Eimear Coughlan

It is settled law that a failure to obtain the bank’s consent to the creation of a lease over mortgaged property renders the lease voidable. A question which recently arose before the High Court, in the case of Stafford v McCourt & anor [2017] IECH 726, was whether the bank’s awareness of a lease constituted consent to its creation.

Background to case

The case concerned borrowings by Mr. McCourt (the “Borrower”) from Anglo Irish Bank Corp PLC (“Anglo”) for €1.25 million, secured over two guesthouses in Dublin by way of a mortgage dated 12 August 2002 (the “Mortgage”). The Borrower defaulted on his repayments and a receiver, Mr. Stafford, was appointed over the properties in 2015. The Borrower resisted the receiver’s order for possession on the grounds that there was an oral lease between the Borrower as lessor and a company controlled by the borrower (the “Company”).

The Borrower claimed the lease was valid and had been in existence prior to the granting of the Mortgage. The kernel of the Borrower’s argument was that the terms of his Mortgage which prohibited him from leasing the properties in question did not apply to the lease to the Company as Anglo was aware of the lease and therefore consented to it. As a result, he argued that the receiver was prevented by the Company from obtaining possession of the properties and issued proceedings.

Dealing with the argument that Anglo was aware of the lease

The Mortgage executed by the Borrower contained clauses which prohibited him from leasing the two guesthouses without Anglo’s consent. The Borrower argued that the lease was in effect before he signed the Mortgage and that Anglo was aware of it. It was noted by the High Court that the onus was on the Borrower to establish that the lease existed and that Anglo consented to it. The Borrower sought to rely on a letter sent to Anglo by his financial advisor, who negotiated the loan with Anglo, which referred to rent and rates being paid by the Company to the Borrower.

Issue of Consent

Judge Twomey deemed the decision in Fennell v. N17 Electrics [2012] IEHC 228 “particularly relevant” and found that the mere fact that Anglo might have been aware that the Company was paying rent to the Borrower was not sufficient to grant the lease priority over the Mortgage. The High Court found that some further action was required from Anglo, such as serving notice on the Company that the rent was payable to them.

Furthermore, the High Court also noted that the Borrower’s solicitor had in fact confirmed that there was no lease in existence in his replies to the requisitions on title in respect of both properties, which were furnished by the borrower’s solicitor to Anglo prior to the granting of the loan.

In reaching a decision, the High Court also placed reliance on the term of the Mortgage which specifically stated that the borrower would not “permit to subsist” any lease of the two guesthouses. Therefore, if a lease was in existence at the time the Mortgage was signed, then the Borrower would have to bring this lease to an end.

Commercial reality

The High Court acknowledged that Anglo may have been lax in their dealings with the borrower as they were on notice that there may have been a lease when they received the letter from his financial advisor. However, the High Court stated that the commercial reality was that Anglo would rarely lend €1.25 million to a borrower unless it had a first legal charge over the property. Justice Twomey concluded that it was “inconceivable” that Anglo “would lend €1.25 million and then consent to the terms of a lease which render its security for those borrowings useless”.

Observation

This case highlights the importance for borrowers of obtaining express consent from the bank to the creation of a lease. It is also a cautionary tale for lenders to ensure that they thoroughly investigate whether a tenant is in situ at the time of granting a mortgage in order to avoid problems in dealing with the security in the future.

• Eimear Coughlan is a solicitor at O’Flynn Exhams Solicitors in Cork. View her profile here.