An issue which often arises before the Irish courts is the failure of a landlord to obtain a bank’s prior consent to the creation of a lease over mortgaged property.

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

Background facts

The borrower entered into a mortgage with Anglo Irish Bank (Anglo) for €1.25 million which was secured on two guesthouses in Dublin. The borrower defaulted on his repayments and a receiver was appointed. The borrower resisted the receiver’s order for possession on the grounds that there was an oral lease between the borrower as lessor and a company controlled by the borrower (the Company). The borrower owned 99% of the Company’s shareholding and he was a director. The borrower claimed the lease was valid and had been in existence prior to the granting of the mortgage. On this basis, the borrower argued that the lease took precedence over the charge registered by Anglo against the property.

Argument that the Bank was aware of the lease

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

Issue of consent

The High Court looked at the decision in Fennell v N17 Electrics [2012] IEHC 228 and found that the mere fact that Anglo might have been aware that the Company was paying rent to the borrower was not sufficient to grant the lease priority over the mortgage. The High Court found that some further action was required from Anglo, such as serving notice on the Company that the rent was payable to them.

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

Terms of the Mortgage

The High Court noted that the Mortgage Deed entered into between Anglo and the borrower specifically stated that the borrower would not “permit to subsist” any lease of the two guesthouses. Accordingly the High Court were of the view that even if Anglo was aware that the lease existed, it was reasonable for them to rely on the borrower’s undertaking that he would not allow any lease to exist over the two guesthouses. While this undertaking was not binding as matter of law on the Company, it could not be ignored that the borrower was its controlling shareholder.

Commercial Realities

The Court acknowledged that Anglo may have been lax in their dealings with the borrower as they were on notice that there may have been a lease when they received the letter from his financial advisor. However, the Court stated that the commercial reality was that Anglo would rarely lend €1.25 million to a borrower unless it had a first legal charge over the property. The Court noted that Mr Court was seeking to “leave the bank high and dry while walking away in possession of the premises through his company”. The Court noted that if it was that easy for a borrower to borrow funds, default and continue to use the premises in this manner, it would be a “very significant disincentive to banks to engage in commercial lending”.

Lessons for borrowers and lenders

This case highlights the importance for borrowers of obtaining express consent from the bank to the creation of a lease. The case is also a lesson to lenders to ensure that they thoroughly investigate whether a tenant is in situ at the time of granting a mortgage. If there is any indication of the existence of a landlord and tenant relationship, the bank should make further enquiries to avoid problems and delays in dealing with the security in the future.

Stafford v McCourt & anor [2017] IECH 726