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High Court decision finds that a bank’s awareness of a lease does not constitute consent

A bank’s awareness of a lease does not constitute consent

Recent High Court decision finds that a bank’s awareness of a lease does not constitute consent.

It is established law, that a failure to obtain the bank’s prior consent to a lease renders the lease voidable. A matter which often arises before the courts is the failure of a landlord to obtain the prior consent of a bank’s to the creation of a lease over mortgaged property.

A question which recently arose before the High Court, in the case of Jim Stafford v. Ronald McCourt and Ashcliff Guesthouses Limited [2017] IECH 726, was whether the bank’s mere awareness of a lease constituted consent to its creation.


The borrower, Mr McCourt, entered into a mortgage in 2002 with Anglo Irish Bank Corporation Plc (“Anglo”) for €1.25 million, which mortgage was secured on two guesthouses in Dublin. The borrower defaulted on his repayments and Mr Stafford was appointed receiver in 2015.

The borrower claimed that the security could not be enforced and resisted the receiver’s order for possession on the grounds that there was an oral lease that had been in existence between the borrower, as lessor, and a company controlled by the borrower, Ashcliff Guesthouses Limited (the “Company”), relating to the two guesthouses, prior to the date of the mortgage. On this basis, the borrower argued that the lease took precedence over the Anglo mortgage.

The borrower was a director of the Company and owned 99% of the Company’s shareholding.  

Argument that the bank consented

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

The borrower argued that the lease was in effect before he signed the mortgage deed and that Anglo was aware of it. To this end, the borrower sought to rely on a letter sent to Anglo by his financial advisor, who negotiated the loan with Anglo. The letter referred to rent and rates being paid by the Company to the borrower.

Question of consent

The High Court looked at the decision in Fennell v. N17 Electrics [2012] IEHC 228 and found that the fact that Anglo might have been “lax in their dealings” with the borrower and aware that the Company was paying rent to the borrower, that this was not a sufficient conclusion to grant the lease priority over the mortgage. The High Court found that some further action was required from Anglo, such as serving notice on the Company that the rent was payable to them.

Furthermore, the High Court also noted that the borrower’s solicitor had in fact confirmed that there was no lease in existence in the most unequivocal terms, in replies furnished to the requisitions on title, which were furnished to Anglo prior to the granting of the loan.

The Court also placed reliance on the terms of the mortgage deed entered into between Anglo and the borrower, specifically prohibiting the borrower from permitting “to subsist” any lease of the two guesthouses. Accordingly, the High Court were of the view that even if Anglo was aware that the lease existed, it was reasonable for them to rely on the borrower’s undertaking that he would not allow any lease to exist over the two guesthouses.

While the company argued this undertaking was not binding as matter of law on the Company, as it was a stranger to the covenant given by the borrower, the Court could not ignore “the controlling mind” of the borrower, as the Company’s controlling shareholder.

Commercial realities

The Court acknowledged that the commercial reality was that it was “inconceivable” that Anglo would lend €1.25 million to a borrower unless it had a first legal charge over the property. The Court noted that Mr Court was seeking to “leave the bank high and dry while walking away in possession of the premises through his company”. The Court noted that if it was that easy for a borrower to borrow funds, default and continue to use the property in this way, it would be a “very significant disincentive to banks to engage in commercial lending”.

Observations for both borrowers and lenders

This case highlights the utmost importance for borrowers of obtaining express written consent from the bank to the creation of a lease.

The case is also serves as lesson to lenders to ensure that they have not acquiesced in or given up the protection of a negative pledge in their security and to thoroughly investigate whether the existence of a landlord and tenant relationship is in place at the time of granting security, in order to avoid any future issues.

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