Magar v Arab Bank [2010] NSWSC 553

The mortgagor (“Aldi”) appointed receivers and managers to the mortgage security comprised of a service station property. The lender was mortgagee. The receivers sought declaratory relief to enable them to take possession of the property. Magar sought to restrain them from interfering with his right to possession, claiming an interest by way of a sub-lease granted by Aldi with the consent of the lender who had approved finance for capital expenditure. He claimed the bank’s conduct in denying his interest was unconscionable, or misleading and deceptive under s 51AB and 52 of the Trade Practices Act and sought damages.

The first issue was (irrespective of whether the lender as mortgagee was bound by the sub-lease to Magar) whether the receivers were entitled to possession as agent of Ald which would be inconsistent with the grant of a sub-lease by Aldi. The next issue was whether the receivers should be restrained from taking possession pending determination of the proceedings.

Justice Ward dealt with the different interests and rights of mortgagor and mortgagee, as follows:

there is no dispute that a registered mortgagee is not bound by a subsequent unregistered interest to which it has not consented. However, Mr Narayan relies on the decision of Palmer J in Antar v Fairchild Development Pty Ltd (R&M App) and Ors [2008] NSWSC 638, for the proposition that (whether or not Arab Bank, as mortgagee, would be bound by any lease of the kind which Mr Eddie Magar asserts) the Receivers (who have been appointed as, and as a matter of common law act as, the agents of Aldi Petroleum) cannot assert an entitlement to vacant possession against a third party (Mr Eddie Magar) with whom Aldi Petroleum entered into an enforceable agreement for lease (assuming for this purpose that Mr Eddie Magar can establish a binding agreement for lease or one which Aldi Petroleum is estopped from denying). Mr Narayan submits that the effect of the decision in Antar v Fairchild is that the summons brought by the Receivers must be dismissed.

Palmer J in Antar v Fairchild held, in effect, that where a receiver is appointed as agent for the mortgagor, the receiver cannot enforce a right that the mortgagor could not have itself enforced. So that where (as between a mortgagor/lessor and lessee) an unregistered lease is binding on the mortgagor, then where the mortgagee exercises its rights to appoint a receiver that receiver acting as agent of the mortgagor cannot exercise rights to possession greater than the mortgagor enjoys (and s 53(4) of the Real Property Act 1900 (NSW) will not operate to give the receiver an ability to take possession as against any unregistered lessee). 

Antar v Fairchild was followed by McDougall J in ACN 113 137 397 v Winterbottom [2010] NSWSC 421.

It was submitted that in circumstances where the lender knew about the sub-lease to Magar in providing finance to him there was a serious question as to whether the lender was estopped from denying its consent to the sub-lease. 
Justice ward agreed with the proposition in Antar and Winterbottom that where receivers are acting as agent for the mortgagor, then the receivers cannot enforce a right to possession which the mortgagor could not have asserted against an unregistered lessee, despite the fact that the mortgagee may not be bound by such a lease by reason of s 53(4) of the Real Property Act (“RP Act”) or otherwise.

Justice Ward discussed the limits of the protection afforded by s 52(4) of the RP Act, as follows:

In Antar v Fairchild, Palmer J considered the limits of the protection afforded to a registered mortgagee by s 53(4), as against an unregistered lessee of the mortgagor’s interest. After suggesting that s 53(4) does not invalidate or limit the rights and obligations between the lessor and the lessee themselves. Palmer J drew a distinction between the situation where a mortgagee seeks to exercise its power of sale, in which case s 53(4) may operate to allow the registered mortgagee to take possession without being subject to any unregistered lease not consented to, and the situation where receivers have been appointed by the mortgagee, but nonetheless are acting as the agent of the mortgagor, and will be bound in the same way as the mortgagor, who, as lessor, is bound by the unregistered lease as between the lessor and lessee, despite the operation of s 53(4).

His Honour said:

The Receivers … rely upon s 53(4) of the Real Property Act, which provides:

“A lease of land which is subject to a mortgage, charge or covenant charge is not valid or binding on the mortgagee, chargee or covenant chargee unless the mortgagee, chargee or covenant chargee has consented to the lease before it is registered.”

It is arguable that s 53(4) of the Real Property Act applies only when a leasehold interest is asserted against a mortgagee who has not consented to its grant; it does not invalidate the rights and obligations between the lessor and the lessee themselves. So, for example, a lease to which the mortgagee has not consented could not prevent the mortgagee from evicting the lessee in order to exercise its power of sale and to convey a title clear of the lease, but the lease would be enforceable by the lessee against the lessor and against anyone else other than the mortgagee: see e.g. Iron Trades Employers’ Insurance Association Ltd v Union of House & Land Investors Ltd [1937] Ch 313, at 317ff; Parkinson v Braham [1962] SR(NSW) 663.

His Honour noted that there was no exercise of the power of sale in that case. Rather the receivers, as agents of the mortgagor, were seeking to enforce a contract entered into by the mortgagor prior to their appointment. His Honour said that:

It seems to me that, as matters presently stand, it is premature for the Bank as mortgagee to insist on removal of the caveat protecting Mr Antar’s claimed leasehold interest. In the scenario which I have depicted, it may well never arise that the Bank has to exercise its power of sale because, as I have said, it may be that the contract with Northaxis will be specifically performed.

If, for some reason, the contract with Northaxis fails and is terminated by one side or the other so that the Bank is then directly and immediately confronted with the necessity to exercise its power of sale in its own right, as it were, rather than by adopting a contract made by Fairchild itself, then, if it wishes, it may prevail in its claim against Mr Antar so that his caveat does not stand in the way of a new sale.

Palmer J’s decision in Antar v Fairchild was briefly discussed, and applied, by McDougall J in Winterbottom. There, McDougall J confirmed that the operation of s 53(4) does not affect the enforceability of a lease as between lessor and lessee (whatever may be the rights of the mortgagee against the lessor as mortgagor) with the result that a receiver appointed to a lessor, when acting as agent of the lessor, will be exercising the rights of the mortgagor/lessor (not the rights of the mortgagee), and so will be bound by the terms of the lease and s 53(4) will not apply. Relevantly, McDougall J there pointed out that had the mortgagor instead exercised its powers under the mortgage to take possession in its own capacity, then it would have been able to do so without being subject to the lease, consequent upon s 53(4).

McDougall J distinguished the decision of the Full Court of the Supreme Court of Queensland in Lake Eerie Pty Ltd (Receiver and Managers appointed) Ltd v Flair Realty Pty Limited [1992] ANZ ConvR 627; (1992) Q ConvR 54-420 (which supported the proposition that receivers appointed by a mortgagee had not only their powers as agents of the mortgagor but also their powers as representatives of the mortgagee, and that their powers under the former head could be exercised in aid of their powers under the latter head). Whilst Lake Eerie might have appeared to suggest a contrary conclusion, insofar as there a receiver, acting as agent of the mortgagor, was nonetheless held not to be bound by a management agreement entered into by the mortgagor to which it had not consented (pursuant to which a third party was given the right to collect rents of a shopping centre and a charge in respect of such rents), McDougall J distinguished the case on the basis that the receivers in that case were not arguing the point of entitlement to possession as against an unregistered lessee but, rather, the rights of that unregistered lessee, pursuant to a deed of assignment, to receive the rents of the property in effect as agent of the lessor.

McDougall J stated:

In Antar v Fairchild Development Pty Ltd (R&M App) [2008] NSWSC 638, Palmer J pointed out at that even if s 53(4) of the Real Property Act 1900 (NSW) operated as between a lessee under an unregistered lease and a prior registered mortgagee, that had no impact “on the rights and obligations between the lessor and the lessee themselves”. His Honour noted that a lease entered into without the requisite consent of the mortgagee could not prevent the mortgagee from evicting the lessee so as to exercise its power of sale with vacant possession. But even in those circumstances, his Honour concluded, “the lease would be enforceable by the lessee against the lessor and against any one else other than the mortgagee.” His Honour referred to authority which, in my view, makes good the propositions that I have quoted.

Mr Henskens sought to distinguish what his Honour had said on the basis that that case was not concerned with the exercise of a power of sale of the mortgaged property, but, rather, with an attempt by the receivers to sell other property of the mortgagor, for the purpose of which, they said, they needed vacant possession. That does not seem to me to matter. It does not have any impact on the proposition that as between lessor and lessee, a lease may be enforceable even though it is not enforceable against a prior registered mortgagee from the lessor.

In this case, if the bank had itself gone into possession, or had gone into possession through the defendants, and if the defendants had purported to exercise the bank’s rights to possession, there could be no case for injunctive relief. But, as Mr Dubler submitted no doubt for good practical and legal reasons, the defendants chose to act not as the bank in possession, but as agent of Llerevni. It seems to me that if (as Palmer J said in Antar was the case) Llerevni could not evict Hotel Sands, then its agents, the receivers, acting in that capacity, could not do so. For those reasons, it seems to me, the notice to vacate given on 16 April 2010 is not effective in law as between Llerevni (or the defendants in their capacity as its agents) and Hotel Sands. (my emphasis)

Relevantly, for present purposes Mc Dougall J noted that:
It may be correct to say that the bank could rectify this position in the near future by going into possession itself, either directly or by appointing the defendants to receive the rents and profits of the property. If it did so, then its exercise of a right under the mortgage would undoubtedly enable it to obtain vacant possession as against the unregistered lessee… But in circumstances where the bank has chosen to act the way it did, and whether for it to act in other ways would mean that it attracted, among other things, legal obligations relating to its occupation and use of the mortgaged property, I do not think that relief should be refused simply on the grounds that the bank might take some further action.
(Judge’s emphasis)

Justice Ward accepted the reasoning in Antar and Winterbottom with the result that the  receivers as agents of Aldi as mortgagor (although their agency operates to protect the mortgagee) could not assert a right to possession which was inconsistent with that which Aldi could itself assert. There was a serious question to be tried as to the existence of the sub-lease claimed by Magar, as between Aldi and himself (whatever the position in relation to the estoppel claimed against Arab Bank). The Receivers were precluded from declaratory until that issue was resolved at final hearing.

It was left open for the lender to exercise its rights as mortgagee on the basis that it was not bound by the sub-lease, by newly appointing the receivers.
There was a serious question to be tried whether there was a binding sub-lease between Magar and Aldi, in circumstances where there was a signed document which contained an agreement for lease and where Magar had taken possession of the property.

Justice Ward was not convinced there was a serious question as to whether the lender was estopped form denying its consent to the granting of the sub-lease, and whether Aldi held the leasehold as constructive trustee for Magar relying on Bahr v Nicolay No. 2 (1988) 164 CLR 604. The lender had merely asserted that its consent was required for the grant to occur and had issued letters of offer to finance capital expenditure, without formal acceptance. If the only question had been whether the lender ought to be restrained form exercising its powers as mortgagee to take possession, Justice ward would not have found there was a serious question to be tried that would have stood in the way of them doing so.   

In the circumstances the balance of convenience favoured the status quo and Justice Ward granted the order restraining the receivers (as agents of Aldi) from taking possession prior to a final determination of the issues. There was no basis for restraining the lender from exercising its rights as mortgagee to take possession and sell the property, whether in its own right or by appointing receivers.

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