The borrower took out a loan to buy land in Victoria.
The borrower later agreed that McDonald’s could rent and build a restaurant on the land. As the improvements would form part of the borrower’s land, they were required to contribute to the costs of construction. The arrangements requiring the borrower to pay McDonald’s were set out in an agreement to lease but not in the lease itself.
The bank loaned the borrower further money to pay McDonald’s the construction costs, however, the borrower used these funds for other purposes. McDonald’s took more than a year to make any claim from the borrower, and by that time there were no funds left.
Under the agreement to lease, McDonald’s was allowed to stop paying the borrower rent to reduce the amount owed to McDonald’s by the borrower. It did so and the borrower was unable to make the repayments to the bank.
When the bank took possession and directed McDonald’s to pay it rent, McDonald’s tried to claim the same right to withhold rent against the Bank. It also claimed that its right to recover the construction contribution from the borrower took priority over part of the bank’s mortgage.
The Court of Appeal agreed with the trial judge that McDonald’s claims were without merit.
It held that McDonald’s and the borrower had structured their arrangements so that McDonald’s right to withhold rent did not travel with the land. This is because the parties had put the relevant right in the agreement to lease but left it out of the lease. As such the right to withhold rent was merely personal, between McDonald’s and the borrower.
As such, it did not affect the bank in taking possession. McDonald’s could not withhold rent from the bank. Moreover, McDonald’s could not establish any basis upon which the borrower’s debt to McDonald’s would be secured by the land in priority to any part of the borrower’s debt to the Bank.
The Court rejected McDonald’s claim to an equitable lien on essentially the same basis. McDonald’s had deliberately structured the arrangement with the borrower without taking any security in the land. Further, McDonald’s could not establish any right to recoupment which would take priority because the monies had not been expended in preserving the security.
The Court also refused McDonald’s any relief under the rule in Hopkinson v Rolt, which can in some instances prevent a mortgagee from tacking further advances to its mortgage where it has notice of a subsequent equity as it was improperly pleaded. However, the Court noted it would not have been likely to find that the borrower (and the bank, to the extent that it had notice) would be acting unconscientiously simply by disposing of the property as McDonald’s had no charge over it. Thus, there is no interest in the property that could be in priority to future payments by the bank.
Click here to read the full judgment