Stafford v McCourt

• Jurisdiction: Ireland
• Judge: Mr. Justice Twomey
• Judgment Date: 04 December 2017
• Neutral Citation: [2017] IEHC 726
• Docket Number: [2014 No. 2851P]
• Court: High Court
• Date: 04 December 2017

[2017] IEHC 726

THE HIGH COURT

CHANCERY

Twomey J.

[2014 No. 2851P]

BETWEEN:

JIM STAFFORD

PLAINTIFF

-AND-

RONALD MCCOURT

AND

ASHCLIFF GUESTHOUSES LIMITED

DEFENDANTS

Loan agreement – Lease – Mortgage – Bank seeking to enforce its security through its receiver, the plaintiff, against the defendant’s guesthouses – Whether the alleged lease of the guesthouses took priority over the bank’s mortgage

Facts: Borrowings by the first defendant, Mr McCourt, were secured on his two guesthouses. Having failed to honour his loan agreement, the borrower claimed that the bank could not enforce its security, through its receiver, the plaintiff, Mr Stafford, against the two guesthouses because the borrower entered into a lease of those guesthouses with a company controlled by him, the second defendant, Ashcliff Guesthouses Ltd. He claimed that, as the bank was aware of that lease, the lease took priority over the bank’s mortgage and so the receiver appointed by the bank was not entitled to possession of the guesthouses.

Held by the High Court (Twomey J) that, having relied on Fennell v N17 Electrics [2012] IEHC 228, the bank did not consent to the alleged lease.

Twomey J held that, therefore, the alleged lease in this case did not have priority over the bank’s mortgage.

Possession granted.

JUDGMENT of Mr. Justice Twomey delivered on the 4th day of December, 2017.

Summary

1 This case involves borrowings by an individual, the first named defendant, which were secured on his two guesthouses. Having failed to honour his loan agreement, the borrower claims that the bank cannot enforce its security, through its receiver, the plaintiff, against the two guesthouses because the borrower entered into a lease of those guesthouses with a company controlled by him, the second named defendant. He claims that, as the bank was aware of that lease, the lease takes priority over the bank's mortgage and so the receiver appointed by the bank is not entitled to possession of the guesthouses. For the reasons set out in this judgment and in reliance on Fennell v. N17 Electrics [2012] IEHC 228, this Court concludes that the bank did not consent to the alleged lease and therefore that the alleged lease in this case does not have priority over the bank's mortgage.

2 It is also noted that the commercial realities of this case are that the borrower is claiming that his own company was a tenant in the properties with the consent of the bank which, if upheld by this Court, would mean that the borrower would have obtained a €1.25 million loan from the bank while effectively giving the bank a worthless security. This would leave the bank high and dry while the borrower walks away in possession of the premises through his company. If it were that easy for a borrower to borrow funds, fail to repay them and then continue to use, through his company, the secured property, it would be a very significant disincentive to banks to engage in commercial lending.

Factual background

3 The first named defendant, Mr. McCourt, borrowed €1.25 million from Anglo Irish Bank, which was renamed as IBRC, following the merger of that bank with Irish Nationwide Building Society (‘Anglo’). The borrowings were secured over two guesthouses which he owns in Dublin; 21 Harrington Street, Dublin 2 and the 10 Warrington Place, Dublin 2. The security was granted by him pursuant to a Mortgage Deed dated 12th August, 2002, entered into between Anglo and Mr. McCourt (the ‘Mortgage Deed’). It has been conceded on behalf of Mr. McCourt that a demand was made by Anglo in relation to the repayment of the loan and that there was default by Mr. McCourt in relation to that demand. The plaintiff, Mr. Jim Stafford (‘the Receiver’), was appointed as a receiver to the two guesthouses on the 21st February, 2014.

4 In these proceedings the Receiver is seeking possession of the two guesthouses. Mr. McCourt and the second named defendant, Ashcliff Guesthouses Limited (‘Ashcliff’), are resisting the claim for possession on the grounds that there is a lease between Mr. McCourt as lessor and Ashcliff, as lessee, over the two guesthouses, which takes precedence over the charge registered by Anglo over the two guesthouses. Mr. McCourt claims this lease was in existence at the time the mortgage was executed by him in favour of Anglo. The alleged lease appears to be an oral lease as no written terms were adduced in evidence. The only evidence adduced regarding the terms of the alleged lease was a reference in documetnation to a rental amount paid by Ashcliff to Mr. McCourt. The substance of Mr. McCourt's claim is that the clauses in the Mortgage Deed which he signed, prohibiting him from leasing the mortgaged premises, are subject to the consent of Anglo and that Anglo was aware of the lease and therefore consented to it.

5 It is relevant to note that in addition to the money which is owed by Mr. McCourt pursuant to the terms of the loan with Anglo secured on the two guesthouses, it was also claimed by the Receiver, and not denied by Mr. McCourt, that there is a further sum of €170,000 owed by Mr. McCourt to the Receiver. This arises from the fact that an interlocutory injunction in these proceedings was settled on the basis that Mr. McCourt would pay all the rent in respect of the two guesthouses to the Receiver, pending the full hearing of the action, which he has failed to do.

6 It is also relevant to note that on the date of the mortgage, Mr. McCourt was a director of Ashcliff, which company was 99% owned by him. Thus, Mr. McCourt was at one and the same time both the alleged landlord and the controller of the alleged tenant of the two guesthouses. The essence of Mr. McCourt's defence to these proceedings by the Receiver seeking possession of the two guesthouses is that on the date of the mortgage there was a lease in existence between him and Ashcliff. It is 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 and in particular that he chose not to give any evidence in respect of the lease which is the basis of his defence to the Receiver's claim for possession.

Onus on Mr. McCourt to establish the existence of a lease that was consented to by bank

7 The failure of Mr. McCourt to give evidence is particularly curious, when one considers that, as is clear from Murphy v. Hooton [2014] IEHC 266, where a borrower is alleging that a lease takes priority over a bank's security and where the borrower has signed a mortgage deed to the effect that he cannot lease the mortgaged property without the consent of the bank, the onus is on the borrower to establish that the lease existed and was consented to by the bank. It was noted by Peart J. at paragraph 22 of that judgment, in the context of a clause in a mortgage deed which prohibited leasing without the consent of the lender (in that case, Clause 11(L)):

‘In my view the evidence of acquiescence or even consent must be clear. It must be clear also exactly what the terms to which they are deemed to have accepted are. The effect of Clause 11(L) and clauses like it cannot be negated by stealth or accident. Where it is sought to imply by its conduct that the lender has acquiesced or given up its entitlement to the protection of such a clause, the facts must be clear so that an intention to do so is clearly made out, in circumstances where the need for a prior written consent is so clearly spelled out. The onus is on the defendant to establish these matters clearly.’

Evidence provided on behalf of Mr. McCourt that bank consented to the lease

8 The only witness called on behalf of Mr. McCourt was Mr. Frank Kenny, a financial adviser/broker who negotiated the loan with Anglo on his behalf. Particular reliance is placed by Mr. McCourt on the letter issued by Mr. Kenny dated 30th May, 2002, to Anglo, which was prior to the execution by Mr. McCourt of the Mortgage Deed on the 12th August, 2012. For this reason, it is relevant to set out some pertinent extracts from that letter:

‘Dear Alan

With reference to the above and our recent meeting, I now enclose herewith for your perusal a proposal for funding in the sum of €1.25m.

Ronald McCourt is aged 38 and is Managing Director and 99% owner of Ashcliff Guesthouse Ltd which trades as Huband House Guesthouse, Warrington Place and Harrington House Guesthouse, Harrington St, Dublin 2. The promoter has traded successfully at both these locations since 1996.

[…]

Mr McCourt has requested a total loan facility of €1.25m secured on two well established and well located Bed & Breakfasts at 10 Warrington Place Dublin 2 and Harrington House, 21 Harrington Street Dublin 2.

Both premises are in excellent condition and were recently valued by Pat Hickey (Auctioneering) Ltd at €1m & €1.27m respectively. As such, loan to value will be in the region of 55% which is well within guidelines. As additional security, an appropriate level of mortgage protection (to be agreed) will be effected on the life of the promoter ad assigned to Anglo Irish Bank.

Overall, the bank will be well secured for its advances.

Repayments on the proposed facility over a term of 20 yrs will amount to c. €100,000pa. The applicant has requested an interest only facility for the first year which will result in annual interest payments of c. €78,000.

Audited accounts in respect of Ashcliff Guesthouse Ltd are enclosed for the 12 month trading period ending 30.06.01. These indicate turnover of 314,000(Irl) and a profit after tax of c 81,000(Irl) after charging depreciation of 12,000(Irl) and Directors Emoluments of 27,000(Irl). The company also paid Mr. McCourt rent and rates of 57,000(Irl) during the trading period in question. These figures compare with turnover of 235,000(Irl) and a profit before tax of 51,000(Irl) after charging a similar level for Depreciation, Directors Emoluments, Rent & Rates (30.06.00).

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