(a) prevented the cross-claimants obtaining an income stream with which to redeem the Mortgage by obtaining refinance;
(b) devalued the property in that, without leases it is valued at $2,400,000 but with leases it is valued at over $3,100,000 (relying on the report of Alcorn Lupton & Associates);
(c) prevented the cross-claimants redeeming the Mortgage by way of refinance, due to the devaluation; and
(d) exposed the cross-claimants to claims by the potential lessees, who were led to believe that they could take possession on the basis that formal leases would be entered because representations were made to them to that effect based, it is alleged, on the representation of Mr Merceica.
32 Moreover, the cross-claimants suggested in submissions that the "issues and discrepancies", raised by Perpetual, in their letter of 26 August 2010, as a reason for not giving consent at that point of time, are "in no way issues which can be stated to prejudice the mortgagee's security interest" (Transcript of Proceedings, page 37). The cross-claimants also submitted that the letter of the cross-claimants' solicitor of 29 August 2010 "is a response to every one and every requisition or complaint made by the mortgagee" such that there ought be no remaining barrier to Perpetual's consent (Transcript of Proceedings, page 37).
33 The results of the refusal of consent outlined above, in the cross-claimants' submission, "can only be avoided by Perpetual consenting to the giving of and registration of [the] proposed leases … and selling the property as mortgagee subject to the proposed leases" (Statement of Cross-Claim, paragraph 14).
34 It was agreed or conceded that, were the relief sought denied, the cross-claimants could seek damages arising once the power of sale is exercised (Transcript of Proceedings, page 56), and the claim for damages or equitable compensation in this Cross-Claim was not pressed (Transcript of Proceedings, page 4).
Consideration
35 Unless the terms of the Mortgage otherwise provide, a mortgagor in possession has a right to lease the mortgaged property (ss 106(1), 106(11), Conveyancing Act 1919). The terms of the Mortgage in the present case, at clause 3.2, require the mortgagee's consent before the cross-claimant can grant a lease. Clause 3.2 states that:
"The Mortgagor will not:
…
(2)(a) dispose of;
(b) create or allow any interest in, or
(c) part with possession of,
any Mortgaged Property, or agree, attempt or purport to do so,
except with the consent in writing of the Mortgagee or as expressly permitted in any Transaction Document."
36 It was common ground that no such consent has been given by the mortgagee, and that any lease entered into by the defendants without such consent does not bind the mortgagee (s 53(4) Real Property Act 1900).
37 Clause 1.4 of the Mortgage further provides that if Perpetual's consent is required, Perpetual may grant or refuse consent in its "absolute discretion and without giving reasons". It was accepted by Perpetual that in exercising its power of sale, it owed a duty of good faith to the cross-claimants (Defence to Statement of Cross-claim, paragraph 8).
38 The correspondence between Perpetual and the cross-claimants on 26 August and 29 August 2010 indicate that there are ongoing negotiations about the giving of mortgagee's consent to the leases by Perpetual; Perpetual is yet to finalise its attitude to consent while these issues and discrepancies remain unresolved, although Perpetual's course of conduct might suggest some reluctance to consent.
39 The issues raised throughout this year by Perpetual for satisfactory resolution before the consent determination are not unreasonable. In circumstances where Perpetual has a legitimate right to protect its security interest, and has a strong commercial incentive to maximise the sale price of the property, it is not unreasonable to seek concrete details of the commencement and termination date of the lease, to draw attention to discrepancies between the lease period on the lease and the disclosure statement, to seek clarification of the rent review dates, to raise concerns about the amount of public liability insurance required under the lease, to query whether the use fits within the permitted uses of the property's zoning, to raise questions about the solvency, and capacity to pay rent, of the lessees and otherwise to note discrepancies and errors in the leases and disclosure statements. The numerous discrepancies uncovered by Perpetual in the draft lease documents would not have inspired confidence in the prudence of the transactions.
40 These concerns remained when Perpetual was served with the Cross-Claim, and legitimate concerns remained even after the cross-claimants assurances on 29 August 2010. For example, it would not be unreasonable for Perpetual to expect evidence of the cross-claimants' due diligence into the lessee's capacity to pay the rent over five years, given the application for winding up made against the lessee in December 2008, particularly given the length of the lease period (including lessee options to renew).
41 Moreover, although, as a general proposition for a commercial property of this kind, it might be accepted that a fully tenanted property would achieve a greater sale price than an untenanted property, there are a number of qualifications to this proposition which Perpetual was entitled to consider in granting or refusing consent. Although there was a significant disparity between the tenanted and untenanted valuations completed by Mr Lupton, Mr Lupton's valuations were based on the assumptions that the lessees were in situ, that the lessees were good tenants, and without consideration of the specific terms of the lease. Mr Lupton accepted that each of these were "riders" which could affect a prospective buyer's valuation of the property (Transcript of Proceedings, pages 24-25), although I accept that, absent proof of default by a lessee, the value of the property once leased would be higher than if not leased. It is not unreasonable or unconscionable for Perpetual to delay, or even refuse, consent until the cross-claimants satisfied Perpetual that the particular leases would in fact improve the property's value at sale.
42 I note the recent decision of Emerton J in Apollo 169 Management Pty Ltd v Pinefield Nominees Pty Ltd [2010] VSC 40, in which, in not significantly dissimilar circumstances involving a mortgagor in default seeking to compel the mortgagee's consent to a lease negotiated at arms' length, her Honour stated (at [121]) that:
"It is true that consent to a lease cannot be arbitrarily or capriciously withheld. However, it does not follow that the second defendant was bound to consent to any lease on reasonable terms to any reasonable and solvent tenant, irrespective of the circumstances."
43 For these reasons, the cross-claimants have not satisfied the Court on the balance of probabilities that Perpetual has yet acted unreasonably or unconscionably.
44 Nor is the Court satisfied on the balance of probabilities that the alleged encouragement of the leases by Mr Merceica's statement to Mr Paola in December renders the refusal to give consent, as yet, unconscionable.
45 In any event, specific performance to force Perpetual's consent as mortgagee is an inappropriate remedy. In circumstances where the terms of the proposed leases were being negotiated up until the date of the hearing, it would be inappropriate for the Court to substitute its own view as to what would constitute reasonable terms for each of the four proposed leases. Further, the order, if granted, would require the Court to supervise the negotiation of reasonable terms in the lease.
46 In this regard, I note the decision of Young J (as his Honour then was) in Thanes Pty Ltd v Custom Credit Corporations Ltd (1985) 5 BPR 11, 955, where his Honour stated (at 956):
"If the situation is that the mortgagee is offering ex gratia a consent then, in my view, the mortgagor must either take it or leave it and if it accepts the mortgagee's offer it must accept it wholly and not just the parts that are acceptable. Thus on this analysis whatever the conditions are they are not imposing on the mortgagor any burden because the mortgagee was not bound to make any offer to agree to a lease binding itself in any event." (See also Independent Order of Oddfellows of Victoria Friendly Society v Telford (1991) V ConvR 54-419, 240 (Gobbo J); WD Duncan, Commercial Leases in Australia, 5th ed (2008) at 445.)
47 The proper remedy, if there be one, and if unconscionability or unreasonableness were to be disclosed, would be damages.
48 No cause of action yet arises for damages or equitable compensation because, as was agreed or conceded by the parties, no damage will in fact be suffered until the power of sale is exercised.
49 Costs of these proceedings are dealt with in the Mortgage and the Court will make no order for costs.
Orders
50 The Court makes the following orders: