National Asset Loan Management Ltd v Southlodge Inns Ltd [2015] IEHC 109 is the latest in a line of cases confirming the position originally laid down in ICC v Verling & Ors. [1995] 1 ILRM 123 that a lease granted by a borrower without the consent of its lender (as stipulated by the mortgage deed) is void as against the lender and cannot inhibit the lender in invoking its right to enforce the security. 

The Facts 

National Asset Loan Management Limited, a NAMA entity (as successor to mortgage loans secured on licensed premises in Clonskeagh originally held by Irish Nationwide Building Society and transferred to NAMA) and statutory receivers appointed under the NAMA Act, 2009 sought an order compelling the defendant tenant company, Southlodge Inns Limited, to deliver up vacant possession of the premises and an injunction restraining it from trespassing or continuing to trespass on the property.

The borrower publican had originally entered into security in favour of INBS in December 2006.  Paragraph 17A of the mortgage entered into stated:

“The Statutory powers of leasing and accepting surrenders of leases shall not be exercised by the Borrower without the prior consent in writing of the Society and the Borrower shall not create or purport to create any lease or tenancy or accept any surrender thereof, otherwise than under the said powers without the prior consent in writing of the society”.

This security was supported by a further commercial mortgage from Clonskeagh House Limited which held a lease of the premises at that time.

The loan the subject matter of the mortgage with INBS was transferred to NAMA in December 2010 and difficulties arose over the repayment of the loan.

A new company, Southlodge Inns Limited, was incorporated in February 2011, the directors of that company being the son and wife of the borrower.  The borrower then proceeded to grant a lease to Southlodge Inns Limited for a period of two years from June 2011.  A second lease was then granted on 8 January 2014 for a term of two years from 21 July 2013.  No prior consent was granted for either lease by NAMA in writing or orally.

There was considerable correspondence between the solicitors for the borrower and the solicitors for NAMA regarding the performance of the loan and the lack of cooperation by the borrower and on 8 April 2014 NAMA demanded repayment of the loan together with interest. A similar letter was sent to Clonskeagh House Limited in light of the security that it had provided in connection with the loan in 2006.

By letter dated 9 April 2014 solicitors for Southlodge Inns Limited wrote to NAMA stating that any attempt to interfere with its rights would be strenuously contested and that no attempt should be made to enter the property.

By Deed of Appointment dated 10 April 2014 statutory receivers were appointed by NAMA over the property. On 17 April 2014 the statutory receivers called to the property in order to take possession but the tenant company, Southlodge Inns Limited, refused to deliver up possession. The statutory receivers again attended at the property on 30 April 2014 and again the tenant refused to deliver up possession.

In two affidavits lodged with the Court the tenant company claimed that NAMA clearly and unambiguously acknowledged the existence of its lease and that it was reasonable to infer from correspondence between NAMA and the borrower that NAMA recognised the validity of the lease.  In particular, the tenant claimed that the fact that NAMA "unequivocally instructed" that all rental income received on foot of a lease agreement between the borrower and Southlodge Inns Limited be mandated to NAMA "can only be seen as a clear and unambiguous acceptance of the validity of the lease from [NAMA's] perspective".  In a further affidavit the same director swore that the tenant company had been paying a weekly sum of €200 by way of direct debit to NAMA since at least September 2013. He accepted that this rental had been refunded by NAMA to the company’s bank accounts since the appointment of the statutory receivers.

The Decision 

Mr. Justice Michael White held that the law establishing the right of a mortgagee to gain possession of property where there has been a lease granted without the consent of the mortgagee is well settled, that the rights of the tenant company as beneficiary of the lease of the 8 January 2014 cannot supercede the rights of the mortgagee where there has been no consent to that lease, and that the court does not regard engagement on the part of a lender seeking the cooperation of the borrower as acting as any form of estoppel in the particular circumstances of the case.

In giving judgment White J referred to the earlier judgment of Dunne J in the case of In the Matter of N17 Electrics Limited (in liquidation) and In the Matter of the Companies Acts 1963 - 2009 Kenneth Fennel and ACC Bank PLC V N17 Electrics Limited (in liquidation) [2012 IE HC228] and in particular the following passage which outlines the position at law:

"A number of useful observations can be made from the authorities referred to above. I think, first of all, that it is clear that a mortgagor and mortgagee can expressly agree to exclude the power conferred by s. 18 of the 1881 Act. If the power is excluded, it may be done in a way that permits the mortgagor to grant a lease subject to the prior consent of the mortgagee. If such prior written consent is not obtained by the mortgagor and the mortgagor proceeds to enter into a lease with a tenant, the lease will be binding on the mortgagor as lessor, but as against the mortgagee, the lease will not be binding. It is also clear that in certain circumstances, the lease may be binding on the mortgagee in circumstances such as those described in the authorities referred, where, for example, the mortgagee 'serves a notice on the tenant to pay the rent to him'. It is also clear from the authorities referred to above, that the mere fact that the mortgagee is aware of the existence of a tenancy and that a tenant is paying rent to the mortgagor which is being used to pay the obligations of the mortgagor to the mortgagee, is not, of itself, sufficient to create a relationship between the mortgagor's tenant and the mortgagee."

He also referred to Laffoy J's comments in the case of in Maloney V O’Shea and Another [2013 IE page 3354] that:

"In summary, what the academic commentary and the authorities indicate is that a lease created by a mortgagor without the consent in writing of the mortgagee, where the requirement of such consent is expressly stipulated for in the mortgage deed, is void as against the mortgagee and the mortgagee is not bound by it."