McDONALD'S Australia Limited v Bendigo and Adelaide Bank Limited and Benalla Retail Investments Pty Ltd

The dispute in McDonald's Australia Limited v Bendigo and Adelaide Bank Limited and Benalla Retail Investments Pty Ltd involved a complex set of contractual obligations surrounding a commercial lease. McDonald's Australia Limited (the tenant) entered into an agreement for lease with Benalla Retail Investments Pty Ltd (the landlord), which included a draft lease. Under the agreement, McDonald's was to construct works to enable the use of the property as a restaurant, with the landlord agreeing to reimburse McDonald's for the costs incurred. However, when the lease was finalised, the right of set off, which would have allowed the landlord to offset unpaid construction costs against the rent, was not included. The landlord subsequently defaulted on the payment of these costs, and McDonald's did not pursue payment through the courts. The property was later mortgaged to Bendigo and Adelaide Bank Limited, which took possession of the land when the landlord defaulted on mortgage payments. The central issues before the court were whether the mortgagee was bound by the right of set off, whether this right was a covenant that ran with the land, and whether the right was personal to the original parties.

The court held that the right of set off was personal to the original parties and not binding on the mortgagee. The court reasoned that the right of set off was not included in the formal lease, and therefore, it did not bind the mortgagee. Furthermore, the court determined that the right of set off did not run with the land as a covenant because it was not explicitly stated in the lease. Consequently, the court found that the equitable lien over the proceeds of the sale was not applicable as McDonald's had not sought payment of the costs within a reasonable time, and the mortgagee had a superior interest in the property. The court concluded that the landlord's obligation to reimburse McDonald's for the construction costs did not constitute a necessary repair or an amount due by the landlord to a third party, thereby negating the applicability of the right of recoupment.

The final orders of the court determined that the mortgagee was not bound by the right of set off and that the equitable lien did not apply. The court held that the landlord's obligation to reimburse McDonald's for the construction costs did not constitute a necessary repair or an amount due by the landlord to a third party, thereby negating the applicability of the right of recoupment. Consequently, the mortgagee's interest in the property remained unaffected by the landlord's previous obligations to McDonald's.