lease did not exclude McDonald’s right to set off these sums against the rent.[6]
[5]Further amended statement of claim, para 34.
[6]Further amended statement of claim, para 36.
In seeking to make good these allegations, McDonald’s relied on the construction argument referred to at [48(a)] above. That is, that the Agreement for Lease and the Lease could be, and were to be, read as one, such that McDonald’s was entitled to exercise the right of set off. This involved an analysis of the documents in context and the judge concluded as earlier summarised.
Early in his reasons, after referring to the relevant terms of the Agreement for Lease and the Lease, the judge said that:[7]
As might be expected, the terms of the grant made on 29 February 2008 did not expressly incorporate any right of set off, or impose any obligation on BRI to pay the Landlord’s Contribution, or the Easement of Way Contribution. Under the terms of the Lease, the plaintiff was expressly required to maintain the Easement of Way, and BRI was expressly required to pay one third of the cost of such maintenance. This cost was characterised as ‘Landlord’s Contribution to Easement of Way Maintenance Costs’. Accordingly, the parties had distinguished and delineated payment obligations, other than for rent, under the Agreement for Lease and the terms of the Lease. The terms of the Lease did not touch upon BRI’s obligation to repay construction costs, even though the obligation to pay might not arise until some time after the commencement of the lease. Another express delineation, but of a different character, is to be found in the clause prohibiting assignment of interests under the Agreement for Lease, which reserved to the plaintiff the right to assign its interest under the Lease.
He then observed that the substantial part of McDonald’s case was directed to establishing that the mortgagee knew of the commercial arrangements between McDonald’s and BRI, and in particular of the right of set off. That explains the relevance of the matter of the mortgagee’s consent to the Agreement for Lease.
[7]Reasons [38].
Further on in his reasons, the judge dealt with and concluded on the construction argument as follows:[8]
72The plaintiff contended that when the Agreement for Lease and the Lease are read together, the apparent inconsistency between the unqualified obligation in the Lease to pay the rent, and the plaintiff’s right of set off, found in clauses 11.4 and 30.2 of the Agreement for Lease, evaporated. The plaintiff contended that the governing intention of the parties was that its obligation to pay rent under the Lease remained subject to the right of set off.
73It is accepted that when multiple documents form a single transaction they ought to be construed together, with reference to each other.[9] But the construction argument advanced by the plaintiff is confronted by the same primary hurdle that confronts its rectification and other claims. The documents are not inconsistent. They presuppose the absence of a right of set off in the lease. In my view, the clear intention of the parties, evident from the terms of the Agreement for Lease and the agreed form of Lease to be granted thereunder, was that the terms of the grant would not contain the right of set off. That right was intended to remain, and did remain, a mere contractual right, personal to the plaintiff and BRI. The Lease that was executed was, in every material respect, in the very terms agreed by the parties to the Agreement for Lease.
74The contractual obligation to repay the construction costs was, and remains, enforceable by the plaintiff against BRI. The parties might have chosen to include those obligations and the corresponding right of set off within the Lease, but did not. The plaintiff, who prepared the Agreement for Lease and the draft Lease, might have assumed that its rights against BRI were adequate protection, or that the obligation would bind a purchaser, although the latter assumption is unlikely. The obligation was, after all, transient in the sense that it was a ‘one off’ payment to be made as soon as construction had been completed. The plaintiff had the opportunity to make the sum due and payable 14 days from the first day of trading — 22 December 2007. It was an obligation that might be expected to have been cleared promptly. Furthermore, the plaintiff’s solicitors might reasonably have concluded that a mortgagee, whose consent was expressly required under cl 13 of the Agreement for Lease, may not consent to a lease containing a right that might significantly impair the value of the security. Such a right, if included in the Lease, might have the effect of imposing on the mortgagee the burden of an unsatisfied obligation to pay repay [sic] construction costs.
75The plaintiff’s construction argument is rejected.
[8]Reasons [72]-[75].
[9]Toohey v Gunther (1928) 41 CLR 181.
These reasons were responsive to McDonald’s case as pleaded and conducted at trial.
Consistently with this, the notice of appeal states that the judge should have found that cl 11.4 (Landlord’s Contribution) and cl 30.2 (Easement of Way Contribution) of the Agreement for Lease, and cl 2.1.1 of the Lease should be read together ‘such that [McDonald’s] is permitted to set off’ the moneys owing by BRI on those accounts against the rent otherwise payable. On its face, this reflects McDonald’s case on construction at trial.
However, on appeal, McDonald’s added to its construction argument a new submission, that BRI’s promise to pay the construction and easement costs, and McDonald’s right of set off, touched and concerned the land (Lot 1), thus binding Bendigo as assignee of the mortgagee.
McDonald’s counsel commenced their submissions by acknowledging the difference between the obligation to pay rent without deduction in cl 2.1.1 of the Lease on the one hand, and the right of set off against rent in cll 11.4 and 30.2 of the Agreement for Lease, on the other hand. The evident inconsistency was met by construing the two documents as one, on the basis that they constituted a single transaction. In his reasons, the judge noted[10] the parties accepted that when documents form a single transaction they ought be construed together.[11] McDonald’s counsel said that if they were, cll 11.4 and 30.2 trump cl 2.1.1. It was submitted that his Honour would have so read the Agreement for Lease and the Lease but for his finding that they were not inconsistent.[12] That was because of his conclusion that the right of set off was a contractual right, personal to McDonald’s and BRI, and not a term of the grant.
[10]Reasons [73].
[11]Toohey v Gunther (1928) 41 CLR 181, 196; Breams Property Investments Co v Stroulger [1948] 2 KB 1, 7-8.
[12]Reasons [73].
It was said that his Honour’s conclusions rested upon his observation that:
(a)the parties might have, but did not, include the obligation to pay the Landlord’s Contribution and Easement of Way Contribution and the right of set off in the Lease; and
(b)McDonald’s solicitors might reasonably have concluded that the mortgagee might not consent to a lease containing a right which may significantly impair the value of its security.[13]
[13]Reasons [74].
It was then said that this reasoning ‘may be doubted’. First, the parties may have chosen to include the payment obligations in the Agreement for Lease because they derived from works to be performed prior to entry into the Lease. Secondly, there was no evidence of what McDonald’s solicitors might have concluded as to the mortgagee’s attitude. Indeed, the right of set off was unlikely to have concerned the mortgagee as it intended to lend funds to cover the Landlord’s Contribution. Thirdly, as the improvements enhanced the value of Lot 1, the right of set off did not impair the value of the security.
It is convenient to interrupt this recitation of McDonald’s submissions to note that at the trial McDonald’s, who drew the Agreement for Lease and the Lease, did not explain why the subject obligations were placed as they were in the Agreement for Lease and the Lease respectively.
At this point, McDonald’s counsel introduced the new argument of ‘touching and concerning’ the land which was said to have received ‘only passing attention’ in the respective Outlines of Closing Submissions to the judge. It is convenient to note that Bendigo’s counsel asserted that in fact it is a new contention, which is consistent with the fact that his Honour, in a judgment marked by its thoroughness and care, did not advert to the contention. It is evident from his reasons that the present part of the case was rested on the question of construction without going further to the issue of ‘touching and concerning’.
McDonald’s next submission commenced with a suggestion that the judge ‘appears to have assumed’ that contractual obligations found in the Agreement for Lease rather than the Lease could not be terms of the grant. This suggestion is to be rejected. However, it is correct, as McDonald’s then submitted, that such an assumption would be wrong. For it is long established that obligations of the nature of those in the Agreement for Lease can be terms of a grant if they touch and concern the land.[14]
[14]Breams Property Investments Co v Stroulger [1948] 2 KB 1, 6-9; Kumar v Dunning [1989] QB 193; Lang v Asemo Pty Ltd [1989] VR 773; Simmons v Lee [1998] 2 Qd R 671, 675, 676-7; Gumland Property Holdings Pty Ltd v Duffy Brothers Fruit Market (Campbelltown) Pty Ltd (2008) 234 CLR 237, [96]-[102].
Counsel then referred to the statutory statement of the touching and concerning doctrine in s 142(1) of the Property Law Act 1958 which provides:
The obligation under a condition or of a covenant entered into by a lessor with reference to the subject-matter of the lease shall, if and as far as the lessor has power to bind the reversionary estate immediately expectant on the term granted by the lease, be annexed and incident to and shall go with that reversionary estate… and may be taken advantage of and enforced by the person in whom the term is from time to time vested…
McDonald’s submitted that the mortgagee’s consent to the Lease gave BRI power to bind the reversionary estate.
The expression ‘with reference to the subject-matter of the lease’ in s 142(1) means the same as ‘touching and concerning the land’, being the condition recognised at common law as necessary for a covenant to ‘run with the land’.[15] Whether a tenant’s covenant touches and concerns land is determined by the application of the test stated by Lord Oliver of Aylmerton in P&A Swift Investments (a firm) v Combined English Stores Group Plc[16] as follows:
(1)the covenant benefits only the reversioner for the time being, and if separated from the reversion ceases to be of benefit to the convenantee;
(2)the covenant affects the nature, quality, mode of user or value of the land of the reversioner;
(3)the covenant is not expressed to be personal (that is to say neither being given only to a specific reversioner nor in respect of the obligations only of a specific tenant);
(4)that fact that a covenant is to pay a sum of money will not prevent it from touching and concerning the land so long as the three foregoing conditions are satisfied and the covenant is connected with something to be done on, to or in relation to the land.
[15]Gumland Property Holdings Pty Ltd v Duffy Brothers Fruit Market (Campbelltown) Pty Ltd (2008) 234 CLR 237, [67].
[16][1989] 1 AC 632, 642.
These criteria have been adopted in Australia including by the Full Court in Lang v Asemo[17] and, more particularly, by the High Court in Gumland Holdings Pty Ltd v Duffy Brothers Fruit Market (Campbelltown) Pty Ltd.[18]
[17][1989] VR 773, 776-9.
[18](2008) 234 CLR 237, [74].
McDonald’s counsel said that the third matter should be read as if the references to ‘specific reversioner’ and ‘specific tenant’ were reversed. That was because the present case concerned a covenant by a landlord.
In Specialist Diagnostic Services Pty Ltd v Healthscope Ltd[19] the Court of Appeal stated that as applicable to a lessor’s covenant, the test formulated in P&A Swift may be stated as follows:[20]
A lessor’s covenant touches and concerns the land if (1) the covenant benefits only the lessee for the time being, and if separated from the term ceases to be of benefit to the covenantee (lessee); (2) the covenant affects the nature, quality, mode of user or value of the demised premises; and (3) the covenant is not expressed to be personal.
[19][2012] VSCA 175, [178].
[20]Ibid [178].
McDonald’s submitted that the right of set off satisfied the first two criteria.
The third criteria was submitted to be satisfied for the following reasons. Clauses 11.4 and 30.2 of the Agreement for Lease referred not to McDonald’s but to the ‘Tenant’, which expression was defined to include the ‘successors and permitted assigns of the Tenant’. The definition of the term ‘Landlord’ included the person presently entitled to the reversion and did not refer to permitted assigns.
The next step was to refer to cl 21 of the Agreement for Lease. The first sentence deprived each party of the right to assign or transfer any interest under the Agreement for Lease without the prior consent of the other. But this ‑
shall not prevent the tenant from assigning, transferring, sub-letting or parting with its interest in the Lease pursuant to the terms of the Lease.
McDonald’s described this sentence as creating an exception to the first sentence, although the first sentence dealt with assignment of the Agreement for Lease, and the second with assignment etc of the Lease (once executed). Hence, rather than an exception it may more appropriately be described as clarification that the Lease had its own provision for assignment by the Tenant (cl 4).
Nevertheless, McDonald’s submission then referred to cl 4 of the Lease, noting that it prohibited only the tenant from transferring the Lease or sub-letting the premises without the landlord’s written consent. This differed from the position under the Agreement for Lease where both parties were prohibited from assigning without consent.
McDonald’s submitted that the reference to ‘permitted assigns’ in the definition of ‘Tenant’, and the absence of any such reference in the definition of ‘Landlord’, in the Agreement for Lease, demonstrated that the reference to ‘permitted assigns’ is a reference to permission under clause 4.1 of the Lease rather than under cl 21 of the Agreement for Lease. Therefore, it was submitted, the ‘assigns’ referred to are assigns under the Lease rather than under the Agreement for Lease. If the intention had been otherwise, the same words would have been in the definition of ‘Landlord’ since the landlord is subject to the same prohibition in cl 21 of the Agreement for Lease.
If, then, it be accepted that the definition of ‘Tenant’ in the Agreement for Lease included assigns under the Lease rather than under the Agreement for Lease, it followed – so it was submitted – that the right of set off satisfied the third criterion for a covenant that touches and concerns the land. And it followed from the definition of Landlord in the Agreement for Lease, together with the above provisions read together, that the right of set off binds the successors of the landlord under the Lease.
Clearly, the obligation to pay rent is a matter that touches and concerns the land.[21] It was submitted that it made commercial sense that a covenant that affected the amount that might actually be paid for rent touched and concerned the land. The result was that cll 11.4 and 30.2 of the Agreement for Lease are to be taken as forming part of the grant to McDonald’s. That being so, they must be applied according to their terms and, being so applied, qualify the obligation to pay rent in cl 2.1.1 of the Lease. That construction was submitted to be inherently more likely than the judge’s conclusion that the right of set off was intended to be personal to McDonald’s and BRI with the consequence that it was exercisable only against BRI.
[21]Simmons v Lee [1998] 2 Qd R 671, 675; approved in Gumland Property Holdings Pty Ltd v Duffy Brothers Fruit Market (Campbelltown) Pty Ltd (2008) 234 CLR 237, [101].
Having thus identified the essence of McDonald’s submissions, it is convenient to reflect upon the Agreement for Lease and the Lease.
These documents were the means by which BRI and McDonald’s chose to carry their commercial arrangements into effect. They were prepared by McDonald’s and accepted by BRI. It is not surprising that they were prepared by McDonald’s having regard to McDonald’s experience and resources in the area, including of course the requirements of a McDonald’s Family Restaurant. McDonald’s is a substantial international corporation.
The Agreement for Lease was a single document which included a number of Schedules, one of which included the draft lease. The grant of the tenancy to McDonald’s came not by the Agreement for Lease, but much later when the Lease was executed, although the term started on 22 December 2007.[22]
[22]This was the date when trading commenced, which by cl 3 of the Agreement for Lease was to be the commencement date of the Lease, and that date was accordingly inserted in item 8 of the Schedule to the Lease when it came to be executed.
Two points arise from this. First, this is not a case where a document such as, for example, a surety in relation to the performance of a tenant’s obligations, comes into being subsequent to the subject lease, and an obligation in the subsequent document is said to touch and concern the land. What McDonald’s relies on here is a document antecedent to the Lease.
Secondly, there was thus a clear separation in time between the coming into existence of the Agreement for Lease on the one hand, and the Lease on the other hand. The two documents cannot simply be rolled together, as it were. That was demonstrated by the judge’s analysis.
Moreover, the failed attempt at rectification exposed McDonald’s difficulty; in short, the parties did not intend that the two documents be read together as though one and, in particular, with the effect that the set off provisions in the Agreement for Lease overrode cl 2.1.1 in the Lease. It is singular that McDonald’s accepts the correctness of the judge’s conclusion on rectification yet seeks a result to the same effect via the construction and touching and concerning argument.
Of course, the mortgagee was not privy to either agreement. But at trial Bendigo accepted that it was bound by the set off covenants in the Agreement for Lease if they were to be read as contained in the Lease. Thus the question of construction. Let the judge’s reasons on this be emphasised, although without repetition in these reasons. As the judge pointed out, in an analysis which is surely correct, the agreements were separate and distinct for good reason, and as such were consistent with the other.
At one point, counsel for McDonald’s criticised as erroneous the judge’s reference to BRI’s obligation being to ‘reimburse’[23] and ‘repay’[24] McDonald’s the construction costs. Rather, counsel said, the obligation imposed on BRI was to ‘pay’ the relevant amount. That is the word used in cll 11 and 30. Whatever was sought to be made out of this, the fact is that what BRI undertook to do was to reimburse McDonald’s for its costs pursuant to cll 11 and 30 respectively. That was the nature of the payment. It was not an original or primary obligation to pay to the persons engaged by McDonald’s to carry out the relevant works their cost of doing so. It was open, and not reflective of any material misunderstanding, for the judge to so describe the obligation as reimbursement or repayment.
[23]Reasons [2], [4] and [6].
[24]Reasons [74].
At another point, McDonald’s counsel made the argument based on the definitions in the Agreement for Lease and the Lease, concerning the matter of assignment. This went to the touching and concerning argument as to the two agreements being read together, or with a consistency of operation. With respect, the submission overlooks that each agreement may operate on its own terms. They are separate agreements, each containing its own assignment provisions.
McDonald’s counsel also referred to the no merger provision in the Agreement for Lease (cl 28). That provided that the execution of the Lease did not affect the continued full force and effect of the provisions of the Agreement for Lease ‘until they have been fully complied with’. While that means that a provision continues to have force and effect, it will do so as a provision in the Agreement for Lease. There is no merger with the Lease. Hence, any such provision will have effect separate from the Lease, subject as any relevant provision in the Lease may provide. Clause 28 does not mean that the right of set off overrode the liability to pay rent in cl 2.1.1 of the Lease. Nor does cl 28 advance the ‘touching and concerning’ argument.
It was not suggested that the stipulation in cl 2.1.1 of the Lease that rent be paid ‘without any deductions’ did not mean what it says.[25] Indeed, McDonald’s whole case proceeded on the premise that on its own terms it constituted an unqualified obligation to pay the stipulated rent. The judge correctly found that, on construction, McDonald’s could not pass over the hurdle presented by this and other considerations.
[25]See Citibank Pty Ltd v Simon Fredericks Pty Ltd [1993] 2 VR 168, 175.
Further, it is to be borne in mind that McDonald’s is seeking to enforce the right of set off against Bendigo, as mortgagee in possession. But the judge found that the mortgagee did not provide its written consent to the subject covenants in the Agreement for Lease as required by the mortgage,[26] and BRI did not otherwise have power to annex the set off covenants to the land so as to bind the mortgagee and the reversionary estate. The judge’s finding was open to be made. The consequence is that the mortgagee and thus Bendigo is not bound by the Agreement for Lease but particularly the subject covenants. Counsel for McDonald’s pointed to correspondence and submitted that the mortgagee should be taken to have made the second advance on the basis of the Agreement for Lease. That was on the basis that the Agreement for Lease rather than the Lease was being referred to, which is not clear.
[26]Reasons [84].
Turning now to the test whether the set-off covenants touch and concern the land, counsel for Bendigo accepted that the first criteria was satisfied but contended that the second and third were not.
The second criteria was submitted not to be satisfied because the right to set off did not affect the nature, quality, mode of user or value of the land during or at the end of the term. In truth, however, it may affect the value of the premises as it affects the amount of rent paid. In this respect it is to be borne in mind that if the right were exercised it would be many years before the right of set off exhausted the amount owing to McDonald’s. That is, for many years no rent would be paid. But this depends on the true nature of the right, and that is the area of the third criteria.
Whether the third criteria was satisfied depends upon whether the right of set off was personal or collateral; this is the acid test as Vice Chancellor Brown-Wilkinson stated in Kumar v Dunning.[27] This turns on an analysis of the covenants in the context of the Agreement for Lease and the Lease. The judge found that the right was ‘a mere contractual right, personal to [McDonald’s] and BRI’[28] and remained enforceable against BRI.[29] Of course, the judge was not addressing the ‘touching and concerning’ question, but his analysis, resting as it did on a true understanding of the transaction, is valid for that purpose. Without repeating all that his Honour relevantly said, the following matters are important.
[27][1989] 1 QB 193, 204; and see Hua Chiao Commercial Bank Ltd v Chiaphua Industries Ltd [1987] 1 AC 99, 112F-113C.
[28]Reasons [73].
[29]Reasons [74].
It was McDonald’s, as prospective tenant, who was obliged to carry out the construction works and thus to incur the costs of doing so. Once the works were carried out ‑ prior to entry into the Lease ‑ the obligation was fulfilled. Then, BRI’s obligation was to repay McDonald’s its incurred costs pursuant to cll 11.4 and 30.2. While McDonald’s could exercise the default right of set off against BRI during the subsistence of its tenancy, could an assignee of McDonald’s do so? It would be odd if an assignee could exercise the right of set off against rent payable by it, because such an assignee had not incurred the relevant costs. And the assignee was not privy to the commercial arrangements carefully struck between McDonald’s and BRI.
This is a factor which serves to make it understandable that the right of set off was not included in the Lease. If it had been, difficulties would arise if a tenant by assignment sought to exercise the right of set off against rent, and if the right was sought to be exercised, as here, against a mortgagee in possession.
Thus understood, as Bendigo submitted, the subject obligations were properly characterised as obligations between owner and prospective tenant/builder in relation to sums incurred prior to the grant of the Lease, rather than as obligations qua landlord and tenant in relation to the payment of rent under the tenancy.
In these circumstances, the third criteria is not satisfied. The right of set off was personal, collateral to the tenancy, and did not run with the land.
Equitable lien
McDonald’s submissions on equitable lien were put as an alternative, lest its construction argument not be accepted.
The relevant principles for the ascertainment of an equitable lien were stated by the High Court in Hewett v Court.[30] Gibbs CJ stated that:
Equitable lien does not depend either upon contract or upon possession. It arises by operation of law, under a doctrine of equity “as part of a scheme of equitable adjustment of mutual rights and obligations”; those words of Isaacs J were used in Davies v Littlejohn (1923) 34 CLR 174, 185, in relation to the doctrine of vendor’s lien, but they have a general application. It would be difficult, if not impossible, to state a general principle which would cover the diversity of cases in which an equitable lien has been held to be created.[31]
[30](1983) 149 CLR 639.
[31]Hewett v Court (1983) 149 CLR 639, 645.
Deane J stated:
An equitable lien is a right against property which arises automatically by implication of equity to secure the discharge of an actual or potential indebtedness … Though called a lien, it is, in truth, a form of equitable charge over the subject property … in that it does not depend upon possession and may, in general, be enforced in the same way as any other equitable charge, namely, by sale in pursuance of court order or, where the lien is over a fund, by an order for payment thereout.[32]
[32]At 663.
Further in his judgment, Deane J said:
that the circumstances which are sufficient for the implication, independently of agreement, of an equitable lien between parties to a commercial relationship are:
(i)that there be an actual or potential indebtedness on the part of the party who is the owner of the property to the other party arising from a payment or promise of payment either of consideration in relation to the acquisition of the property or of an expense incurred in relation to it…
(ii)that that property… be specifically identified and appropriated to the performance of the contract… and
(iii)that the relationship between the actual or potential indebtedness and the identified and appropriated property be such that the owner would be acting unconscientiously or unfairly if he were to dispose of the property … to a stranger without the consent of the other party or without the actual or potential liability having been discharged. [33]
Deane J added that this was a statement of what was sufficient rather than of what was essential.
[33]At 668.
The reference to acting unconscientiously or unfairly is not to be understood as connoting some free-ranging exercise based on an assessment of conduct being fair or unfair. Gibbs CJ warned of this in Hewett v Court[34] in a passage referred to with approval by the High Court in Stewart v Atco Controls Pty Ltd[35] where their Honours referred to Gibbs CJ having cautioned that:
… while the rules of equity are not rigid or inflexible when faced with novel situations, this does not mean that courts should proceed on general notions of justice without regard to settled principles.
[34](1983) 149 CLR 639, 649.
[35][2014] HCA ASP 9; (2014) 307 ALR 562, [31].
Counsel for McDonald’s submitted that each circumstance described by Deane J was present in this case. It was submitted that the lien arose subsequent to the grant of the mortgage, when McDonald’s commenced construction works, and reached its full extent when construction was completed in 2007. McDonald’s submitted that the lien came into existence by December 2007. McDonald’s further submitted that nothing occurred subsequently to destroy the lien. The mortgagee could have ensured that the second advance was paid to McDonald’s, and thus ended McDonald’s lien. Further, McDonald’s delay in seeking payment from BRI did not destroy the lien because there was no evidence that BRI or the mortgagee changed its position as a result of the delay. Moreover, the defence did not plead reliance on the delay as constituting in any way a bar to, or end of, the lien.
Further, as the mortgagee had notice of McDonald’s expenditures and its right of set off, the rule in Hopkinson v Rolt[36] applied and prevented the mortgagee from tacking the second advance and the Shepparton Retail Investments liability, onto the mortgage in priority to McDonald’s equitable lien. It was submitted that the judge was wrong to conclude that the Hopkinson v Rolt point had not been pleaded; the judge misinterpreted the pleading as meaning that the equitable lien arose before the mortgage, whereas the allegation was that the lien had priority over the mortgage. The former is, in terms or effect, what ground of appeal 7 alleges. The desired amendment to that ground is to cover the possibility that the lien has priority only over the second advance and the amount owing under the Shepparton Retail matter.
[36](1861) 9 HL Cas 514.
Just as a lien can arise ‘by implication of some equitable doctrine applicable to the circumstances, its implication can be precluded or qualified by express or implied agreement of the parties’.[37]
[37]Hewett v Court (1983) 149 CLR 639, 663 (Deane J).
Bendigo submitted that the terms of the Agreement for Lease precluded the implication of an equitable lien over the proceeds of sale of the land. That was because the terms provided only for a personal contractual remedy to recover any indebtedness. No security of a proprietary nature was provided. That is, there was no agreement that gave McDonald’s the right to recover any amount owing out of the property itself whether by foreclosure or from of the proceeds of sale of the Lot 1. Regarded overall, the parties agreement precluded the implication of the claimed equitable lien. This submission should be upheld.
As stated, McDonald’s submission is that the lien arose when McDonald’s began to improve the land and reached its full extent when construction was completed in December 2007.[38] The construction works were carried out in the latter half of 2007; Bendigo’s counsel said between August and December.
[38]Appellant’s submissions, para 24.
This submission was inconsistent with the claim in the prayer for relief in the further amended statement of claim where McDonald’s sought a declaration that Bendigo ‘takes the mortgage subject to an equitable lien in favour of [McDonald’s] over any proceeds of sale and rent payable with respect to’ Lot 1. This declaration must have been refused as the mortgage, of which Bendigo was assignee, was granted long before the execution of the Agreement for Lease and the carrying out of the construction work. It was little wonder that McDonald’s counsel conceded in their written submission that an equitable lien could not have arisen at the time when the mortgage was granted in 2006.
However, the same error is carried into ground of appeal 7, which in its unamended form claims priority for the alleged lien over the amounts secured by the mortgage. On its face, this would extend to include the amount of the first advance made in 2006, to fund the acquisition of the property, again well before the agreement for lease and the undertaking of the building works.
It was doubtless to accommodate this difficulty, and with the benefit of his Honour’s judgment, that McDonald’s sought to amend ground 7, to add as an alternative that the priority was over the second advance (paid on 16 November 2007 and 1 February 2008) and the Shepparton Retail liability. The difficulty with this is that mentioned earlier, that the proposed amendment raises matters which, Bendigo submits, were not issues at trial. To develop this, counsel for Bendigo stated that no case was pleaded or run at trial that priority under the mortgage was lost from some point in time when the mortgagee had actual or constructive notice of facts from which an equitable lien might arise.[39]
[39]Bendigo’s outline of submissions, para 14.
Counsel referred to and relied upon what his Honour said as to McDonald’s pleaded case, and the evidence, or deficiencies in each, and it is instructive to set out his Honour’s observations in these respects.[40]
127The plaintiff might have, but did not, advance a case based on an application of the rule in Hopkinson v Rolt,[41] contending that by a particular time, the mortgagee had notice of a subsequent equity and, as a consequence, its right to priority under the mortgage did not extend beyond that point. Unfortunately, the plaintiff did not direct attention, in the pleadings, evidence, or submissions, to important questions such as the time at which an equitable lien might have arisen; the significance to the implication of the lien, of the terms of the Agreement for Lease under which the parties expressly dealt with the plaintiff’s security for repayment of the construction costs; the content of notice required to displace the mortgagee’s priority; whether the second advance was truly voluntary; whether the mortgagee had a duty of enquiry; the state of the mortgagee’s knowledge, at relevant times, concerning the status of the debt due to the plaintiff; and the relevance of the plaintiff’s conduct in failing to bring about the circumstances that made the debt payable.
128It is true that there were some allegations, scattered throughout the pleading, that touched upon one or other of those questions, and some evidence about some of those matters. But such allegations and evidence were coincidental, in the sense that they were directed to a different case. Had the plaintiff advanced a case in which it sought to displace the mortgagee’s priority, and grappled with the questions of the implication of the equity, notice, enquiry, timing, conduct and precise consequences, there might well have been a responding plea by the Bank that put in issue the adequacy and content of notice, which in turn might have prompted, by way of reply, the allegation of a duty to enquire. In my view, the plaintiff’s failure to properly plead a case to displace the mortgagee’s priority cannot be remedied by calling for further submissions. If the plaintiff were to properly plead such a case, it would require extensive amendments, and additional evidence on both sides.
[40]Reasons [127], [128].
[41](1861) 9 HL Cas 514; 11 ER 829.
McDonald’s response to this was to refer to the mortgagee being aware of the construction costs and the right of set off, and then to assert that ‘The prospect of further evidence appears remote’.[42] With respect, the views of the trial judge, supported by counsel for Bendigo, compel against allowing the amendment. Yet the fact is that counsel for Bendigo did address the merits of the matter, and perhaps he had to, while maintaining his objection. Notwithstanding, in the circumstances the fairer and just course is to refuse the application for leave to appeal from the refusal of the amendment.
[42]Appellant’s submissions, para 27.
The appeal is thus to be considered in the light of ground 7 unamended.
Turning then to the circumstances referred to by Deane J, the first may be considered satisfied in the sense that during the construction works a potential indebtedness was arising on the part of BRI from or incurred in relation to the property. But for other reasons a lien should not be implied. That is because in all of the circumstances, including the contractual relationship between McDonald’s and BRI, Lot 1 was not appropriated to the performance of the contract and BRI would not be acting unconscientiously or unfairly if it were to dispose of Lot 1 without McDonald’s consent and without the liability being discharged.
This bears directly on the matter of fairness. Indeed, his Honour considered that:[43]
Having regard to the express terms of the Agreement for Lease, under which the plaintiff secured the right to set off rent against the debt, I am not satisfied that BRI would be acting unconscientiously or unfairly towards the plaintiff if it were to dispose of the property to a stranger without the consent of the beneficiary (the plaintiff) or without having discharged the liability.
That view is reinforced by the party’s agreement to limit the recoverable amount of construction costs to $1,400,000 and McDonald’s control over the time for payment.
[43]Reasons [134].
Further, and relevantly, on matters of conduct, McDonald’s pointed to the following, properly to be taken account of: that McDonald’s did not assert an equitable lien over the proceeds of sale of Lot 1 until after the second advance, and did not plead the claim until March 2013; that McDonald’s did not bring the caveats to the attention of the mortgagee before March 2009 and informed the mortgagee of the claimed interest in late 2009. As his Honour observed:[44]
155On the evidence before the Court, the mortgagee was entitled to assume that by the time of the second advance, the liability had been discharged or would be discharged forthwith. A prudent mortgagee, with notice of a claimed equitable lien, may have sought additional information to satisfy itself that the liability had in fact been discharged, but that is not this case. The enquiry concerned the question of payment. The mortgagee was entitled to accept its customer’s position, communicated shortly before drawdown. It was not required to do more.
156The plaintiff bears the burden to establish notice of the subsequent equity. While questions of notice were raised in connection with the claimed set off under the Lease, the plaintiff did not address, in its pleadings or evidence, a case designed to establish notice of the equitable lien. I am not satisfied that the plaintiff has established a proper basis upon which the mortgagee should lose its priority as a secured creditor in relation to the second advance. On the evidence as it stands, the notice the mortgagee had of the facts from which a lien can be implied, was not sufficient to displace its priority as a secured creditor. Accordingly, I find that the second advance was secured by the mortgage without regard to the claimed equitable lien, if there was one.
[44]Reasons [155], [156].
For these reasons the appeal on equitable lien fails.
Right of recoupment
As mentioned earlier, this claim was neither pleaded nor run at trial, but by leave of the Judicial Registrar the notice of appeal was amended to rely upon it.
In their written submissions, McDonald’s counsel succinctly stated the principle relied upon and why it applied in the present case. The principle was expressed in this way, namely that where a tenant expends money to carry out necessary repairs to the leased premises that the landlord is required to but fails to carry out, or where the tenant at the landlord’s request pays an amount due by the landlord to a third party, the tenant has a right to recoup the expenditure by deducting it from the rent. Bendigo’s counsel did not question the accuracy of counsel’s statement of principle. There being no difference between the parties on the matter of principle, there is no need to refer to the authorities cited.
McDonald’s counsel submitted that the right should be recognised in the present case because McDonald’s expenditure had been agreed by BRI to be made, and it incontrovertibly benefited BRI and the mortgagee, by substantially increasing the value of Lot 1, in circumstances where BRI was obliged to reimburse McDonald’s up to $1,400,000. Finally, it was said that the obligation to pay rent ‘without any deductions’ in cl 2.1.1 of the Lease did not preclude the right of recoupment.
The principle is not applicable in the present circumstances. First, the construction costs were not expended in carrying out necessary repairs to the leased premises, that BRI had been required to but had failed to carry out. Secondly, the construction costs were not payable by BRI to any third party being the person or
persons who carried out the construction costs; BRI had no obligation to pay the contractor or contractors engaged by McDonald’s to carry out the construction of the restaurant. Nor did McDonald’s pay the $1,400,000 at BRI’s request.
That is sufficient to dispose of the contention. It should be noted, however, that counsel for Bendigo submitted that the mortgagee was not bound by any equity in respect of a right of recoupment against BRI. As to that, he referred to the statement of Beach J in Citibank Pty Ltd v Simon Fredericks Pty Ltd[45] that:
… a mortgagee in possession is not bound by any claims a tenant may have against the lessor-mortgagor. Upon default in payment of principal and interest due under a mortgage, a mortgagee is given a statutory right to the rent due under a lease of the mortgage property. See s 78 of the Transfer of Land Act. That right cannot be subject to any personal obligation of the mortgagor to the tenant.
[45][1993] 2 VR 168, 175; see also Westend Entertainment Centre Pty Ltd v Equity Trustees Limited [1999] VSC 514, [42].
Further, Bendigo’s counsel stated that if it were considered that McDonald’s had paid an amount at BRI’s request, the case would have to be reopened as to facts relating to that issue. In the circumstances it is not necessary to consider whether McDonald’s should not be permitted to rely on the ground, on account of prejudice to BRI.
Conclusion
For these reasons, the application for leave to amend Ground 7 and the appeal should be dismissed.
BEACH JA:
I have had the considerable advantage of reading in draft the reasons for judgment of Hansen JA. I agree with his Honour that, for the reasons given by him, the appellant’s application for leave to amend ground 7 should be refused and the appeal should be dismissed.
GARDE AJA:
I have had the benefit of reading the judgment of Hansen JA in draft. I agree with the reasons given by his Honour, and wish to make some additional observations as to why the rights of set off contained in cl 11.4 and 30.2 of the Agreement for Lease do not touch and concern the land, and do not run with the land.
It is a question of construction whether a contract or a particular right or obligation under a contract is of a personal character. The contractual intention as to the nature of any particular right or obligation is derived by construing the provisions of the contract in the light of the surrounding circumstances and subject matter.[46]
[46]Tolhurst v Associated Portland Cement Manufacturers (1900) Ltd [1903] AC 414, 416-7; Pacific Brands Sport & Leisure Pty Ltd v Underworks Pty Ltd (2006) 149 FCR 395, 404-5 [32] and 411 [59]; Australis Media Holdings Pty Ltd v Telstra Corporation Ltd (1998) 43 NSWLR 104, 118–20.
The Agreement for Lease was an agreement between BRI and McDonald’s. Clause 6 provided in substance for BRI to hand over its premises to McDonald’s, and for McDonald’s to construct a McDonald’s Family Restaurant Facility in accordance
with plans and a schedule of works attached to the Agreement for Lease. McDonald’s was responsible for the construction of buildings and most works. The Agreement for Lease was in a standard form, and also provided for the performance by BRI of car park pavement works and line marking. McDonald’s was to lease the premises for a term of fifteen years from the commencement of trading, with four further terms of five years each.
Clause 21 of the Agreement for Lease prohibited assignment or transfer of any interest under the Agreement for Lease without the prior written consent of the other party. The restriction on assignment points to the contractual intention that the Agreement for Lease was to be personal.[47] The only exception to the prohibition on assignment found in cl 21 operated in favour of McDonald’s not BRI, and related to the assignment of the Lease - not the Agreement for Lease. The exception was to the effect that McDonald’s was not prevented by cl 21 from assigning, transferring, subletting or parting with its interest in the Lease pursuant to the terms of the Lease.
[47]See Linden Gardens Trust Ltd v Lenesta Sludge Disposal Ltd [1994] 1 AC 85, 106 (Lord Browne-Wilkinson).
The term ‘Landlord’ in cl 1.1 of the Agreement for Lease was defined in an unusual and limited way to include “each natural person or corporation for the time being entitled to the reversion of the Premises immediately expectant on the termination or expiration of this Agreement …” What this definition was intended to achieve is obscure and was unclear during argument, even with the assistance of Senior Counsel for both parties. However, since this definition takes effect only on the reversion of the premises following the termination or expiration of the Agreement for Lease, it conforms with the personal nature of the Agreement for Lease. Clause 27 is a no merger clause. Clause 28 is an entire agreement clause. Both are consistent with the personal character of the Agreement for Lease.
The final consideration that starkly highlights the personal nature of the Agreement for Lease is the intentional contradiction between the rights of set off against rent found in cl 11.4 and 30.2 of the Agreement for Lease, and the “without any deductions” from rent stipulation found in cl 2.1 of the Lease. Why would experienced conveyancing solicitors provide in the Agreement for Lease that there were to be rights of set off against future rent, but negate any such right in the Lease itself? The answer can only be that the Agreement for Lease was intended to bind BRI and McDonald’s only, whereas the Lease was intended to run with the land for a lengthy period. It is perfectly understandable why the covenant for payment of rent as found in the Lease was agreed to be free of deductions. Senior Counsel for McDonald’s could not advance any other cogent explanation for the deliberate inconsistency between the Agreement for Lease and the Lease. It inevitably follows that the Agreement for Lease was intended to be personal between BRI and McDonald’s while the covenants in the Lease run with the land.
For these reasons, I agree with the opinion expressed by Hansen JA and by the trial judge that the Agreement for Lease was a personal contract between BRI and McDonald’s. The rights of set off against rent contained in cl 11.4 and 30.2 of the Agreement for Lease do not touch and concern the land, and do not run with the land. They do not bind Bendigo, and McDonald’s is not entitled to set off the outstanding construction costs owed by BRI under the Agreement for Lease against the rent payable to Bendigo under the Lease.
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