Set-off against Kingsway
96(NSW) Real Property Act 1900, s 53, relevantly provides as follows:
53 Land under the provisions of this Act-how leased
(1)When any land under the provisions of this Act is intended to be leased or demised for a life or lives or for any term of years exceeding three years, the proprietor shall execute a lease in the approved form.
...
(6)A lease of land which is subject to a mortgage, charge or covenant charge is not valid or binding on the mortgagee, chargee or covenant chargee unless the mortgagee, chargee or covenant chargee has consented to the lease before it is registered.
97Elite contends that Kingsway is bound by the lease, its consent having been given on or about 20 March 2009, or at least before the lease was registered on 21 April 2009. As has been observed, no instrument of consent was ever signed by Kingsway, but Kingsway does not dispute that it consented to the lease in the form in which it was registered. Mr Barry's email of 20 March refers to an oral statement of Mr Polito suggestive of consent, and consent is implicit in Mr Polito, albeit as Mr Barry's agent, attending to registration of the lease on 21 April. In my view, Kingsway consented to the lease prior to registration; alternatively, it would be estopped from denying that it consented. Kingsway did not dispute that it had consented to the lease, in the form in which it was registered.
98The next question is whether that consent, when it was given in April 2009, incorporated the terms contained in the "terms of consent" that Kingsway had proffered in September 2007 - notwithstanding that neither 5A nor Elite had ever signed or returned those terms of consent. Kingsway was aware, in February 2009, that the terms of consent had not been signed and returned. There was no reference to the terms of consent in the 2009 communications preceding registration between Kingsway, 5A and Elite. On 20 March, Mr Barry communicated to Elite, with a copy to Kingsway, that if registration were pursued first, the other issues could be addressed later. Elite pressed for registration, but it never assented to the terms of consent. Kingsway procured registration of the lease, without insisting on assent to the terms of consent. Consent is a unilateral act, and does not require the concurrence of the lessor and lessee. However, the mortgagee cannot unilaterally foist additional obligations on, or detract from the rights of, the lessee or lessor, without their agreement. In my judgment, the consent that was given by Kingsway, implicitly by attending to registration of the lease, was given without reference to the September 2007 terms of consent, and did not incorporate them. Accordingly, Kingsway is bound, in the sense intended by s 53(4), by the lease in the form in which it was registered, to which it consented prior to registration - which included, relevantly, Elite's covenant to pay the rent "without deduction" (clause 12.1), and 5A's covenant to pay for lessor's works (clause 19.2), as defined in clause 19.1.
99Elite submits that Kingsway is also bound by the October agreement. I reject this, for the following reasons. First , the October agreement was not a variation of the lease, but a personal agreement between 5A and Elite. Despite correspondence in which it asserted that there was a "pre-payment" an agreement, Elite re-executed the lease after minor alterations in April 2009, knowing that it was to be registered without any express alteration of the original terms about lessor's works to reflect the alleged agreement variation. That it was a personal agreement between 5A and Elite, and not a variation of the lease, is concluded by the subsequent amendment and initialling and registration of the lease, without reference to any alleged variation.
100Secondly, even if, contrary to my above conclusion, the October agreement amounted to a variation of the lease as between 5A and Elite, Kingsway's consent was only to the lease which was registered, and not to any variation of it. The nature and purpose of the Torrens system in general, and s 53(4) in particular, is such that the requirement for consent extends to any variation, so that a mortgagee would not be bound by a variation of a lease to which it had not consented prior to registration of the variation, any more than it would be bound by a lease to which it had not consented - at least, other than an amendment authorised by and in accordance with the lease, and within the scope of the consent. A variation of lease, enforceable as between 5A and Elite, would not bind the mortgagee unless within the scope of the original consent, or the subject of a further consent. Kingsway only consented to the lease document containing the terms as executed and registered, which did not include, nor authorise, the October agreement.
101Thirdly , insofar as Elite alleges that Kingsway is estopped from denying that its consent extends to the October agreement, adequate particulars supporting the allegation are lacking, but its basis appears to be (1) that Kingsway knew of the poor financial position of 5A, and of the lease proposal, including the terms of the lease - specifically those with respect to lessor's works - and believed if the lease proceeded there would at least potentially be a positive impact on 5A, which would be to Kingsway's advantage as its creditor and mortgagee; and (2) that with that knowledge, Kingsway offered to advance to 5A the money required to fund the lessor's works that were 5A's obligation under the lease, and in fact paid for some of the lessor's works by funding 5A, both by direct payments to contractors and by advances to 5A.
102However, the first of those matters (which I would accept as established), falls well short of establishing knowledge of the October agreement at the time of the alleged act of acquiescence, which would be fundamental to any case of consent or estoppel. There is no evidence that Kingsway had knowledge, in 2007 (when it agreed to advance funds for the lessor's works), of the October agreement. The alleged variation was first raised in correspondence with Kingsway by Elite during November 2008, after Kingsway had served its first section 63 notice, and long after Kingsway had made the $250,000 advance. Thereafter, Kingsway insisted on being paid the rent without deduction (which is quite inconsistent with consent to the variation) and Elite complied - admittedly under protest or reserving rights, at least on some occasions.
103As to the second matter, it is at least as, if not more, consistent with Kingsway funding 5A to perform the lessor's works in accordance with clause 19.2 of the lease, than with consent to or acquiescence in the October agreement. In any event, its effect as an act of consent or acquiescence would depend upon establishing the requisite knowledge, which for the reasons just given is absent.
104It is true that, by the time it finally consented to the lease on 21 April 2009, Kingsway knew that Elite claimed to be entitled to a credit for prepayment, but mere consent to the lease that was registered cannot of itself import consent to the October agreement, when Kingsway continued to insist upon rent being paid without deduction. There is no allegation, and no evidence, that the parties proceeded on the footing that Kingsway had consented to the October agreement; nor that Kingsway stood by, knowing that Elite believed that it had so consented; nor that Kingsway represented or conducted itself in such a way as to induce Elite to believe that Kingsway had so consented (to the contrary, it insisted on payment of the rent in full); nor that 5A acted reasonably (or at all) in reliance upon any such belief. Nor is it apparent what relevant detriment Elite incurred and would have avoided but for Kingsway's supposed silence. Elite submitted that Kingsway "remained deliberately silent in circumstances where it knew that [Elite] was acting to its detriment in entering into the lease and [Elite] was a person of special disadvantage being an occupant of commercial premises on which it had been duped into expending significant sums (improving its value for the benefit of Kingsway) and having no alternative premises to conduct its business from", and that the result was an estoppel against denying Elite the "full benefit of the lease" and an equity "to abate and set off the rent, costs and interest". Exactly what erroneous assumption on the part of Elite Kingsway is supposed to have known of but remained silent about, is not apparent. The relevant assumption for Elite would be that it was entitled to have its expenditure on fit-out treated as "pre-paid rent" under the October agreement. But there is no allegation, let alone evidence, that Kingsway knew of the October agreement before November 2008, and once it became aware of Elite's contention in that respect, Kingsway's conduct in insisting upon payment of rent in full is hardly deliberate silence, and could not be understood as acceptance or acquiescence in Elite's position.
105Further, it is said that the consent to lease was provided on a "fully informed basis", specifically including that Elite as lessee was paying an additional $45 per square metre in respect of the fit-out, which is agreed to remain the property of the lessor, and that it was unconscionable for Kingsway to insist upon payment of the full rent when, in the events that transpired, Elite had fitted out the premises at its own expense. But even if all that were established - and, as I have found, it is not established that Elite has paid for works which 5A was bound to perform - that does not establish knowledge of, let alone consent to or acquiescence in, the October agreement.
106It follows that Kingsway is bound only by the lease as registered, and not by the October agreement between Elite and 5A. The evidence does not establish any wider consent on the part of Kingsway.
107Although Kingsway is bound by the registered lease, that does not mean that it was answerable for any breach of the lessor's personal covenants contained in the lease. Elite's case appeared to proceed on the basis that, Kingsway having consented to the lease, it was bound by all the obligations of 5A as lessor and was amenable to any set-off Elite had against 5A. However, s 53(4) does not impose on a mortgagee all of the obligations of the lessor contained in a lease to which it has consented - it merely renders the mortgagee's interest in the land subject to that of the lessee under the lease. It does not render the mortgagee liable to perform the lessor's personal covenants at the suit of the lessee. Accordingly, while consent to the lease is a necessary condition of any right of set-off against Kingsway, it is not a sufficient condition.
108As has been observed, breach by 5A of cl 19.2 (by failing to perform the lessor's works), if established, would have given Elite a claim for damages for breach of covenant against 5A which, I am prepared to accept, could have been set off against rent in accordance with the principles discussed in British Anzani. However, whatever the position in that respect between Elite and 5A, as between Elite and Kingsway - even absent clause 12.1 of the lease - neither breach by 5A of clause 19, nor the October agreement, could ground an equitable set-off. This is because, even absent a contractual basis to deny a right of set-off, a lessee's personal claim against a lessor does not affect a mortgagee in possession [ Reeves v Pope [1914] 2 KB 284; Citibank Pty Ltd v Simon Fredericks Pty Ltd [1993] 2 VR 168; Ory v Betamore Pty Ltd (in liq) (1993) 60 SASR 393]. Even if a personal claim by the lessee can be set off against rent payable to the lessor, in New South Wales (as under the equivalent provisions in Victoria and South Australia, but not in Queensland) the mortgagee has an independent statutory right not only to receive but also to enforce the rent covenant directly against the lessee, which is not affected by any personal claim of the lessee against the lessor [ Real Property Act , ss 60, 63; Citibank Pty Ltd v Simon Fredericks Pty Ltd [1993] 2 VR 168; Ory v Betamore Pty Ltd (in liq) (1993) 60 SASR 393; cf as to the position in Queensland Re Partnership Pacific Securities Limited [1994] 1 Qd R 410 ].
109Although, in Ory v Betamore, the Court emphasised that the overpayments made by the lessee in that case were not rent - suggesting that the position might have been otherwise in the case of an overpayment of rent - in fact the same position would obtain, notwithstanding that the claimed set-off was in respect of a prepayment of rent, as distinct from damages for breach of covenant. This is because of the legal effect of a prepayment of rent in advance by a lessee where there is a prior mortgage, which - albeit in the context of a common law mortgage - was explained by Willes J in De Nicholls v Saunders (1870) LR 5 CP 589 (at 594):
The receipt of rent the could not be treated here as a discharge by the landlord, because by assigning the reversion before the rent was received by him he had parted with the power of giving such a discharge. The plaintiff [mortgagee] lent his money on a contract, which was under an implied condition that the landlord should continue entitled to the rent at the time it became due, and able, therefore, then to give the plaintiff a valid discharge.
110Accordingly, it was held that pre-payment of rent before it was due was not a fulfilment of the obligation imposed by the covenant to pay rent, but rather an advance to the landlord with an agreement that on the day when the rent became due such advance would be treated as a fulfilment of the obligation to pay rent [see also Federal Commissioner of Taxation v Steeves Agnew & Co (Vict) Pty Ltd (1951) 82 CLR 408, 418 (Dixon J); and Hudson v Shevket [ 2003] NSWSC 648, [17] (Malpass M)]. It followed that a payment by the tenant to the landlord, expressed to be and accepted as a payment of rent in advance, was not effective against a mortgagee who obtained the mortgage before the payment, and the mortgagee was permitted to recover the rent that, according to the terms of the lease, accrued after the tenant had notice of the mortgage, the tenant not being entitled to rely on the advance payment to the landlord as a defence.
111Accordingly, neither a claim for damages by Elite for breach by 5A of clause 19, nor a claim that it was entitled to be treated as having prepaid rent under the October agreement, would found an equitable set-off on the part of Elite against Kingsway.