New South Wales Supreme Court CITATION : Bank of Western Australia Ltd v Love [2009] NSWSC 1421 HEARING DATE(S) : 14 December 2009 JUDGMENT DATE : 17 December 2009 JURISDICTION : Common Law JUDGMENT OF : Harrison AsJ (1) Leave is granted to State Wide Pool Services Pty Ltd to be joined as second defendant to the proceedings. (2) Leave is granted to State Wide Pool Services Pty Ltd to file a defence and cross claim within 14 days. DECISION : (3) The parties are to attend mediation. (4) The matter is listed before the Registrar for directions on Thursday, 4 February 2010 at 9.00 am. (5) Costs are reserved. CATCHWORDS : PROCEDURE - judgments and orders - amending, varying and setting aside – application to have a default judgement for possession set aside - miscellaneous procedural matters - other matters – application for leave to join as second defendant and leave to file a defence - leave granted - REAL PROPERTY - torrens title - registration - mortgages, charges and encumbrances - question whether mortgagee entered into constructive possession - leases - lease option - benefit and burden principle - TRADE AND COMMERCE - Trade Practices Act 1974 (Cth) and related legislation - unconscionable conduct Real Property Act 1900 LEGISLATION CITED : Trade Practices Act 1974 (Cth) Uniform Civil Procedure Rules 2005 CATEGORY : Procedural and other rulings Adams v Kennick Trading (International ) Ltd & Ors (1986) 4 NSWLR 503 Clifford v Dove [2003] NSWSC 938; 11 BPR 21,148; [2004] ALMD 4806 Cohen v McWilliams (1995) 38 NSWLR 476 Cuttle v Brandt (1947) 64 WN (NSW) 96 Davies v Pagett (1986) 10 FCR 226 ER Ives Investments Ltd v High [1967] 2 QB 379 Evans v Bartlam [1937] 2 All ER 646 Frater v Finlay (1968) 91 WN(NSW) 730 Frederick Berry Ltd v Royal Bank of Scotland [1949] 1 KB 619 Gallagher v Rainbow (1994) 179 CLR 624 Goldstein v Sanders [1915] 1 Ch 549 CASES CITED : Government Insurance Office (NSW) v KA Reed Services Pty Ltd [1988] VR 829 Halsall v Brizell [1957] Ch 169 Horlock v Smith (1842) 11 LJ Ch 157 Lambert v F W Woolworths & Co (No 2) [1938] Ch 883 Rhone v Stephens [1994] 2 WLR 429 Rufa Pty Ltd v Cross [1981] Qd R 365 Rural and Agricultural Management Ltd v West Merchant Bank Ltd (1995) 18 ACSR 793 Ryan v Rouen [2000] NSWSC 468 Tito v Waddell (No 2) [1977] Ch 106 Tooheys v The Municipal Council of Sydney [1946] 71 CLR 407 Vacuum Oil Pty Limited v Stockdale (1942) 42 SR (NSW) 239 Young v Ashley Gardens Properties Ltd [1903] 2 Ch 12 TEXTS CITED : The Law of Consent, Young JA (1986) The Law Book Company Bank of Western Australia Limited ( Plaintiff) PARTIES : Gary Willard Love (First Defendant) State Wide Pool Services Pty Ltd (Second Defendant) FILE NUMBER(S) : SC 15750/2008 COUNSEL : P Newton (Plaintiff) S Jacobs (Second Defendant) SOLICITORS : Kemp Strang (Plaintiff) John Fisher Business Lawyers (Second Defendant) IN THE SUPREME COURT OF NEW SOUTH WALES COMMON LAW DIVISION POSSESSION LIST ASSOCIATE JUSTICE HARRISON THURSDAY, 17 DECEMBER 2009 15750/2008 - BANK OF WESTERN AUSTRALIA LIMITED v GARY WILLARD LOVE JUDGMENT (Join a defendant – set aside default judgment) 1 HER HONOUR: The issue is whether a lessee can exercise an option to renew a registered lease when the mortgagee does not consent. 2 By notice of motion filed 11 August 2009, State Wide Pool Services Pty Ltd seeks firstly, leave to be joined as the second defendant in these proceedings, secondly, leave to State Wide Pool Services Pty Ltd to file a defence; and thirdly, that the judgment for possession obtained by the plaintiff, be set aside as against the second defendant, to the extent that such possession would be inconsistent with the rights of the second defendant as lessor pursuant to registered lease No AC 635066Y. State Wide Pool Services Pty Ltd, if granted leave to file its defence, will file a cross claim 3 The plaintiff is the Bank of Western Australia Limited ("the Bank"). The defendant is Gary Willard Love ("Mr Love"). The Bank relied upon affidavit of Michael Wirth sworn 29 September 2009 and Kate Rowland sworn 14 December 2009. The proposed second defendant is State Wide Pool Services Pty Ltd ("State Wide"). State Wide relied on the affidavits of its director Geoffrey Harvey Prior sworn 13 August 2009, 22 September 2009, 26 September 2009and 10 December 2009 and the affidavits of John Howard Fisher sworn 13 August 2009,19 August 2009, 16 October 2009 and 10 December 2009. Background 4 On 20 December 2000, Mr Love mortgaged the property at 1 Castle Hill Road, West Pennant Hills to the Bank pursuant to registered mortgage No 7308838V. On 1 August 2006, State Wide, as lessee, leased the premises from Mr Love, as lessor. The purpose of the lease was to use the property as a pool shop. The term of the lease, between the Bank and Mr Love, was for a period of three years, commencing on 1 August 2006, with an option to renew for a further two period of three years set out in Clause 4 of the lease. The lease expired on 31 July 2009. 5 On 27 January 2009, default judgment was entered that the defendant give the plaintiff possession of the land comprised in certificate of title folio identifier 14/807905 being the land situated at and known as 1 Castle Hill Road, Pennant Hills NSW 2215 ("the property"). Mr Love, the lessor, has played no active role in these proceedings. So far as the mortgage between the Bank and Love, Mr Love is in default of his loan repayment in excess of $1M. The writ of possession has been stayed. The Bank is prepared to allow State Wide to remain in possession until 28 February 2010. Setting aside default judgment 6 The power to set aside judgment is contained in 36.16 of the Uniform Civil Procedure Rules 2005 ("the Rules"). It reads: 36.16 Further power to set aside or vary judgment or order …. (2) The court may set aside or vary a judgment or order after it has been entered if: (a) it is a default judgment, or (b) it has been given or made in the absence of a party, whether or not the absent party had notice of the relevant hearing or of the application for the judgment or order, or (c) in the case of proceedings for possession of land, it has been given or made in the absence of a person whom the court has ordered to be added as a defendant, whether or not the absent person had notice of the relevant hearing or of the application for the judgment or order." 7 The authorities on setting aside default judgment are Evans v Bartlam [1937] 2 All ER 646; Vacuum Oil Pty Limited v Stockdale (1942) 42 SR (NSW) 239; Cuttle v Brandt (1947) 64 WN (NSW) 96; and Adams v Kennick Trading (International) Ltd & Ors (1986) 4 NSWLR 503. 8 One of the considerations to be taken into account when determining whether default judgment should be set aside was expressed by Priestley JA in Cohen v McWilliam (1995) 38 NSWLR 476 (at 481) quoting from the Federal Court in Davies v Pagett (1986) 10 FCR 226: "It is, however, another question whether concern about the extent of delays, either in a particular case or generally, should, in the absence of prejudice in the particular case, be taken into account in exercising a discretion to set aside a default judgment. The fundamental duty of the court is to do justice between the parties. It is, in turn, fundamental to that duty that the parties should each be allowed a proper opportunity to put their cases upon the merits of the matter. Any limitation upon that opportunity will generally be justified only by the necessity to avoid prejudice to the interests of some other party, occasioned by misconduct , in the case, of the party upon whom the limitation is sought to be imposed. The temptation to impose a limitation through motives of professional discipline or general deterrence is readily understandable; but, in our opinion it is an erroneous exercise of the relevant discretion to yield to that temptation…" 9 It is conceded by the Bank that State Wide has provided a satisfactory explanation as to its delay in making this application. Mr Prior sought and accepted legal advice to the effect that State Wide did not have to play any active role in the proceedings as it was protected by the registered lease. This advice in so far as it went is correct but it did not canvass the options to renew the lease. The proposed defence 10 The proposed defence of State Wide raises four issues. They are firstly those contained in [9.1] to [11.2] (the ss 60 and 63 issue); secondly, [12] (the benefits and burden issue); thirdly, [13.1] to [13.2] (unconscionable conduct issue); and finally, [14] (the pleading issue). The lease and option 11 Counsel for State Wide submitted that as the lease between Mr Love and State Wide was registered it operated for a period of three years with an option to renew for a further two periods of three years as set out in Clause 4. The termination date was stipulated to be 31 July 2009. 12 The Bank consented to the granting of the lease between Mr Love and State Wide on conditions. Those conditions are: "1. The Bank: (a) gives this consent without prejudice to its right to act under the Mortgage subject to the Lessee's right to quiet enjoyment under the lease); and (b) is not under any obligation, liability or responsibility to observe or perform the covenants and agreements entered into by the Lessor, unless it enters into possession of the property as a mortgagee in possession, but in that event only to the extent of the lessor's covenants and agreements contained in the Lease. 2. Until the Mortgage is discharged: (a) the lessor and the Lessee will not vary, rescind, terminate or renew the lease (or purport to do so); and (b) the lessor will not terminate the Lease (or purported to do so): without first obtaining the Bank's written consent ." [my emphasis added] 13 The consent deed was addressed to both Mr Love and State Wide, Mr Prior only became aware of that document and its terms 16 August 2009. The lease was registered. 14 Clause 4.4 of the lease provides: "The tenant can exercise the option only if - 4.4.1 the tenant serves on the landlord a notice of exercise of option not earlier than the first day stated in item 12D in the schedule and not later than the last day stated in item 12E in the schedule; 4.4.2 there is at the time of service no rent or outgoing that is overdue for payment; and 4.43 at the time of service all the other obligations of the tenant have been complied with or fully remedied in accordance with the terms of any notice to remedy given by the landlord." 15 On 11 April 2009, State Wide sent Notices to Exercise Option to Renew the lease to both the Bank and Mr Love. The lease could not be renewed unless the Bank gave its written consent. It did not. In my view, it is clear the proposition that just because the lease was registered, the lessee could exercise this option is wrong because it ignores the terms of the Bank's consent to registration of the lease. 16 Paragraphs [9.1] to [11.2] of the proposed defence plead: "9.1 The Plaintiff consented to the registration of the Lease by producing the Certificate of Title to the Department of Lands; 9.2 On or about 10 March 2009, the Plaintiff served a Notice on the Second Defendant pursuant to Sec 63 of the Real Property Act; and 9.3 The Second Defendant has paid the rental delimited by the Lease to the Plaintiff since then. 10. On or about 11 April 2009, the Second Defendant served notice on both the First Defendant and the Plaintiff whereby it gave Notice of its intention to exercise the said Option to renew the Lease. 11.1 As at 10 March 2009, the Plaintiff was in possession of the Land by dint of the said Sec 63 Notice, and as such; 11.12 is bound by its consent to the registration of the Lease alternatively, by Item 1 of the consent to give effect the Second defendant's said exercise of the Option." 17 Between 10 March 2009 and 1 September 2009, State Wide made rental payments to the Bank pursuant to s 63 notice of the Real Property Act 1900. 18 Section 60 reads: "60 In case of default, entry and possession, ejectment The mortgagee, chargee or covenant chargee upon default in payment of the principal sum or any part thereof, or of any interest, annuity, or rent-charge secured by any mortgage, charge or covenant charge may: (a) enter into possession of the mortgaged or charged land by receiving the rents and profits therefore, or (b) (Repealed) (c) bring proceedings in the Supreme Court or the District Court for possession of the said land, either before or after entering into the receipt of the rents and profits thereof, and either before or after any sale of such land effected under the power of sale given or implied in the mortgage, charge or covenant charge, in the same manner in which the mortgagee, chargee or covenant chargee might have made such entry or brought such proceedings if the principal sum, interest, annuity, or rent-charge were secured to the mortgagee, chargee or covenant chargee by a conveyance of the legal estate in the land so mortgaged or charged." 19 Section 63 reads: "63 Suspension of mortgagor's rights as landlord (1) Whenever a mortgagee, chargee or covenant chargee gives notice of demanding to enter into receipt of the rents and profits of the mortgaged or charged land to the tenant or occupier or other person liable to pay or account for the rents and profits thereof, all the powers and remedies of the mortgagor, charger or covenant charger in regard to receipt and recovery of, and giving discharges for, such rents and profits, shall be suspended and transferred to the said mortgagee, chargee or covenant chargee until such notice is withdrawn, or the mortgage, charge or covenant charge is satisfied, and a discharge thereof duly registered. (2) In every such case, the receipt in writing of the mortgagee, chargee or covenant chargee shall be a sufficient discharge for any rents and profits therein expressed to be received, and no person paying the same shall be bound to inquire concerning any default or other circumstance affecting the right of the person giving such notice beyond the fact of the person's being duly registered as mortgagee, chargee or covenant chargee of the land. (3) Nothing herein contained shall interfere with the effect of any judgment or order of the Supreme Court in regard to the payment of rent under the special circumstances of any case, nor shall prejudice any remedy of the mortgagor, charger or covenant charger against the mortgagee, chargee or covenant chargee for wrongful entry or for an account." 20 Section 64 reads: "64 Mortgagee of leasehold entering into possession liable to lessor Any mortgagee or chargee of leasehold land under the provisions of this Act, or any person claiming the said land as a purchaser or otherwise from or under such mortgagee or chargee after entering into possession of the said land or the receipt of the rents and profits thereof shall, during such possession or receipt but only to the extent of any benefit rents and profits which may be received by him or her, become and be subject and liable to the lessor of the said land or the person for the time being entitled to the said lessor's estate or interest in the said land to the same extent as the lessee or tenant was subject to and liable for prior to such mortgagee, chargee, or other person entering into possession of the said land or the receipt of the rents and profits thereof." 21 Counsel for the plaintiff submitted that the mortgagee entered into a constructive possession. Counsel for State Wide referred to Horlock v Smith (1842) 11 LJ Ch 157, which states that a mortgagee who service a notice to a lessee directing the lessee to pay rent to the mortgagee, thereby enters into possession. I have read Horlock v Smith and it did not refer to the operation of the Real Property Act, so I do not consider it of assistance. 22 In Tooheys v The Municipal Council of Sydney [1946] 71 CLR 407 at 412, Rich J explained the operation of s 64 of the Real Property Act in this way: "The plaintiff appellant is only a mortgagee but it is a mortgagee of leaseholds and has gone into possession. To assimilate the position as mortgagee in possession to that of the lessee the plaintiff relies on s 63 of the Real Property Act , which deals with mortgagees of leasehold land under the Act, after entering into possession or receipt of the rents and profits, shall become and be subject to and liable prior to the mortgage. But there is a qualification to the liability imposed by the section; the liability is limited to the extent of any benefit, rents and profits which may be received by the mortgagee in possession." 23 Starke J similarly stated: "Although a mortgagee in possession of leasehold land is by force of the provisions of s 64 subject and liable to the lessor of the land in respect of rents and profits received by him during his possession to the same extent as the lessee or tenant was subject and liable prior to the mortgagee entering into possession, still the relation of landlord and tenant is not created between the mortgagee and the mortgagor nor between the mortgagee and any one under whom the mortgagor claims. All the section does or purports to do is to make the mortgagee subject and liable to the lessor of the land or the person for the time being claiming under him for the amount of the rents and profits received by him during his possession to the same extent as the lessee or tenant of the land was subject prior to the mortgagee entering into possession." 24 The effect of ss 60, 63 and 64 is to make the Bank subject and liable to Mr Love for the amount of the rents received by it during its possession to the same extent as the State Wide was subject prior to the Bank entering into possession. In my view, this situation is unlikely to amount to constructive possession but it is at least arguable. (ii) Benefits and burden 25 At [12] of the defence it is pleaded that in any event, by reason of the facts set out above, including the appropriation of rental, the Plaintiff is bound to recognise the State Wide's exercise of the Option, pursuant to the principle of benefits and burdens. 26 Counsel for State Wide submitted that a person who takes the benefit of a deed is bound by a condition contained in it even though that person does not execute the deed and that this principle extends to successors in title to a person bound by a deed: Clifford v Dove [2003] NSWSC 938; 11 BPR 21,149; [2004] ALMD 4806. While State Wide is not a successor in title, the deed entered into by the Bank is addressed to both Mr Love and State Wide. 27 In Clifford v Dove, Bryson J discussed the statement "A man who takes the benefit of a dead is bound by a condition contained in it though he does not execute it." Bryson J continued (at [67]): "… in Gallagher v Rainbow (1994) 179 CLR 624 at 647-648 McHugh J referred to Frater v Finlay (1968) 91 WN (NSW) 730 and Rufa v Cross [1981] Qd R 365 - 'Furthermore, the successor in title to a person bound by a deed may be bound by obligations in the deed if the successor in title takes a benefit conferred by the deed Rhone v Stephens [1994] 2 WLR 429; Halsall v Brizell [1957] Ch 169; ER Ives Investments Ltd v High [1967] 2 QB 379; Frater v Finlay ; Rufa Pty Ltd v Cross .' McHugh J assumed but to my reading should not be understood to have decided that the benefit and burden principle extends to persons who are not parties to or named in the Deed (at 648). The benefit and burden principle was extensively criticised in Government Insurance Office (NSW) v KA Reed Services Pty Ltd [1988] VR 829 by Brooking J in his judgment at 830 to 841: the views of Brooking J would have to be addressed carefully by a court which is asked to act simply on that principle, but that is not the present case. The principle of benefit and burden has not become established as a general legal principle. It has sometimes been referred to as the Ocean Island Equity, an allusion to Tito v Waddell (No 2) [1977] Ch 106. It was considered with references to authorities and sources, by Young J in Rural and Agricultural Management Ltd v West Merchant Bank Ltd (1995) 18 ACSR 793 and in Ryan v Rouen [2000] NSWSC 468 at [72] to [75]. There seems to be room for such a principle where owners of equitable interests or claimants against a fund compete with other similar claims. In context of positive obligations under easements Rhone v Stephens appears to have concluded against any such principle." 28 The benefit and burden principle is not certain. With the consent of Mr Love, Mr Prior caused $47,454.15 worth of work to be carried out on the premises so that it complied with the development application for the use of the premises. Mr Prior has obtained a valuation of the property and has offered to buy the property for a figure higher than the valuation but the Bank had refused to negotiate. There is an arguable case that the Bank has taken a benefit, namely an increased value of the premises and does not want take the burden, namely consenting to the option. 29 State Wide further submitted that the consent to the renewal of the lease cannot be unreasonably withheld. State Wide referred to a passage from The Law of Consent, by Young JA, (1986) The Law Book Company, where his Honour stated (at 156): "The landlord is not bound to give any reasons for refusing his consent, Young v Ashley Gardens Properties Ltd [1903] 2 Ch 12; Goldstein v Sanders [1915] 1 Ch 549, but if he does not, the court would more readily imply that the withholding was unreasonable, Frederick Berry Ltd v Royal Bank of Scotland [1949] 1 KB 619 at 623, explaining a dictum of Slesser LJ in Lambert v F W Woolworths & Co (No 2) [1938] Ch 883 at 906. However, the facts may be so plain that no reasons need to be given, such as in Goldstein v Sanders , where the tenant had so conducted himself as to make the landlord's refusal perfectly reasonable." 30 This passage refers to the landlord/tenant relationship but not one where the mortgagee takes possession. However, this proposition is at least arguable. (iii) Unconscionable conduct "13.1 Alternatively, and only in the event the contentions of the cross claimant in paras [11.1] – [12] above are not upheld, the Second Defendant pleads as follows: (a) the current market value of the Land is $650,000.00; (b) The Plaintiff has not commenced any marketing campaign in respect of the Land; (c) a marketing realisation period in respect of the Land would be 9-12 months; (d) the amount owing by the First Defendant to the Plaintiff exceeds $1M; (e) The Second Defendant had substantial moneys invested in the Land from which its business is being conducted; (f) there are no other business premises reasonably available to the Second Defendant; (g) The Plaintiff has served its Notice seeking vacant possession as a tactic to extract from the Second Defendant the amount owing from the First Defendant; (h) the insistence by the Plaintiff on its strict legal rights to vacant possession is harsh, oppressive or capricious. 13.2 In all circumstances the conduct of the Plaintiff seeking vacant possession of the Land constitutes unconscionable conduct within the meaning of Section 51AA of the Trade Practices Act 1974 (Cth). 14. Alternatively and in any event, the order for Possession dated 27 January, 2009 falls to be set aside by reason of the fact that the existence of the lease in favour of the Second Defendant was known to the Plaintiff [which had consented to same] but nevertheless not disclosed to the Court when the application or the said judgment was made. …" 31 Section 51AA of the Trades Practices Act 1974 (Cth) reads: "51AA Unconscionable conduct within the meaning of the unwritten law of the States and Territories (1) A corporation must not, in trade or commerce, engage in conduct that is unconscionable within the meaning of the unwritten law, from time to time, of the States and Territories. (2) This section does not apply to conduct that is prohibited by section 51AB or 51AC." 32 Section 51AAB reads: "51AAB Part does not apply to financial services (1) Section 51AA does not apply to conduct engaged in relation to financial services. (2) Section 51AB does not apply to the supply, or possible supply, of services that are financial services." 33 State Wide submitted that a serious question arises as to whether the Bank has acted unconscionably and contravened s 51AA of the Trade Practices Act. Firstly, State Wide finds itself in a position of situational disadvantage in that the current circumstances have occurred through no fault of State Wide, but rather through that of the owner/landlord who defaulted; secondly, the disadvantage is that (assuming there be no legal right to exercise the option, contrary to State Wide's primary position) State Wide finds itself at the mercy of the Bank; thirdly, the Bank, despite having no marketing campaign on foot in respect of the premises, threatens to evict State Wide unless it secures the premises by paying very much in excess of its current market value; fourthly, the threat of eviction comes in the lead up to the traditionally busy summer period of a pool shop; and fifthly there will or may well be collateral damage to the employees of State Wide. The pleading issue 34 Rule 36.8 of the Rules reads: "36.8 Possession of land Unless the court orders otherwise, judgment for possession of land may not be given or entered against a defendant in his or her absence unless the plaintiff files an affidavit: (a) stating that, when the originating process was filed or (if the claim for possession arises from an amendment to the originating process) when the amendment was made: (i) specified persons (other than parties to the proceedings) had been in occupation of the whole or any part of the land, or (ii) no persons (other than parties to the proceedings) had been in occupation of the whole or any part of the land, and (b) stating that, as to each person specified in accordance with paragraph (a) (i) (other than a person whose occupation the plaintiff does not seek to disturb): (i) the originating process has been duly served on the person, or (ii) the person has, since the time referred to in paragraph (a), ceased to be in occupation of any part of the land, and (c) in relation to a claim for possession by reason of default in the payment of money, stating particulars of the default." 35 The Bank has complied with requirements under s 36(8) of the Rules. A notice to occupier was served on State Wide in accordance with Rule 36.8(a) and (b). This ground of defence is hopeless. 36 However, in my view other grounds are at least arguable and leave should be granted to State Wide Services Pty Ltd to be joined as second defendant to the proceedings. Leave is also granted to State Wide Pool Services Pty Ltd to file a defence and cross claim within 14 days. Costs are reserved. 37 As previously stated, State Wide has offered to purchase the premises for an amount of higher than the valuation it has obtained. The Bank has not responded nor, as I understand it, had the property valued. It would make commercial sense for the parties to mediate their dispute. I order the parties to attend mediation. The Court orders: (1) Leave is granted to State Wide Pool Services Pty Ltd to be joined as second defendant to the proceedings. (2) Leave is granted to State Wide Services Pty Ltd to file a defence and cross claim within 14 days. (3) The parties are to attend mediation. (4) The matter is listed before the Registrar for directions on Thursday, 4 February 2010 at 9.00 am. (5) Costs are reserved. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.