Dibeek Holdings Pty Limited v Emmanuel Notaras & Ors [2000] ACTSC 1 (2 February 2000)

Last Updated: 16 October 2000

DIBEEK HOLDINGS PTY LIMITED v EMMANUEL NOTARAS & ORS [2000] ACTSC 1 (2 February 2000)

CATCHWORDS

MORTGAGEE SALE - leased premises - appeal from Tenancy Tribunal - respondents had sub-leased property from a close relative's family company - company had earlier mortgaged property to a bank - bank claimed company in default and took possession of property as mortgagee - appellant purchased property from bank - appellant took possession of the sub-leased property, alleging, inter alia, breaches of covenants to pay rent - respondents argued that they had made payments to the company which originally owned the property - such payments were characterised as rent in advance - rent in advance agreement had been made with bank's knowledge and without objection - whether the Tribunal erred in law in finding the respondents were in arrears as their rent in advance agreement was ineffective - Tribunal made an error of law in deciding that the agreement was ineffective because it occurred after the mortgage - whether the respondents therefore had no liability to pay rent to first the Bank and then the appellant - legislation and case law considered - bank and appellant had relevant notice of the respondents' equitable entitlement to have future rentals regarded as paid - appellant not entitled to terminate the respondents sub-leases or refuse to honour options for their renewal on the ground of non-payment of rent - Tribunal's orders set aside.

Tenancy Tribunal Act 1994

Land Titles Act 1925, s 59

Transfer of Land Act 1893 (WA)

Transfer of Land Act 1958 (Vic), s 81

Conveyancing Act 1919-1954

Conveyancing and Law of Property Act 1898 (NSW) (ACT), s 95

Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298

De Nicholls v Saunders (1870) LR 5 CP 589, 593

Harrison v Petkovic [1975] VR 79

Green et anor v Rheinberg (1911) 104 LT 149

Lord Ashburton v Nocton [1915] 1 Ch 274

Ellis v Wallsend District Hospital (1989) 17 NSWLR 553

Minister for Immigration v Teo (1995) 57 FCR 194

Minister for Immigration v Singh (1997) 144 ALR 284

Bahr v Nicolay [No 2] [1988] HCA 16; (1988) 164 CLR 604

Achatz v De Reuver [1971] SASR 240

Valbirn Pty Ltd v Powprop Pty Ltd [1991] 1 Qd 295

Campion v Randwick Council (1934) 34 SR (NSW) 167

Cook v Guerra (1872) LR 7 CP 132

Grace Rymer Investments Ltd v Waite [1958] 1 Ch 831

Roxburghe v Cox (1881) 17 Ch D 520

Edward Nelson & Co Ltd v Faber & Co [1903] 2 KB 367, 375

Clyne v Lowe (1968) 69 SR (NSW) 433

SEAA Enterprises Pty Ltd v Figgins Holdings Pty Ltd [1998] 2 VR 90

Figgins Holdings Pty Ltd v SEAA Enterprises Pty Ltd [1999] HCA 20; (1999) 162 ALR 382

Commonwealth Bank of Australia v Figgins Holdings Pty Ltd [1994] 2 VR 505

J L Smallman Ltd v Castle [1965] IESC 1; [1932] IR 294

Municipal Permanent Investment Building Society v Smith (1888) 22 QBD 70

ON APPEAL FROM THE ACT TENANCY TRIBUNAL

No. SCA 71 of 1998

Judge: Higgins J

Supreme Court of the ACT

Date: 2 February 2000

IN THE SUPREME COURT OF THE )

) No. SCA 71 of 1998

AUSTRALIAN CAPITAL TERRITORY )

ON APPEAL FROM THE ACT TENANCY TRIBUNAL

BETWEEN: DIBEEK HOLDINGS PTY LIMITED

Appellant

AND: EMMANUEL NOTARAS, HELEN NOTARAS and STAMATINA KAROUZOS

Respondents

ORDER

Judge: Higgins J

Date: 2 February 2000

Place: Canberra

THE COURT ORDERS THAT:

1. The Cross-Appeal be upheld.

2. The matter be remitted to the Tribunal to rehear the dispute and, if appropriate, assess the damages due to the respondents in accordance with these Reasons.

1. This is an appeal and cross-appeal from a decision of the Tenancy Tribunal of the Australian Capital Territory (the Tribunal), constituted by President Burns.

2. The first appeal was filed by the appellant, Dibeek Holdings Pty Ltd (Dibeek). It sought to reverse the order made by the Tribunal that monies paid by way of rent by the Salvation Army should be regarded as reducing the order for monies payable by the respondents.

3. The respondents cross-appealed. There were a number of grounds. The dispute as to the rent paid by the Salvation Army was resolved. Dibeek withdrew its appeal in respect of that matter.

4. The respondents did not press a complaint against the Tribunal's decision that it failed to take account of the decision by Dibeek's predecessor in title to allow the respondents to remain in occupation of the demised premises. They did not press a complaint of denial of natural justice.

5. It is necessary to have regard to the history of the matter. It is particularly relevant in circumstances where, as is the case with the Tribunal, an appeal to this court lies only in respect of an error of law, not in respect of a factual conclusion.

History

6. The dispute relates to an area of land subject to a single Crown Lease. That area is known as the Tuggeranong Markets (the Markets). The registered proprietor was Gahahan Pty Ltd (GPL). That was a family company of Mr George Notaras. He is a brother of the first and third respondents and a son of the second respondent.

7. The premises comprising the Markets were subdivided into various Units. The Units were sublet to various persons. Subleases (leases) were granted to the respondents by GPL over thirteen of those Units.

8. On 8 January 1990, GPL granted a mortgage over the Markets to Advance Bank Ltd (the Bank).

9. The leases granted by GPL to the respondents were:

* On 1 June 1994, Units one to six and sixteen to eighteen for three years from 1 June 1994, with options to renew.

* On 1 October 1994, Units seven and eight for three years from 1 October 1994, with options to renew.

* There was an additional arrangement entered into in August 1995 in respect of Units nine and ten on terms that no additional rent was payable to that payable for Units seven and eight.

10. The first two groups of leases were in writing. The third was an occupation agreement, allegedly pursuant to an oral agreement, evidenced at least partially in writing. That was claimed by the respondents to give rise to a statutory right to a five year lease from October 1995.

11. On 3 June 1996, the Bank took possession of all the Units alleging that GPL was in default under the mortgage. It thereby became, as mortgagee in possession, effectively the landlord in relation to each of the Units or groups of Units.

12. On the same day the respondents granted an underlease to the Salvation Army in respect of Unit one. However, as the appeal in respect of that issue is not pressed it is not necessary to consider that matter further.

13. On 22 August 1996, GPL executed a variation of the sublease in respect of Unit one, extending its term to 31 May 1999. No issue is raised on this appeal concerning that transaction.

14. Dibeek purchased the Markets from the Bank on 5 February 1997. Part of the agreement was an assignment by the Bank to Dibeek of the Bank's rights (if any) to recover unpaid rents for the period 3 June 1996 to 4 February 1997.

15. The respondents sought from Dibeek on 27 March 1997, a five year lease from October 1995 over Units nine and ten, relying on clause 35 of the Commercial and Retail Tenancies Code of Practice (the Code). On 28 April 1997, the respondents purported to exercise options to renew their leases over Units two to six and sixteen to eighteen. On 30 September 1997, they purported to exercise options to renew their leases over Units seven and eight.

16. Notwithstanding these claims by the respondents, Dibeek took possession of Units one to eight and sixteen to eighteen on 7 October 1997 and of Units nine and ten on 4 December 1997 relying on alleged breaches of the covenants to pay rent and other "performance breaches" not the subject of any finding by the Tribunal and, hence, not relevant to this appeal. They may become relevant if the Tribunal rehears the dispute.

The Dispute

17. The respondents filed Notices of Dispute under the Tenancy Tribunal Act 1994 (ACT) (the TT Act). They alleged that Dibeek had wrongfully taken possession of the Units.

18. Dibeek alleged breach of the leases in respect of Units one to eight and sixteen to eighteen in two respects. The first, non-payment of rent. The second, so-called "performance breaches". President Burns did not find it necessary to rule on those latter breaches. If Dibeek has standing to press those breaches, it may be necessary to determine them, if the matter is to be reheard.

19. The respondents denied being in arrears in relation to rent. They also denied the "performance breaches" but that issue is not part of this appeal.

20. In relation to Units nine and ten, different matters of dispute arose. Dibeek denied that the alleged oral arrangement between the respondents and Mr George Notaras of GPL constituted an agreement for a lease for the purposes of the Code. Thus, Dibeek contended, there was no such entitlement as the respondents asserted. It was merely a permissive occupancy pending re-letting. The respondents acknowledged that if a lease was required to be granted under the Code then it would not be rent-free.

Payment of Rent

21. It was not contended by the respondents that, if they were, in fact, in breach of the covenants to pay rent, as alleged, they could lawfully resist the claim of Dibeek to possession and, hence, to damages for breach of the covenant to pay rent beyond the termination date and to arrears of rent before then.

22. The breach, if established, of the covenants for payment of rent, would also have prevented the respondents from validly exercising their options to renew the leases in question.

23. The respondents contended that they had been relieved of the obligation to pay rent after the Bank entered into possession in consideration of previous payments they had made to GPL before control of the premises passed to the Bank on 3 June 1996.

24. It was found as a fact by President Burns that, between 26 May 1994 and 3 April 1996, the respondents paid $544,365, much of it over and above the reserved rent which had by then fallen due, to GPL.

25. That was not really disputed by Dibeek. The payments were genuinely made.

26. However, the real issue, as the parties and the learned President viewed it, was whether those payments were to be characterised as prepayments of rent or whether they were simply advances to a family company with a view to propping it up financially, redefined to be characterised as rent when those unsecured loans appeared threatened by GPL's looming insolvency, and, if so, whether that affected the rights of the parties.

The evidence before the Tribunal

27. Ordinarily, absent other considerations, payments by a tenant to a landlord, would be assumed to be payments for rent (including outgoings treated as rent).

28. The first respondent provided affidavit evidence that:

* Since 1992 the respondents had provided funds to GPL to enable it to keep the Markets going and to enable them to be sold as a going concern.

* In 1992, George and Emmanuel Notaras came to an understanding that a change of lease purpose would be necessary to attract a lead business like a supermarket.

* In about April/May 1994, Emmanuel Notaras proposed to George Notaras that the respondents themselves establish the supermarket.

29. None of those matters was disputed.

30. Following that discussion, Emmanuel claimed that he said to George:

"We are happy to continue to help the company with the operation of the Markets, but any further payments to the company will have to be credited against our rent account under our leases."

31. That was not conceded by Dibeek, though, of course, it could not directly contradict the assertion. The respondents also proposed at about that time to take further leases to enable a supermarket to be set up. That assertion was not disputed. Indeed, it is evident that they did so.

32. George Notaras provided an affidavit to much the same effect. He deposed that GPL had accepted the proposal referred to by Emmanuel Notaras.

33. Thus it was said to be agreed that payments over and above rent currently due would be (according to George Notaras' understanding):

"...a rent credit to the [respondents] for some time in the future."

34. That such an arrangement was made at that time, as the learned President noted, was not one that was unsupported by any contemporary records of either GPL or the respondents.

35. GPL needed the Bank's consent to the proposed subleases and to the supermarket proposal. It needed consent to register the leases. Negotiations with the Bank were put in train after the leases were executed as between GPL and the respondents. On 15 June 1995, GPL's solicitors, Messrs Snedden Hall & Gallop, (who were also solicitors for the respondents) wrote to the Bank accordingly. In part of that letter, they disclosed that:

"Some rentals for these leases which are progressively paid in advance have attracted a modest reduction in gross rent levels."

36. The family connection of the lessor and lessees was put forward as a positive advantage in support of GPL's case for consent to the leases with the respondents.

37. Clayton Utz, solicitors for the Bank, responded on 23 August 1995. They referred to a notice to GPL requiring repayment of monies due to the Bank. In doing so, however, they also referred to a document which had purported to show that Notaras family members had pre-paid rentals to "various dates in 1997". The leases had already been consented to on 30 June 1995 and registered on 9 August 1995. They continued:

"When [GPL] sought the consent of the Bank to enter into various lease agreements with members of the Notaras family there was no mention made of any intention to prepay rents and the Bank therefore requires evidence of such prepayment as a matter of urgency. If satisfactory evidence is not forthcoming the Bank will not accept the allegation that rents have been prepaid and will be looking to the various tenants concerned for payment of rent in the event that the Bank enters into possession of the properties by way of receiving rents and profits."

38. It will be observed that the solicitors for the Bank, whether inadvertently or otherwise, had incorrectly suggested that prepayment had not been referred to. It had been referred to in quite clear terms. It may be that the Bank had not instructed its solicitors as to the terms of the letter from Messrs Snedden Hall & Gallop of 15 June 1995.

39. Indeed, by way of response, dated 28 August 1995, GPL's solicitors addressed that issue, adding that the Bank had been aware of the sources of funds made available to GPL by the respondents since May 1994. That was not disputed, though whether it was aware that those funds had been then characterised as rent is another matter.

40. It was further suggested by GPL's solicitors that the prepayments had made sale of the businesses operated by the respondents more attractive to a buyer, as well as having the advantage of tiding GPL over its financial difficulties.

41. That correspondence set up a case the Bank could not deny. It was aware, as from June 1995, and accepted, that the respondents had, at least, purported to pay rentals in advance. It could not complain then if the sum so paid equalled the rental due for the balance of the lease ie. had paid out the value of the rental covenant. Before the Tribunal the debate concerned itself with an issue as to whether advances had, as from May 1994, been characterised as credits against rent, including future rents.

42. In relation to that issue, the President noted that payments before and after the entry into the new leases had continued to be made on an "as required" basis. They were not calculated by reference to the rents falling due from time to time. That was not significant of itself as it was the respondents' assertion that these advances were designed primarily to prop up GPL's financial position.

43. The internal records of GPL did not purport to characterise the payments in question as "rent". They were accounted for in GPL's books as being credited to loan accounts in favour of the respondents. There were no tax returns prepared for GPL for the relevant period. If there had been "rent" paid, GPL would have needed to declare it as income. "Loan" funds would have been a contribution to capital subject to a liability to repay it. Interest, if any, levied on the loans would have been an allowable deduction.

44. Further, if the loan accounts were to be regarded as appropriated to future rents as they fell due, the President noted that, contrary to his expectation if that was so, no deductions were made for such rental liabilities. At the time of the Tribunal hearing, of course, no tax returns for the relevant period had been prepared, nor were they then relevantly overdue.

45. No records were produced by the respondents to show that they treated the payments they made as "rent". The President was not impressed by Mr Emmanuel Notaras' suggestion that such records might have been lost due to the taking of possession of the premises by the Bank.

46. Be that as it may, the rule in Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298 entitled the President to infer that the absent records would not have assisted the respondents' case, as he did.

47. Clearly, as the President inferred, the respondents had both family and business reasons to assist GPL. It was a sensible economic objective to sell the Units and/or the Markets themselves as a going concern. Those objectives would be well-served if long-term, stable tenants were in place and if few vacancies were apparent. A "prepaid" tenant would have had a powerful incentive to stay, though the future rental stream to a purchaser of the Markets would thereby be lessened, assuming that such prepayment could, in law, be effective against such a purchaser.

48. The President concluded that the correspondence emanating from GPL's solicitors, was "cryptic". It did not, he said, refer to "a specific agreement for rent to be paid in advance in the terms of that now alleged."

49. It is correct that the letter of 15 June 1995 did not specify the quantum of prepayments which had been made or which were proposed. Nor did the evidence suggest that the agreement between George and Emmanuel Notaras, even if made when they said it was, was that specific. However, GPL did, clearly, put the Bank on notice that some arrangement for prepayment of rent had, as at 15 June 1995, occurred. If the Bank considered that occurrence might affect its interests, as clearly it belatedly recognised as at 23 August 1995, it could have, as it then did, enquire as to the nature and extent of those prepayments.

50. This is not an appeal by way of rehearing. Thus, if the time at which the agreement to appropriate loan funds, including future advances, was significant, there could be no appeal against the Tribunal's conclusion that it had not occurred during 1994. However, if the terms of the letter of 15 June 1995 gave a sufficient notice of such an agreement, then that issue would become irrelevant. In any event, it is Dibeek's contention that, as a matter of law, the prepayment of rent, even if made, would not bind it or the Bank as mortgagee. That is the central issue of law involved in this appeal.

51. It is necessary, however, before considering that issue, to consider that status of President Burns rejection of the Notaras brothers' evidence that, in 1994, they had agreed that the payments made by way of advances to GPL by the respondents should then and in future be characterised as rent.

52. That conclusion was one of fact. It is not open to attack on this appeal.

53. However, it seems to me, with respect, that the factual issue addressed by the Tribunal was irrelevant. Certainly, if there had been such an agreement in 1994, it would have had effect as at the date on which the Bank consented to the leases of the Units in question. However, an agreement reached, even as late as 15 June 1995, would be equally effective (or ineffective). In truth, it would make no difference to that question whether the agreement was made at any other time between the grant of the mortgage and the Bank's consent to the leases.

54. It was undeniable that, when the letter of 15 June 1995 was sent, the respondents had by then agreed with GPL that the monies due from GPL and to be advanced to it would henceforth be appropriated to rent due or to become due. That was an express representation made by GPL to obtain the Bank's consent to the leases. Indeed, it was not a representation which GPL could have denied. Nor, in the circumstances, could the respondents, having assented to the making of the representation, deny the truth of it so far as it concerned or was made to any third party who had acted on that representation. Nor did they attempt to do so.

The nature and effect of a prepayment of rent

55. The respondents submitted that the prepayment of rent was binding on the Bank as mortgagee. That was disputed by Dibeek. It contended, first, that a mortgagee was not bound by a landlord/mortgagor's acceptance of prepayments of rent by a tenant. It further contended that such a prepayment was not binding on it as transferee from GPL by operation of the mortgagee's power of sale.

56. President Burns concluded, applying De Nicholls v Saunders (1870) LR 5 CP 589 and Harrison v Petkovic [1975] VR 79, that:

"A payment of an amount to a lessor before it is due is therefore not a payment of rent, but is payment in gross or an advance to the lessor with a collateral agreement that the lessor will treat that payment as a fulfilment of the lessee's obligation to pay rent as and when that obligation arises."

57. That does not, of course, address the question as to the binding force of the agreement to appropriate prepayments to rent as it fell due or whether such an agreement, if made, could bind a successor in title to the lessor. Whilst conceding the possibility that a successor in title might be bound to honour such an arrangement, the learned President concluded that it did not do so as against a mortgagee where the agreement was made after the mortgage had been granted. The decisions recognising the binding force of such an agreement on a successor in title to the landlord were, in President Burns' view, based on actual or constructive notice to the successor in title that such an arrangement had been made - (referring to Green et anor v Rheinberg (1911) 104 LT 149 and Lord Ashburton v Nocton [1915] 1 Ch 274). It is not entirely clear if the learned President accepted that, if the appropriation of loan monies paid to future rent had been agreed in early 1994, it would have bound the Bank.

58. Nevertheless, following his finding there was no agreement for prepayment at the time the respondents had advanced monies to GPL, the learned President concluded:

"A discharge for rent payable under a lease may only be given by the person to whom the rent is payable at the time that payment of the rent became due."

59. It followed, in the Tribunal's view, that the mortgagee could not be bound by an alleged agreement not in existence when the mortgage was entered into, at least in the absence of specific notice of it to the mortgagee before the payments in question were made.

60. In this case, the Bank as mortgagee had no notice, actual or constructive, of the arrangement for prepayment before the mortgage was granted. Indeed, on any account of it, that arrangement had yet to be made. Thus, in the Tribunal's view, not only was the Bank not bound, but Dibeek, as purchaser from the Bank also was not bound by the prepayment agreement.

61. The learned President concluded that the truth was that:

"...the assertion of such an agreement is an afterthought of Mr Emmanuel Notaras and Mr George Notaras to enable the applicants to continue as occupants of a significant portion of the Markets should the Bank take possession and/or sell the Markets without the [respondents] having to risk further significant funds".

62. In general terms that conclusion was open to the Tribunal. However, it leaves open the question as to when the "afterthought" was first put into effect. It must have been before the letter of 15 June 1995 was sent to the Bank. The Tribunal must, therefore, have been taken to have found that such an agreement, if then made, was of no effect.

63. That finding raises a question of law for consideration.

64. In relation to Units nine and ten, President Burns was satisfied that the arrangement between the respondents and GPL had not been intended to be a "lease" within the meaning of the TT Act. On its face it appeared to be an arrangement that the respondents would, as a favour to GPL, use and occupy those units to avoid an appearance of vacancy, pending re-letting.

65. That was a question of fact for the Tribunal to determine. It seemed unlikely to the learned President that the parties had intended that either would be bound to a five year lease which, otherwise, the Code would require. In truth, there was no evidence that the parties ever turned their minds to the consequences flowing from the occupation by the respondents of Units nine and ten. Thus, the Tribunal concluded, the respondents had no entitlement to a lease over Units nine and ten.

66. Dibeek's claim for damages was then allowed. In effect, President Burns allowed Dibeek's claim for rental, being the entitlement thereto assigned to it by the Bank and the value of the rental covenants as from re-entry until termination of the leases over Units one to eight and sixteen to eighteen.

67. The total assessed was $302,684.85. It does not appear that that sum was disputed as being a proper calculation of rental due and assessment of damages.

The submissions of the Parties

68. The respondents did not pursue their appeal in respect of Units nine and ten. That seems to me to have been a proper concession. It was a question of fact for President Burns to determine and no error of law appeared.

69. As to the remaining Units, save for Unit one, where the issue does not arise, the respondents contended that the alleged agreement for prepayment of rent precluded Dibeek from terminating those leases for non-payment of rent.

70. The foundational difficulty in the way of that submission was, of course, s 58 of the TT Act. It permits an appeal only in respect of "a question of law" (s 58(1)).

71. Whether or not there was an agreement as alleged, the respondents concede, is, ultimately, a question of fact. However, they contended that errors of law did appear in the Tribunal's reasoning in coming to that conclusion. That, in their submission, raised a "question of law" which, if erroneously answered, has vitiated the Tribunal's finding. I have already indicated that, in truth, the issue was not relevant to the question which required an answer. However, in deference to those submissions I will give them consideration.

72. The matters taken into account by the Tribunal, the respondents further contended, were, even collectively, of insufficient weight to have warranted the rejection of the evidence that such an agreement had been reached. Indeed, they contend that it was not open to the Tribunal to conclude otherwise than that there had been an agreement such as that alleged by the respondents and Mr George Notaras.

73. Those matters were as follows.

Transaction not "at arm's length"

74. The respondents do not dispute the premise. They contend that the conclusion drawn was not consistent with it. Instead, they suggest, it should have been concluded that, because the parties were trying to keep the Markets afloat, they would favour characterising the payments made as "rent" rather than as a loan. Because the parties were related there was less need to record the transactions. They would not foresee a dispute about it. There is considerable force in this contention.

No other payments recorded as having been made by way of rent

75. The respondents contend that, rather than favouring the view that the payments were not intended to be characterised as rent, that consideration favours the opposite conclusion. Given there could be either a liquidation of GPL or foreclosure by the Bank, why would the respondents, they ask, risk an allegation that rent was not paid? Indeed, they would strive for overpayment both to keep the markets apparently occupied and functioning and to ensure their own continued tenure if the control over or identity of the landlord changed.

76. Indeed, the view that an "advance" rather than prepayment of rent would favour either party was, apparently, based on the Tribunal's incorrect assumption that, if GPL was put into liquidation, the monies advanced by the respondents to GPL could be claimed in full from GPL. As an unsecured creditor, the respondents would have been at risk of being returned less than 100% in the dollar if GPL was put into liquidation. They would, however, have had to pay the full value of any outstanding rent. It would have been against their interests not to insist that monies previously advanced and any monies to be advanced to keep GPL afloat should be credited to rent both past and future. Again, there is some force in that submission.

No record kept as to character of payments received

77. The payments made said to be characterised as rent were not recorded as such by GPL. The respondents point out that each of the similar payments made before the leases in question were entered into were similarly uncharacterised. Given the size and frequency of the advances, the respondents contend, it would be plainly absurd to suppose that the respondents were simply making a gift of those advances to GPL. Indeed, neither Dibeek nor the Tribunal advanced or entertained that hypothesis. They were, at least, loan funds repayable at reasonable notice.

78. As to the lack of record of appropriating or "writing-off" those advances to rents as they fell due, the respondents contended that, as GPL was in liquidation at the time of the proceedings before the Tribunal, the adverse inference from the absence of such records should not, as a matter of law, have been drawn.

79. Further, it is said, the Tribunal did not appreciate that the records of GPL were never under the control of the respondents.

80. To my mind, this consideration would be relevant only if it was necessary to find that the agreement to prepay rents predated the mortgage or had occurred significantly before 15 June 1995. This consideration seems to me to be relatively neutral.

The agreement was an "afterthought"

81. The contention of the respondents was that, as the case was conducted, Dibeek did not seriously contest the proposition that the alleged agreement was made. Thus it was not open to the Tribunal to reject the evidence of the Notaras brothers that the agreement had been made as they alleged. That is not quite accurate. Dibeek did challenge the assertion that there was such an agreement in place as at the date when the Notaras brothers asserted that it was made.

82. The terms of the letter of 15 June 1995 clearly asserted prepayment of rent. It could not be contended that, by then, there had been no such agreement. Indeed, it had been put forward by GPL as a representation favouring the grant of consent by the mortgagee to the registration of leases in question. It was open to the Tribunal, as I have noted, to have concluded that the agreement there asserted had been recently made, as an "afterthought" prompted by GPL's continuing financial difficulties.

The question of fact or law

83. Dibeek contends that none of those matters, severally or in combination raises any question of law which has been erroneously decided.

84. The first question is whether the conclusion to which the Tribunal came, that the prepayment agreement was not made significantly prior to 15 June 1995 was in error. It was not. But it did fail to address the real question which was whether, after the mortgage was entered into, but by 15 June 1995, a prepayment agreement had been made between GPL and the respondents with a view to redefining the status of the balance of monies already advanced and applying those balances to rental payment including future rents. To my mind, the letter of 15 June 1995 establishes beyond doubt that, at least by then, and for whatever motive, GPL and the respondents had decided to characterise the payments made and to be made by the respondents to GPL as either rent or a prepayment of rent (as the case may be).

85. That the motive was to advantage the Notaras' interests whether or not it disadvantaged the Bank is irrelevant. Even if that motive was to be assumed and characterised as a "sharp" practice that does not deny its existence nor does it deprive it of such legal effect as it was capable of.

86. It seems to me that the Tribunal assumed that, unless it was accepted that the agreement asserted by the letter of 15 June 1995 was made in 1994, it had no legal effect. Of course, it was open to the Tribunal to be unpersuaded by the contention that the agreement was made as early as 1994. However, that does not mean that an agreement later reached, even if for an unmeritorious motive and as an "afterthought" brought on by the perilous financial state of GPL, had no legal effect.

87. In so concluding, I do not accept the argument advanced by the respondents that the evidence supporting an ab initio agreement was "uncontradicted", and so, must be accepted. That submission, though pressed by the respondents, is not sustainable (see eg. Ellis v Wallsend District Hospital (1989) 17 NSWLR 553).

88. Whether or not I might have concluded otherwise, it was open to the Tribunal to have rejected the evidence of the Notaras brothers as to when and in what terms they came to agree upon the application of the monies undoubtedly paid by the respondents to GPL towards rent, including future rent as it fell due.

89. It was not open to the Tribunal to conclude that there had not, as at 15 June 1995, been such an agreement. The Tribunal did not address that question. The letter of 15 June 1995 itself evidenced that agreement and made it legally impossible for the parties to it, even had they desired to do so, to deny the truth of it.

90. The distinction between error of law and of fact was discussed at length in Minister for Immigration v Teo (1995) 57 FCR 194, 199-202 (Black CJ, Gummow and Beazley JJ) - see also Minister for Immigration v Singh (1997) 144 ALR 284.

91. In my view, the Tribunal erred in law in failing to appreciate the significance of the objective fact constituted by the solicitors' letter of 15 June 1995.

92. As both parties agree, that is not an end to the matter. The question is whether the effect of having characterised monies standing as a credit to the respondents in GPL's loan accounts as "rent" discharges the respondents' liability to pay rent falling due after the entry into possession of the premises by the Bank as mortgagee.

The effect of Prepayment of Rent

93. The facts surrounding the prepayments made are not, relevantly, in doubt.

94. As at 15 June 1995, the mortgage to the Bank had been in place since 8 January 1990. The leases in question had been in place since 1 June 1994 (Units one to six and sixteen to eighteen) and 1 October 1994 (Units seven to eight).

95. After being informed of the prepayment of rents, in terms suggesting that the practice would continue, the Bank formally consented to those leases on 30 June 1995.

96. Thus, whatever the legal effect of prepayment of rents, neither the respondents nor the Bank can complain of any lack of notice that rents had been, and might well continue to be, prepaid. Insofar as the Bank was unaware of the extent of prepayment past or future it had only itself to blame. It could (as it later did) enquire of GPL or the respondents as to the extent of the prepayment which had then taken place and was thereafter intended (if at all).

97. If the prepayments were effective against Dibeek, there were no arrears of rent entitling Dibeek, as at 7 October 1997, to decline to honour the options for renewal and to re-enter. It was not alleged that there was any assignment to Dibeek of any right the Bank might have had (if any) to terminate the respondent's leases for breach of the covenant to pay rent (or, indeed, for any other breach of covenant). Insofar as the prepayments were effective against the Bank, Dibeek could not recover the rent due from 3 June 1996 to 5 February 1997. That right could only arise by virtue of the assignment to Dibeek of the Bank's rights to those rents.

98. It is not disputed that, up until 3 June 1996, the power to give a discharge for the obligation to pay rent was vested in GPL - (see De Nicholls v Saunders (1870) LR 5 CP 589, 593).

99. At common law, a mortgage was an assignment of the reversion of an estate. Under the Torrens system the right to receive and give a valid discharge for rents receivable, vests in the registered proprietor of the primary estate unless and until a mortgagee lawfully enters into possession. In other words, subject to the terms of the mortgage itself and the provisions of the LTA, a mortgagor may deal with the reversion as if the mortgage had never been granted.

100. A mortgagee under the Torrens system is in the same position as a judgment creditor seeking to execute upon lands by a writ of elegit. The mortgagor's power to give or agree to give a discharge for rent present and future continues unaltered unless and until the mortgagee enters into possession of the rents and profits of the land.

101. The Court of Appeal in Lord Ashburton v Nocton (supra) referred to the contrast between a mortgage transferring the legal estate in land and a creditor obtaining registration of writs of elegit who only then becomes entitled to receive the rents and profits.

102. Swinfen Eady LJ, at 290-1, considered whether the prepayment of rents by a tenant to a judgment debtor in advance bound a judgment creditor in respect of rent prepaid before the writs were registered but in respect of rents falling due thereafter. His Lordship stated,

"A prepayment is not really a payment of rent, as was pointed out by Willes J in De Nicholls v Saunders (LR 5 CP 589). He said (LR 5 CP 594): `Payment of rent before it is due is not a fulfilment of the obligation imposed by the covenant to pay rent, but is, in fact, an advance to the landlord, with an agreement that on the day when the rent becomes due such advance shall be treated as a fulfilment of the obligation to pay the rent'. But in that case, as in the present, when the day for payment arrived, the landlord was not in a position to give a discharge for the rent. Here the receiver claimed it before the due date. A prepayment will be good, to the amount of the rent which becomes actually due, before notice has been given to the tenant by the mortgagee, although not as to the residue."

103. That, on its face, would not assist the respondents.

104. However, the respondents contend that because, at least from 15 June 1995, the Bank had notice, actual or constructive, of the prepayments of rent and gave consent to the leases nevertheless, it was bound to honour that prepayment agreement. Notice is not relevant in the case of a judgment creditor.

105. The Tribunal took the view that the prepayment agreement, had it been made, could have been binding on a mortgagee or purchaser only if the mortgagee or purchaser had notice of the lessee's rights under that collateral agreement.

106. There was, of course, no such agreement at the time the mortgagee took the mortgage. The Tribunal concluded that the relevant time for considering when notice affected the mortgagee was when the mortgage was entered into. It followed that the notice given on 15 June 1995 was not effective to bind either the mortgagee or Dibeek as its successor in title. Of course, that conclusion, if correct, made the issue as to when the prepayment agreement was made irrelevant.

107. The respondents do not disagree with the Tribunal's acceptance that notice of prepayment is necessary to bind a successor in title taking a legal interest with no notice of that agreement. However, they contend that the relevant time to consider whether notice had been given was when the leases were consented to, not when the mortgage was taken.

108. Dibeek not only supports the Tribunal's reasoning so far as the relevant date for notice is concerned, but goes further and contends that in no circumstances is a mortgagee bound to accept the consequence of any agreement for prepayment of rent by a tenant with a previous landlord.

109. That latter submission relied particularly on s 59 of the Land Titles Act 1925 (ACT) (LTA) which, on its face, provides that the interest of a registered mortgagee is not:-

"... affected by notice, direct or constructive, of any trust or unregistered interest, any rule of law or equity to the contrary notwithstanding."

110. The benefit of the prepayment agreement is not a registered (or registrable) interest. Insofar as Dibeek relies on the indefeasibility principle, however, I am in agreement with the submission of counsel for the respondents. The reliance upon s 59 (LTA) is misconceived - see Bahr v Nicolay [No 2] [1988] HCA 16; (1988) 164 CLR 604. The leases in question are protected as burdens upon the title of GPL, whether or not registered, by virtue of s 58(1)(d) (LTA).

111. The transmission of title to the Bank and then the transfer to Dibeek could not affect the respondents' title to their leases.

112. The dispute between the respondents and Dibeek was not as to whether there were leases burdening Dibeek's title, including options to renew (see for example, Achatz v De Reuver [1971] SASR 240; Valbirn Pty Ltd v Powprop Pty Ltd [1991] 1 Qd 295. It was, rather, whether the respondents were in breach of their covenants to pay rent.

113. Indeed, Dibeek's counsel relied on that very proposition in oral submissions. That was, of course, to support a contention that the prepayments were merely loans to GPL and that the collateral agreement for appropriation of monies paid to GPL by the respondents to rent as rent fell due conferred no interest in the land burdening in law or equity the title acquired by the Bank or Dibeek.

114. The issue raised is one of considerable importance. A lessee has a term of years. It is conditioned upon obedience to the valid covenants of the lease. One such covenant, commonly found in commercial leases, is to pay a yearly rental, usually by monthly instalments. There is no principle of law or equity which renders it unlawful for landlord and tenant to agree to the discharge of the right to receive future rents in consideration of an advance payment whether discounted or not. For various reasons, a tenant might wish to be relieved of the need to find rental payments in the future. It may be done for cash flow reasons, for a tax advantage or, simply, as in this case, to assist the landlord.

115. A landlord who receives advance rental may, of course, be burdened by additional assessable income in a particular tax year. That may well be offset by allowable deductions which would otherwise return a negative income situation. A landlord might well be advantaged by receiving rental in advance. (There might well be some question as to the appropriate tax year in which prepayments of rent should be brought to account)

116. However, whether a prepayment is a "buy-out" of the benefit to the landlord of the rent covenant or an advance progressively offset by the liability to pay rent as rent falls due, is not important so long as only the original landlord and tenant are involved.

117. Complications arise once the rights of third parties intrude. A secured creditor of the landlord of leased premises would, notice to the contrary aside, legitimately expect to have access to the rental stream apparently reserved by leases granted over the mortgaged premises in the event of default by the landlord under the mortgage.

118. Unsecured creditors would entertain a similar expectation in favour of a liquidator or receiver/manager as also would a purchaser of the reversionary estate, whether directly from the landlord or indirectly from a mortgagee, liquidator or receiver exercising power of sale.

119. In the present case, there was express notice to the Bank, after it took its mortgage over the Markets, but before GPL had registered the leases in question, that the rentals due under those leases had been and would be paid, at least to some extent, in advance. Unless prepayment was legally irrelevant, that gave clear warning that the security, so far as represented by a future income stream from those leases was, to that extent, likely to be diminished. It is, of course, no different a disadvantage, in the result, than if the rentals reserved under the leases in question had been expressed to be nominal or significantly less than full market rates.

120. A purchaser from a lessor or mortgagee of a lessor, as Dibeek was, takes the leases as it finds them. If the rentals had, by virtue of an uncommercial generosity on the part of GPL, been nominal (or less than a market rate), Dibeek would have had no right to claim a commercial payment from the respondents. There would, of course, then have been notice of the reduced rents in the leases as registered or presented. I recognise, of course, the possibility that a liquidator of GPL could move to set aside the leases as a fraud upon creditors but that is not a relevant issue for present purposes. It has not been done nor does any fraud appear, given the disclosure to the Bank. Nor could it be claimed that the respondents had not, in truth, paid the monies standing to their credit in the records of GPL. It is not suggested that the rents reserved under the leases were less than a commercial rate.

121. This is not a case in which Dibeek claims to have been unaware of the claim put forward by the respondents to have prepaid rent. That awareness is not claimed to have arisen only after Dibeek agreed to purchase from the Bank both the residue of the term of the Crown Lease and the benefit, if any, of the alleged debt for rent due to that date from the respondents to the Bank as successor in title under the mortgage to GPL.

122. The issue, therefore, is whether the Tribunal's conclusion that an agreement for prepayment would only bind successors in title to a mortgagee if the mortgage was taken with notice of an agreement for prepayment, was correct. At issue is whether prepayment can affect the right of a mortgagee in possession to receive rent which otherwise would have fallen due after the mortgagee's right to enter into possession had arisen and been exercised. That is a question of law.

123. It is unnecessary for present purposes to consider whether it would be a breach of a mortgagor's implied obligation not to do anything which diminishes the security of the mortgage, whether by entering into an uncommercial lease or by agreeing to give a discharge for future rents without the mortgagee's knowledge and consent (but see Campion v Randwick Council (1934) 34 SR (NSW) 167).

124. Clause 35 of the mortgage expressly provided,

"That the mortgagor will not without the prior written consent of the Bank convey assign sub-lease surrender mortgage charge or otherwise deal with or dispose of the mortgaged premises or any part thereof and any consent by the Bank under this clause may be subject to such terms and conditions as the Bank thinks fit."

125. It may be noted, therefore, that the mortgagee, pursuant to this clause, could not have been bound by any disposition of the mortgaged premises by way of lease or otherwise to which it had not consented. Further, it could have limited its consent in such manner and to such terms and conditions as it considered reasonable.

126. The question then is whether, if an existing mortgagee gives its consent under cl 35 to leases, knowing that the lessor has accepted, and will continue to accept, rental payments in advance in respect of those leases, the mortgagee is bound to honour the prepayment agreement by giving credit for prepayments by then made after it enters into possession of the premises.

Is a prepayment of rental able to bind a mortgagee?

127. The effect of an agreement to accept prepayments of rent must, in the absence of a manifest intention to the contrary, be that adopted by Willes J in De Nicholls v Saunders (supra).

128. It is important to note the sequence of events in that case. B had leased the premises to the plaintiff at a quarterly rent. B then mortgaged the premises to the defendant. It remained lawful thereafter for B to continue to receive rents as they fell due and were paid. B accepted one year's rent in advance from the plaintiff. He then defaulted under the mortgage. Having given notice to the plaintiff of that default, the defendant demanded from the plaintiff rent thereafter falling due notwithstanding that the plaintiff had already paid B for that rental period.

129. At 593, his Lordship said,

"... but this is a case in which a person gets an assignment of the reversion, and obtains a right to give notice to the tenant to pay the rent to him before payment is made to the assignor, and in which, therefore, the landlord had no power to accept payment or give a release at the time the payment was made."

130. However, that is not to say that a landlord cannot bargain away the right to future rents. As his Lordship also said, at 593,

"... a release by the landlord of all rent before assignment would be good against an assignee of the reversion."

131. De Nicholls v Saunders (supra) does not deny that a receipt of rental in advance may be good against a party later taking an interest in the land in question. It denies to a mortgagor who has assigned the reversion to a mortgagee the power to release future rents. The mortgagor only retained, after the grant of on Old System mortgage, the right to receive and give a discharge for rent currently due.

132. The point is further illustrated by Cook v Guerra (1872) LR 7 CP 132. Prepayment of rent had been made before the plaintiff took the mortgage in respect of which default had occurred. However, there was already an earlier mortgage to B, predating both the plaintiff's mortgage and the lease. They were, of course, Old System mortgages. Thus, the landlord had no power, at the time of the prepayment agreement, to give a discharge for future rent. That power resided in the first mortgagee.

133. Willes J (Keating and Brett JJ concurring) noted that, by statute, the landlord/mortgagor retained the right to receive rents as they fell due (though not in advance). Advance payments, if made, could only be credited as they fell due. Once notice of default was given to the tenant, the landlord lost even that limited right. At no time had the landlord the right to discharge or burden the right to receive future rents. No consent to such a course had been given by either mortgagee.

134. As to the role of notice, and what will suffice to render it effective, Green v Rheinberg (supra) provides some guidance.

135. In that case, Vaughan Williams LJ noted that a purchaser or mortgagee taking the reversion from a landlord will be bound by all the equities enforceable against the landlord. Those may include collateral agreements relating to a lease such as an agreement to regard rent as prepaid. As to that kind of agreement, his Lordship said, at 151:

"There is the agreement between the landlord and the tenant to accept a lump sum paid down in satisfaction of the rent for the whole of the term. After that agreement the landlord could not have sued or distrained upon the tenant for any of that rent ... the mortgagee must bear the loss, he not having taken the trouble to inquire of the tenant himself, asking him if he had any and what rights or claims in respect of the premises. If he makes an inquiry and the tenant will not answer or answers wrongly, the purchaser or mortgagee is protected."

136. Farwell LJ agreed, noting that, at least since the fusion of law and equity, the agreement to pay and accept rent in advance, preceding as it did the grant of the mortgage, would have, at 151,

"... compelled the court to grant an injunction restraining any attempt by the landlord to enforce payment of that rent ... [i]t has been contended that this was not such an interest in the land as the rule applies to, but it is clear that it is, for the rent issues out of the land."

137. In my view, therefore, the Tribunal was correct when it concluded that an agreement to accept rent in advance will create an enforceable (equitable) right in the tenant to resist any claim at law based on a demand for rent. It is a right that depends on the capacity of the landlord to make such an agreement. If the landlord has parted with the power to give a discharge of future rent by burdening or transferring the reversion, then the agreement, even if enforceable as between landlord and tenant, does not create an equitable right capable of enforcement against any other person having a relevant interest in the land. If the landlord has not parted with the capacity to give a discharge for future rent, then the question is whether the equitable right to have future rent regarded as paid as it falls due will bind other persons with an interest in the land. It will do so only if that equity can prevail over the interests of those other persons.

138. That was, in essence, the issue in Lord Ashburton v Nocton (supra). In that case, the issue was when the charge arising from registration of the writs of elegit (execution) took effect. No question of notice of the tenant's rights following prepayment arose. The judgment creditor's rights did not depend on any consent to the prepayment agreement nor did the judgment creditor take any interest in the land with notice, actual or constructive, of a prior equity. The charge was held to have become operative before the prepayment. Thus the decision did not deny, it rather accepted, that a prepayment of rent accepted as such by a landlord would have been effective against a judgment creditor later registering writs of elegit.

139. A similar analysis was adopted by the Court of Appeal (UK) in Grace Rymer Investments Ltd v Waite [1958] 1 Ch 831 (Lord Evershed MR, Romer & Omerod LJJ concurring).

140. In that case, in October 1955, mortgagors took three year's rent in advance from prospective tenants of a property they then proposed to purchase. The contracts were exchanged on 28 November 1955. The tenants then went into possession. On 30 December 1955 the purchase was completed and a mortgage granted to the plaintiff. The mortgagors then defaulted. The plaintiff sought possession. Although the demand for rent in advance was illegal (a premium) it was found not to taint the agreement between the landlords and the tenants so far as the tenants were concerned. The Court held that, in consequence, the landlords, as at settlement, had become bound to honour the tenants' rights to have rentals falling due in future regarded as paid. The charge under the mortgage was held to take effect subject to the tenants' prior equitable rights of which the mortgagees/plaintiffs had constructive notice by virtue of their knowledge that the defendants were then in occupation as tenants. Knowing of their occupation, the onus was, as had been held in Green v Rheinberg (supra), on the mortgagee to make enquiry of the tenants before accepting the mortgage.

141. It was suggested by Dibeek that Harrison v Petkovic (supra) was contrary to that view. It was, however, quite a different case. In that case, the tenant had agreed to pay, in advance, the final three months rental of a six year lease, effectively a bond. The tenant defaulted on rental due November 1967 to January 1968 inclusive. He had not paid the advance rent. The landlord sued. The issue was whether the advance rent fell due for the purposes of the Limitation Act in April 1962 or February to April 1968.

142. I would respectfully agree with Norris J who held that the limitation defence failed. The advance required to be paid in 1962 was an advance against the rent due in the last three months of the lease. The action was to recover that rent. However, as there was no issue as to notice to mortgagees or purchasers, it was unnecessary to determine who would have been entitled to receive those rents when they fell due had they been prepaid and a mortgagee had entered into possession after the payment but before those rents fell due.

143. Norris J did say (at 82),

" ... if at the time the rent falls due the person to whom the payment has been made is not entitled to receive it, the payment does not operate as a discharge of the rent."

144. That statement is subject to the considerable qualification that if, as at the date the landlord lost the entitlement to receive rents, a prepayment of rent had already created an equitable right in the tenant to have the rents yet to fall due regarded as paid as against the landlord, it would "operate as a discharge of the rent" in equity unless there was some reason, recognized in equity, why that obligation did not bind the successor to the landlord.

Did the prepayment of rental by and from 15 June 1995 create an equitable interest binding on the Bank and/or Dibeek?

145. It follows from the previous discussion that, unless and until GPL was released from it, the respondents had an equitable right against GPL to have future rentals regarded as paid as they fell due until the prepayments were exhausted.

146. However, both the leases and the conferral of those equitable rights were subject to the terms of the mortgage to the Bank. Neither the leases, nor the equitable rights conferred by the prepayment agreement could, without its consent, prevail against the Bank's interest (see cl 35).

147. Thus, the Bank had the power to protect its interest in ensuring that, if GPL defaulted, there would be a rental stream of which it could take possession.

148. There is no doubt that, if a mortgagee or purchaser takes an interest, legal or equitable, with notice of a prior equitable interest, that party will be bound to give effect to it. In some cases those prior interests will be binding even absent such notice - see eg. Roxburghe v Cox (1881) 17 Ch D 520, 526 per James LJ; Edward Nelson & Co Ltd v Faber & Co [1903] 2 KB 367, 375 per Joyce J.

149. Clyne v Lowe (1968) 69 SR (NSW) 433, supports the view that prior rights, such as those asserted by the respondents, remain binding on a purchaser or mortgagee taking an interest with notice of those equitable rights.

150. The High Court affirmed that point in Bahr v Nicolay [No 2] (supra). A transfer was taken with notice of a prior obligation the transferor had assumed to sell that interest to the current tenant, who was the previous registered proprietor. In effect, the current tenant, as transferor, had made an arrangement akin to an Old System mortgage (sale, lease-back with option to re-purchase). The transferee had promised to honour the transferor's promises to the tenant, though, of course, the transferee was not a party to that arrangement. Having taken the legal estate and become registered as proprietor under the Torrens System (Transfer of Land Act 1893 (WA)), the transferee then refused to honour the transferor's agreement. That refusal was held ineffectual. The transferee, despite registration, was bound in equity to honour the previous registered proprietor's agreement with the tenant.

151. The doctrinal basis for that decision is significant for present purposes, including, as it does, an explanation of the differences between the Old System and the Torrens System of land tenure.

152. Mason CJ and Dawson J founded their decision not only on the view that a trust had been created and accepted by the transferee but also on the basis that to permit the transferee to resile from its agreement to take the transfer subject to the prior arrangement would amount to "fraud" within the meaning of s 68 of the Transfer of Land Act (WA).

153. Wilson and Toohey JJ, though agreeing that there had been a binding trust, did not agree that there had been "fraud". It was not fraud to take the legal interest knowing that a prior equity would be destroyed.

154. Brennan J considered that the terms accepted contractually by the transferee at the behest of the transferor concerning the prior owner's residual rights were binding on the transferee, constituting an equitable interest vested in the prior owner of which the transferee had notice before transfer. To enforce those rights did not detract from the indefeasibility of the title acquired. In his Honour's view, at 654,

"A registered proprietor who has undertaken that his transfer should be subject to an unregistered interest and who repudiates the unregistered interest when his transfer is registered is, in equity's eye, acting fraudulently and he may be compelled to honour the unregistered interest."

155. The current situation is stronger because the issue is not whether the Bank was bound to respect a prior equity of which it had notice when the mortgage was registered, but rather, whether it could repudiate an equitable right, the creation or, at least, the continued existence, of which it had notice when it consented to the registration of the leases in question.

156. Counsel for each party referred to the recent decision in the matter of SEAA Enterprises Pty Ltd v Figgins Holdings Pty Ltd [1998] 2 VR 90; Figgins Holdings Pty Ltd v SEAA Enterprises Pty Ltd [1999] HCA 20; (1999) 162 ALR 382. Each party contended that the decision favoured their argument.

157. The respondents argued that,

* Dibeek is to be regarded as a successor in title to GPL not the Bank.

* Dibeek was, therefore, bound by the registered variation of sublease over Unit 1.

* Dibeek was bound by the equities arising from the agreement notified to the Bank on 15 June 1995 and binding on GPL whether or not that agreement had been binding in equity upon the Bank.

158. Dibeek argued that,

* By virtue of s 99 LTA, GPL lost, as from 3 June 1996, the power to receive rents and to give discharge for payment. It then lost the power to apply advances by then made in excess of rent to rent due under the leases. (As I have found, this submission misconceives the real issue which was whether the equitable right to have the advance so credited bound the Bank. That right had already arisen by 15 June 1995.)

* Figgins turned on the provisions of s 81 Transfer of Land Act 1958 (Vic) (TLA (Vic)), that is,

"... a first mortgagee shall, until a discharge from the whole of the money secured or a transfer upon a sale or an order for foreclosure has been registered, have the same rights and remedies at law and in equity as he would have had if the legal estate in the mortgaged land had been vested in him as mortgagee with a right in the mortgagor of quiet enjoyment until default in payment of any principal or interest or a breach in the performance or observance of some covenant."

* This Territory has no provision equivalent to s 81 (TLA (Vic)). Section 99 LTA operates to suspend the mortgagor's right, after notice of default, to receive and give a discharge for rents and profits.

* There was no deed of variation of the sublease (as there was in Figgins). There was merely an oral agreement, albeit evidenced in writing, to credit advances made to GPL by the respondents towards rent as it fell due.

159. In Figgins, the tenant had a lease of a shop in a retail arcade (from 1988). In 1989 the arcade was sold. The new owner granted a mortgage to a bank. That mortgage was registered under the TLA (Vic). In September 1990, the mortgagor defaulted. In February 1991, the mortgagor and the tenant executed a deed of variation of the lease. The tenant agreed to cease to occupy the demised area whilst retaining legal possession. The landlord, in return agreed to payment to it of only a nominal rent. The bank was unaware of this deed and never consented to its terms. However, the bank had not by then exercised its right to receive the rents. It could have done so by virtue of the mortgagor's prior default. In July 1993 the bank appointed a receiver. The bank, in October 1993, sought declarations that it was not bound by the deed of variation. That application was granted by Hayne J (Commonwealth Bank of Australia v Figgins Holdings Pty Ltd [1994] 2 VR 505). The bank then sold its interest in the lease to the appellant. The appellant sought arrears of rent from the tenant as if the deed of variation had not been executed . The tenant disputed its liability. It claimed that the purchaser was bound by the deed of variation, even if it had not been binding on the bank as mortgagee.

160. There subsequently was an arbitration of the dispute between the purchaser and the tenant. An appeal was taken to the Court of Appeal ([1998] 2 VR 90), (Winneke P, Brooking and Charles JJA) from the dismissal of an appeal against the arbitrator's finding that the transferee's interest was encumbered by the deed of variation though it had not bound the bank. In consequence the transferee was held not to be entitled to claim rent under the original lease but was bound by the deed of variation as the mortgagor had been. The appeal was upheld. The Court of Appeal took the view that if the deed of variation did not bind the bank, it did not bind the transferee.

161. Brooking JA delivered the judgment of the Court. His Honour noted that the lease itself had been valid as against the mortgagee. It had pre-dated the mortgage.

162. The mortgagor thereafter had had no power as against the mortgagee to grant or vary a lease, see s 81(1) TLA (Vic). It had only the power to receive rents as they fell due unless and until the mortgagee exercised its power to receive them.

163. Notwithstanding that finding his Honour accepted the proposition that a landlord who has not been divested of the power to do so, may lawfully release all rent to become due under a lease. That agreement will be good against a subsequent assignee of the reversion (see J L Smallman Ltd v Castle [1965] IESC 1; [1932] IR 294). That case, his Honour noted, was a case, as is the present, of a grant of a lease by a mortgagor in possession. A payment of rent in advance was held not to be good against a mortgagee who, thereafter, but before that rent had fallen due, gave notice to the tenant to pay rent to it. However, the mortgagee had not consented to the agreement to pay rent in advance or to the registration of any lease the subject of such an agreement.

164. His Honour also referred with approval to Municipal Permanent Investment Building Society v Smith (1888) 22 QBD 70 (set-off of an existing debt to future rent) and concluded that:

"(102) The result of these authorities is that if there is an arrangement whereby rent is paid in advance or future rent is to be set off against money due to the tenant from the mortgagor, this arrangement will, whether it was made before or after the mortgage, have the result that the tenant must be taken, as against the mortgagee, to have paid the rent in respect of such amounts as fell due before the mortgagee gave notice to the tenant to pay rent to him.

As regards amounts of rent which fall due after the mortgagee gives notice to the tenant to pay rent to him, the effect of the arrangement will depend on when it was made ... if the arrangement precedes the mortgage, the question will be whether, on the facts, the mortgagee made enquiries which prevent his being fixed with notice ... If the arrangement is subsequent to the mortgage, then the only defence to an action by the mortgagee for rent is that of payment, and payment will occur only when the arrangement made between mortgagor and tenant actually takes effect with regard to a particular amount of rent that has fallen due."

165. That latter statement assumed the statutory equivalent of the Statute of Anne, referred to by Willes J in De Nicholls v Saunders (supra), to be in force. It further assumed that the mortgagee has not consented to the mortgagor, after the mortgage had been registered, entering into leases encumbered with a collateral agreement for pre-payment of rent. However, the Municipal Building Society case (supra) provides ample authority for the view that an agreement to set-off an existing debt against future rent is valid and binding as between landlord and tenant. It will also bind a party who takes an interest with notice of such an agreement. Thus, even had the Court of Appeal decision remained undisturbed, a prepayment agreement binding on a mortgagor would equally bind a transferee from the mortgagee.

166. However, Figgins went on appeal to the High Court. The result was unanimous. The decision of the Court of Appeal (Vic) was set aside. The High Court found that the variation of lease, even if ineffective as against the mortgagee, had been effective as between landlord and tenant. It was, therefore, effective against the purchaser from the mortgagee who took a transfer from the mortgagee knowing of the deed of variation.

167. Gaudron, Gummow and Callinan JJ (with whom Kirby J agreed) took the view that it was unnecessary to consider whether the mortgagee had, in fact, been bound by the lease variation. The issue was whether the purchaser from the mortgagee was so bound.

168. Their Honours noted the distinction between an Old System mortgage and a Torrens System mortgage. In the former case, the mortgagee is, in law, the owner of the legal estate. A Torrens System mortgage, however, is a creature of the statute creating it. The general character of such a mortgage is that of a statutory charge involving no transfer of the ownership of the interest in land the subject of the mortgage. The powers of the mortgagee and the incidents of the mortgage are, likewise, a creature of statute.

169. Section 81 of the TLA (Vic) is not replicated in the LTA (ACT). Their Honours, contrary to the view of the Court of Appeal (Vic), took the view that s 81 did not affect the power of the landlord to agree to a variation of the lease as between the landlord and the tenant. That variation did not affect the mortgagee's right to receive rent at the rate prior to the variation (as Hayne J had held) but the estate the mortgagee passed to the purchaser was that of the landlord, unencumbered by the mortgage, not the estate the mortgagee had acquired as against the mortgagor.

170. McHugh J also rejected the purchaser's contention to the contrary, pointing out:

"(403) Unlike a mortgage of land under old system title, the legal estate under the Torrens system remains in the mortgagor."

171. The Torrens System mortgage does not operate as a transfer of the land or give any right to possession of it, though it is an "interest" in the land. Even the terms of s 81 TLA (Vic) did not, his Honour held, mean that:

"(404) the reversion expectant upon any lease is replaced with a statutory or fictional reversion or that, upon default, the mortgagee automatically becomes the landlord of any tenant who has a lease of the land."

172. Even so, s 81(3) TLA (Vic) recognized that, with consent of the mortgagee, the mortgagor could pursue any cause of action which otherwise s 81 would vest in the mortgagee. Thus, even though s 81 made "considerable inroads" into the mortgagor's legal rights, it did not alter their fundamental incidents.

173. It followed that the mortgagor was the owner of the reversion as well as being the lessor under the original lease. Even the terms of s 81(1) TLA (Vic) were insufficient, in his Honour's view, to assign the reversion to the mortgagee and then reassign it to the mortgagor under a notional concurrent lease. The reversion remained vested in the mortgagor.

"(408) Until default by [the mortgagor], the [mortgagee's] rights in respect of the property were very limited, perhaps confined to those rights necessary to protect its interest as mortgagee ... I would have thought that the correct application of that section to the facts of the case led to the conclusion that [the mortgagor] remained entitled to deal with the reversion. I would have thought that, subject to the operation of s 66(2) [No registered lease of land subject to a mortgage ... shall be valid or binding against the mortgagee ... unless he has consented in writing to such lease] or the triggering of one or more of the rights and remedies conferred by s 81, [the mortgagor] was entitled to deal with the reversion as it pleased, both before and after any default on its part. On that view, any default on the part of [the mortgagor] merely enlivened the rights and remedies conferred by the section and, in the absence of those rights being invoked, did not affect the right of [the mortgagor] to deal with the reversion."

174. Thus, in this case, even if a provision such as s 81 TLA (Vic) applied in this Territory, unless and until the Bank exercised its rights and remedies under the mortgage and the LTA (ACT), GPL was entitled to deal with the reversion as it pleased subject to the restraints imposed by the mortgage and the LTA (ACT). Those restraints are directed towards preventing GPL from effecting a diminution of the security without the consent of the Bank as mortgagee.

175. McHugh J had doubts as to whether, even as against the mortgagee, the variation of lease had been ineffectual, even though the mortgagee had the right to seek possession and, before the variation of rent was agreed, to seek to receive the rents. His Honour said:

"(410) In my opinion, even if the deed of variation could not affect the bank's rights - and I think that it probably could - it varied the lease in point of law and consequently the rights attached to the reversion. That means that, subject to the statutory rights which the bank had, the deed of variation bound Figgins and Lamina [the mortgagor] and their respective successors in title. Immediately prior to the sale of property Lamina was entitled to rent in accordance with the lease as varied by that deed. SEAA, as Lamina's successor, was in no better position than Lamina."

176. In Figgins the lease in question was one which did not require registration to be binding as a legal interest. The difference from the present case is that, in Figgins there was an agreement reducing the rent receivable for the future rather than, as in the present case, a collateral agreement having a similar effect. The deed of variation could have been registered. The collateral agreement in this case could not have been registered (unless it was re-cast as a variation of lease).

177. Although it was not necessary in Figgins for the High Court to determine the effect of the variation of the lease upon the mortgagee's rights under the mortgage (though views were expressed on that subject matter), it is necessary for me to decide upon the effect of the agreement between GPL and the respondents to apply monies which had or might be advanced from time to time to rent which had, or might later, become due under the rent covenants, on the Bank's rights to receive rents from the respondents.

178. In any case, as there is no ACT equivalent to s 81, TLA (Vic), it is the law of this Territory which governs both of those questions with such guidance as emerges from the Figgins judgments.

179. Section 11, Conveyancing Act 1919-1954 (ACT) provides:

"A mortgagor entitled for the time being to the possession of any land as to which no notice of his intention to take possession, or to enter into the receipt of the rents and profits thereof, has been given by the mortgagee, may sue for such possession, or for the recovery of such rents or profits, or to prevent or recover damages in respect of any trespass or other wrong relative thereto, in his own name only, unless the cause of action arises upon a lease or other contract made by him jointly with any other person."

180. This section applies to both Old System and Torrens System mortgages. It is the current equivalent of the Statute of Anne s 10 (supra).

181. The Conveyancing and Law of Property Act 1898 (NSW) (ACT), s 95 provides:

"The person exercising any power of sale hereby conferred shall have power to convey or assign by deed to and vest in the purchaser the property sold for all the estate and interest therein which the person who created the charge had power to dispose of."

182. That section affirms the principle that, subject to the terms of the charge and any relevant provision of the LTA (ACT) to the contrary, a mortgagee can give no greater interest than he, she or it has as a result of entitlement to exercise a power of sale. It does not, as Figgins illustrates, imply that the estate of the mortgagee, free of all equities which bound the mortgagor but not the mortgagee, is transferred to such a purchaser. It is the estate or interest of the mortgagor together with any encumbrance or burden, legal or equitable, upon it which is transferred. That is relevant to Dibeek's claim to rent after the sale to it of the proprietorship of the Crown Lease by the Bank.

183. Section 93(1) of the LTA (ACT) provides, in the form conventional to most Torrens system statutes:

"Any mortgage ... under this Act shall, have effect as a security but shall not operate as a transfer of the land thereby charged."

184. The mortgagor therefore, whether before or after the mortgage is granted, is not deprived of the power to grant a lease over the whole or part of the subject land. A mortgagor, subject to the terms of the mortgage and any other provision of the LTA (ACT), is entitled to continue to deal with the former estate in the land as the mortgagor could before the mortgage was granted. The legal estate in the reversion and the reversion expectant on the termination of any lease are not thereby affected.

185. There are two provisions of the LTA (ACT) which are relevant to the extent of the freedom of the mortgagor, as against the mortgagee, to deal with the land.

186. Section 84 provides:

"No lease of land subject to a mortgage or encumbrance shall be valid or binding against the mortgagee or encumbrancee unless he or she has consented to the lease before it is registered."

187. That section is relevant to the question whether a mortgagor retains or not the power to lease to a sub-tenant all or part of the land. Though the provision does not deny that power to a mortgagor, it does indicate that a lease to which the mortgagee has not consented, entered into after the mortgage is taken, will not bind the mortgagee. Its effect as between the mortgagor and the tenant is another matter, as also is its effect upon a transferee of the mortgagor's interest in the land pursuant to the mortgagee's power of sale.

188. Section 85 LTA (ACT) is relevant to the position of such a transferee as well as that of the mortgagee:

"(1) A registered lease is subject to any prior unregistered lease, or agreement for a lease, for a term not exceeding 3 years.

(2) No right or covenant to purchase the freehold or to assign the reversionary interest of the lessor contained in any lease or agreement, and no right or covenant to or for the renewal of any lease or agreement shall be valid as against any subsequent purchaser of the reversion, lessee, mortgagee or encumbrancee unless the lease or agreement is registered."

189. It therefore, follows that, the subject leases having been registered with the consent of the Bank, they were valid and binding on both the mortgagee and any transferee from the mortgagee whether or not the mortgagee took the mortgage subject to those leases. Figgins suggests that they would be binding also on a transferee from the mortgagee of the estate of the mortgagor, as if the mortgagor was the transferor.

190. The test adopted by the Tribunal, namely, that any equitable interest associated with the registered leases had to be in existence when the mortgage was granted to bind the mortgagee, is not, with respect, sustainable. It is inconsistent with s 84 of the LTA (ACT).

191. Relevant to the claim by Dibeek, particularly in the light of Figgins (supra), is s 95(2) LTA (ACT):

"Where a transfer is registered under subsection (1), the interest of the mortgagor ... in the land comprised in the transfer shall pass to and be vested in the transferee, freed and discharged from all liability on account of -

(a) the mortgage ..."

192. That emphasises the point, made in Figgins (supra), that a transferee, such as Dibeek, gains the mortgagor's title, inclusive of any interests qualifying or burdening that interest, insofar as they are capable of transfer, not that of the mortgagee, whether in possession or not. In other words, equities binding on the mortgagor but not the mortgagee, may, nevertheless, bind the transferee from a mortgagee exercising power of sale.

193. As with any other transferee of a legal estate, an equitable interest burdening it will survive such a transfer if the transferee takes the legal interest with notice of that equitable burden (subject to the effect of s 59 LTA (ACT)).

194. In my view, given the nature and effect of the agreement between GPL and the respondents and the notice which Dibeek had of it, Dibeek could not take the transfer it did free of the equitable obligation which had bound GPL to treat the rents payable by the respondents as discharged to the extent of the prepayment they had made, constituted by setting off the credits standing to their names in the loan accounts to which they had contributed. That it was a set-off of loans already made as advances to GPL is of no consequence.

195. The Bank had the protection of both s 84 of the LTA (ACT) and cl 35 of the mortgage. It was not obliged to consent to the leases entered into between GPL and the respondents. It could have made its consent conditional upon the agreement as to prepayment, notified by GPL to it, being without prejudice to its right to receive the full rentals reserved under the leases. If GPL was unable or unwilling to agree to such a stipulation, or could not get the respondents to agree to it, then the Bank could refuse consent to the leases (cl 35) or to their registration (s 85) (or both). That would have left the respondents only with remedies against GPL if it breached its equitable obligation to honour the collateral agreement. Having consented, with notice of the respondents' possible equities, it was not open to the Bank to rely on the lack of detail in the notice. The onus was on the Bank to make further enquiry before giving consent. Green v Rheinberg (supra) renders any contrary argument unsustainable.

196. Even if the Bank had refused consent to the leases, it would not have followed that the transfer to Dibeek was not burdened by the respondent's equitable rights against GPL. At best, the Bank could have preserved the effect of its assignment to Dibeek of the debt for rent. In the result not even that debt existed so as to be transferred. Dibeek was not entitled to terminate the respondents' leases nor to refuse to honour their options for renewal thereunder for non-payment of rent.

197. It follows that the orders made by the Tribunal must be set aside.

198. Dibeek also submitted that, even if the payments made by the respondents to GPL before consent to the registration of the leases was given (30 June 1995) by the Bank, those payments could not bind the Bank thereafter as it had no notice of them and had not consented to them.

199. That is, however, to misconceive the nature and extent of the rights vested in the respondents and the Bank respectively. The Bank had notice, before 30 June 1995, of past prepayments of rent. It had notice that the practice of prepayment was current. It was open to the Bank to enquire as to whether the prepayment agreement had extended to the tender of all future rents or only part of them and as to whether it extended to making further payments or only to those made to that date.

200. The Bank was put on enquiry as to the nature and extent of the prepayment agreement and, hence, of the equitable rights, enjoyed by the respondents to be freed from future demands for rent by GPL and its successors in title (if any). It chose not to enquire before giving consent to the leases. It was, therefore, fixed with notice of the fact of past, and the likelihood of future, prepayments of rent.

201. In any event, once the leases were consented to, even as against the Bank, GPL retained the right to deal as it chose with the rental covenants and its rights thereunder, unless and until the Bank exercised its right to possession of the rents and profits of the Markets.

202. In my view, the equities binding on GPL as a result of the prepayment agreement also bound the Bank as mortgagee in possession. They also bound Dibeek on transfer to it of GPL's interest which included the burden of the equities referred to. That burden would have applied even if the Bank had been able to avoid it. Whatever the status of the assigned debt, it was never possible for Dibeek to mount an action for possession of the Units for breach of the rental covenants. GPL could not have done so - Dibeek was in no better position.

203. The matter will be remitted to the Tribunal to consider the issue of "performance breaches" and to assess the damages (if any) payable to the respondents by Dibeek for wrongful termination of their leases including refusal to honour the options for renewal therein. Subject to the effect, if any, of any "performance breaches" the Bank was not entitled to recover arrears of rent from the respondents. There was no debt for it to assign to Dibeek.

204. I will hear the parties as to costs.

I certify that the preceding two hundred and four (204) numbered paragraphs are a true copy of the Reasons for Judgment herein of his Honour, Justice Higgins.

Associate:

Date: 2 February 2000

Counsel for the Appellant: Mr M Einfeld QC with Mr S Habib

Solicitor for the Appellant: Clayton Utz

Counsel for the Respondents: Mr A Sullivan QC with Mr R J Arthur

Solicitor for the Respondents: Snedden Hall & Gallop

Date of hearing: 30 August 1999

Date of judgment: 2 February 2000