A lease…. not a lifeline


By McDowell Purcell \ In All Posts, Banking, Litigation & Dispute Resolution

In a judgment delivered last week in Jim Stafford v. Ronald McCourt and Ashcliff Guesthouses Limited, Mr Justice Twomey concluded that it was “inconceivable” that Anglo Irish Bank “would lend €1.25 million and then consent to the terms of a lease which render its security for those borrowings useless.”

The case concerned borrowings by Mr McCourt from Anglo Irish Bank Corp PLC (“Anglo”), secured over two guesthouses in Dublin by way of mortgage dated 12 August 2002 (the “Mortgage”). Jim Stafford was appointed as receiver over the properties in 2015. Mr McCourt claimed that the Bank could not enforce its security via the receiver as there was a “lease in existence at the time the (Mortgage) was executed by him in favour of a company (“Ashcliff”), controlled by him.” Judge Twomey noted that “the only evidence adduced regarding the terms of the alleged lease was a reference in documentation to a rental amount paid by Ashcliff to Mr. McCourt.” The kernel of Mr. McCourt’s argument was that the terms of his Mortgage which prohibited him from leasing the properties in question, did not apply to the lease to Ashcliff as Anglo was aware of the lease and therefore consented to it. As a result, the Receiver was prevented by Ashcliff from obtaining possession of the properties and issued proceedings.

The Controlling Mind

On the day his Mortgage was signed Mr. McCourt was a director of Ashcliff and a 99% shareholder. Given that the substance of the defence was that, on that date the Mortgage was granted, a lease purportedly existed as between the first and second defendant, Judge Twomey found it “curious therefore that Mr. McCourt (in his own right, or as the director and controller of Ashcliff) chose not to give any evidence in this trial in respect of the lease which is the basis of his defence to the Receiver’s claim for possession.”

Pursuant to the decision in Murphy v. Hooton [2014] IEHC 266; where a borrower alleges a lease takes priority over a bank’s security, the onus falls upon the borrower to adequately establish the lease in question existed and, furthermore, that the bank consented to it.

Ashcliff in its defence, claimed that it was entitled to benefit from the lease as it was a stranger to the covenant given by Mr McCourt. Judge Twomey acknowledged that Ashcliff is indeed at law a separate legal entity however, one could not ignore that “the controlling mind of Ashcliff is Mr. McCourt and more importantly that he borrowed funds from Anglo on the back of his undertaking [in the Mortgage] not to allow a lease to subsist over the guesthouses.” The question which arose for the Court was whether it would be “unconscionable to permit Ashcliff’s alleged lease to take priority over the negative pledge given by Mr. McCourt” in the Mortgage, despite “the actual knowledge of the controlling mind of the company of that negative pledge”? Judge Twomey referenced the similarities in this case to the circumstances of those of Re: Salthill Properties Limited [2006] IESC 35.

Did Anglo consent?

Judge Twomey deemed the decision in Fennell v. N17 Electrics [2012] IEHC 228particularly relevant.” The key issue here was whether the evidence adduced on behalf of Mr. McCourt lead to a conclusion that Anglo consented to the lease with Ashcliff, such that the lease takes priority over its charge.

Mr McCourt relied on a letter furnished from his financial advisor to Anglo when applying for the facilities, which referenced a rent being paid by Ashcliff to Mr McCourt. In accordance with the reasoning in Fennell v. N17 Electrics, the mere fact that Anglo might have been aware that Ashcliff was paying rent to Mr. McCourt, with the consequent suggestion that Anglo was or should have been aware of the existence of a tenancy, is not sufficient to grant Ashcliff’s lease priority over Anglo’s security. It is clear that “something considerably more is required, such as Anglo serving notice on Ashcliff to pay rent to it. Nothing of this nature occurred in the present case.”

Furthermore, there were requisitions on title in respect of both properties which were signed by a solicitor on behalf of Mr. McCourt. These requisitions “expressly deny the existence of a lease in the most unequivocal terms.” If Mr. McCourt were to be successful in his argument that Anglo consented to the existence of the lease, “then this would fly in the face, not only of Mr. McCourt’s replies to requisitions, but also of the commitment by him to provide a first legal charge over the guesthouses.”

In reaching a decision, the Court also placed reliance on the term of the Mortgage which prohibited Mr. McCourt from allowing ‘to subsist’ any lease on the two guesthouses. Therefore, if a lease was in existence at the time the Mortgage was signed, then Mr. McCourt would have to bring this lease to an end.

Judge Twomey commented that Anglo may have been “lax in their dealings” with Mr McCourt’s’ financial adviser however concluded that the mere fact that Anglo was aware that Mr. McCourt was in receipt of rent from Ashcliff did not amount to consent by Anglo, to the existence and the terms of a lease.

Commercial realties

The Court acknowledged the particular circumstances in reaching its decision which were Mr. McCourt “borrowed €1.25 million from a bank and gave security over two very valuable properties in order to induce the bank to lend to him”. The Court also noted the representations to his solicitor at the time, that there was no lease on the premises and the first legal charge he undertook to give over the property. “It is clear to anyone with any knowledge of commerce that a bank would not, save in the rarest of situations, lend money on the back of security unless it had a first legal charge over the secured property (i.e. that a lessee did not have priority over the interest of the bank). This was also confirmed in evidence given in this case on behalf of Anglo.

If Mr McCourt’s argument were to be upheld by the Court, this “would mean that Mr. McCourt would have obtained a €1.25 million loan from the bank while effectively giving the bank a worthless security. Mr. McCourt seeks to leave the bank high and dry while walking away in possession of the premises through his company (albeit that his shareholding in the company is less than 99% now) and in possession of the rent of those premises, as the landlord.

Observations

McDowell Purcell acted on behalf of the Plaintiff in this case which compounds and approves the seminal decision in Fennell v. N17 Electrics, and subsequent decisions. In order to deem that a secured creditor has acquiesced in or given up the protection of a negative pledge clause, the facts must be clear so that an ‘intention’ to give up that protection is also made out.

To access a copy of the judgment, please click here.

Authors: Susie Higgins, Noreen McGovern and Kean Kavanagh