Figgins Holdings Pty Ltd v SEAA Enterprises Pty Ltd M13/1998 [1998] HCATrans 354 (2 October 1998)

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Melbourne No M13 of 1998

B e t w e e n -

FIGGINS HOLDINGS PTY LTD

Appellant

and

SEAA ENTERPRISES PTY LTD

Respondent

GAUDRON J

McHUGH J

GUMMOW J

KIRBY J

CALLINAN J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON FRIDAY, 2 OCTOBER 1998, AT 10.18 AM

(Continued from 1/10/98)

Copyright in the High Court of Australia

GAUDRON J: Yes, thank you, Mr Myers. MR MYERS: Thank you, your Honour. I should like first to mention one matter, which I had intended to deal with in the first five minutes of my address yesterday and I did not.

KIRBY J: And you were so busy handing us up a document that we already had.

MR MYERS: Unless I mention it now, I will probably overlook it again. My learned friend, Mr Castan, read from Halsbury volume 32, dealing with mortgages, at paragraph 617, and there was one matter that I wish to draw the Court's attention to. The first sentence of paragraph 617 begins:

So long as the mortgagee allows the mortgagor to remain in possession, that is so long as the mortgagee does not give notice to the lessee to pay the rent to him, the mortgagor continues to be entitled to receive the rent, and he is also entitled to enforce and take advantage of the lessee's covenants.

And that is wrong as far as Victoria is concerned. That is what section 81(3) affects. No doubt it is the correct statement of the law of England.

Your Honours, the appellant's case is that there is no arrears of rent; there has been payment of all the rent.

KIRBY J: Why is that not right, because the relationship of the appellant is with the landlord, it is not with you, and if the accommodation on the rent is made as between the landlord and the tenant, then there is no arrears of rent?

MR MYERS: This is the very fundamental point. The relationship is with us because we are the reversioner. This is the crucial issue, your Honour.

McHUGH J: The rent attaches to the reversioner.

MR MYERS: The rent belongs to the reversioner, and we are the reversioner.

GUMMOW J: Yes, but you are a secured creditor, really. You keep saying you are the reversioner, but you have an interest no greater than your right to receive moneys which are secured on this interest you get.

MR MYERS: But the law, your Honour, regarding mortgages is perfectly clear. The rights and duties of mortgagor and mortgagee is adjusted primarily on the basis of the legal relationship that subsists between them. I do not disagree with the proposition that we are a secured creditor. But that does not, with respect, address the issue. The issue is what are our rights as a secured creditor. And our rights as a secured creditor, as the cases show - - -

GUMMOW J: No, no, no. Your right as secured creditor before default? It cannot possibly be to acquire these rents.

MR MYERS: Before default?

GUMMOW J: Yes.

MR MYERS: That depends upon one's view - - -

GUMMOW J: In the absence of an expressed covenant.

MR MYERS: It depends upon the effect that one gives to the concluding words of section 81(1).

GUMMOW J: Yes.

MR MYERS: Whether there is a statutory demise or not. In the case of an old title mortgage, before default the mortgagee is entitled to the rent. With respect, there can be no question about it.

GUMMOW J: You say "entitled" but equity would have something to say about that, I think.

MR MYERS: Equity has nothing, with respect, to say about that. The only circumstances in which the mortgagee is not entitled to the rent in the case of an old title, "legal mortgage", is if there has been a redemise and there is a concurrent lease.

GUMMOW J: No, I am talking about the situation where the rent preceded the mortgage. I understand your point if the mortgage precedes the lease but, if the lease precedes the mortgage - - -

MR MYERS: If the lease precedes the mortgage, the reversioners are entitled to sue for all arrears of rent that exist at the time of the mortgage. Again, that follows from the legal relationship which is established in the cases without dispute or doubt for 200 years. Those principles are not in issue in this case, and indeed my learned friend said they were not in issue. How could they say they were in issue?

GUMMOW J: What we have to find is the principles that supports all these rules and in particular what seems to be the rule that in some circumstances before notice the lessee gets a good discharge by paying the mortgagor.

MR MYERS: The lessee gets a good discharge by paying the lessor because the lessee does not have notice of the existence of the mortgage, perhaps.

GAUDRON J: Or the breach.

MR MYERS: No, it is not a question of breach. Default is not crucial. I understand the position as regards section 81(1).

GUMMOW J: Yes.

MR MYERS: I am not addressing the issue of default there, but, default under the old title mortgage was not crucial to the enforcement of the mortgagee's rights. The mortgagee had the rights as reversioner by virtue of the mortgage, independently of default.

GAUDRON J: If he attorned tenant.

GUMMOW J: To create privity. It was the attornment that created the privity.

MR MYERS: Of course. It depends upon the privity. I am not wishing to take issue with what your Honour Justice Gummow is saying, with respect. It is the privity; it is the fact that they are in privity of estate with each other. That is the crucial issue, in my respectful submission, in answer to your question, Justice Kirby. At the end of the day, towards the end of the day, the learned presiding Judge - - -

KIRBY J: Is this the metaphorical end of the day, or yesterday's end of the day.

MR MYERS: End of yesterday.

KIRBY J: Oh, I see.

MR MYERS: The end of the sittings yesterday, shortly before the Court adjourned, the presiding Judge suggested that there could have been a release on each occasion when rent became payable; and it might be thought that that is the strongest way that it could be put on behalf of the appellant. It is not, indeed, the way it has been put on behalf of the appellant but, in any event, one asks, well, by what authority would that release be given? The right to the rent belongs to the mortgagee - - -

GUMMOW J: Yes, but in Trent v Hunt, to which you referred us yesterday, Baron Alderson spoke of this situation: instead of giving notice to the tenant to pay the rent to himself, the mortgagee permits the mortgagor to go on receiving the rent as before.

MR MYERS: Yes, that is all. Permits - - -

GUMMOW J: Does not the principle come out of that circumstance?

MR MYERS: No, that is the circumstance and that is the circumstance I wanted to address. Your Honour has taken me to the very case that I was going to refer to. All that has happened is a permitting of the mortgagor to receive the rent. It is not a conferral of authority to give a discharge other than in accordance with the covenant which belongs to the mortgagee. There is simply no actual authority given. It is no more than a permitting to receive the rent. I referred several times yesterday to the effect of section 81(3) and it reinforces the contention that I am putting. There is nothing to support the argument that is advanced in the cases. When one thinks of the enormous body of learning regarding mortgages, there is not a single authority that my friends have been able to refer to which supports them.

It may be said, and perhaps it was said in argument from time to time yesterday, that something might depend upon the fact that the rent is for, or can be retained by, the mortgagor for the mortgagor's benefit and one has to, it may be said, face that fact. Well, that is not something that confers authority and it is not even a basis for ostensible authority because, as far as the tenant knows, all the mortgagor is doing is receiving the rent. The mortgagor may well be receiving the rent on behalf of the mortgagee. May I direct your Honour's attention to some dicta in one of the cases. It is, as I recall, Visbord v The Federal Commission of Taxation [1943] HCA 4; (1943) 68 CLR 354. It is not at 382 that I want to refer to it but at 383.

There is a useful statement by Mr Justice Williams about cases where a mortgagee, without entering into possession of the mortgage property, may, in effect, collect the rents and he identifies at least three methods by which the mortgagee can become entitled to receive his interest out of the income of the mortgage property without becoming liable as a mortgagee in possession. They are set out there. Shortly, one is to take advantage of the rule concerning equitable assignments: Tailby v Official Receiver. The second is to become the attorney of the mortgagor and, thirdly, is the appointment of a receiver. Now, in the first two cases, at least, there would be a case where, to the world, the mortgagee is permitting the mortgagor to receive the rent but the rent goes to the benefit of the mortgagee and so the fact that the rent might be received by the mortgagor for his own benefit as far as a tenant could see, is not any basis for a contention of ostensible authority.

The next matter that I refer to is this question of hardship. One cannot escape from the fact that one is dealing here with a registered mortgage under Torrens legislation and every tenant knows, or must be taken to know, the law and to know of the provisions of section 81. A tenant cannot come along and complain and say, "The effect of the operation of section 81 is harsh". The tenant must get consent. If he does not get consent he takes a risk.

KIRBY J: That is one way for it to operate. The other is for the tenant who are of great variety, to say, "Well, you are in a position as mortgagee; you are the person who is aware of the relationship of landlord and tenant; you can give notice; you give notice", and as from that moment the tenant is on notice. It is a little unrealistic to expect - you say the tenant is on notice and it may well be in this case the tenant actually knew but we have to look at how this operates in conveyancing practice for a whole variety of tenants who may have no conception. Why should not the mortgagee have to give notice? As from that moment, you then fix the tenant with obligations.

I mean the law may require something different, but you put forward a proposition for conveyancing practice, which I find to be unrealistic. Now, it may be that I am driven to that by the law, but it will take a mountain of law to drive me to it, because the variety of tenants, I think, ought to be put on notice by the mortgagee in a situation like this.

MR MYERS: All tenants are put on notice of the existence of the mortgage; everyone who deals with property that is registered is put on notice of registered interests.

KIRBY J: Well, that is very theoretical.

MR MYERS: But there cannot be a compromise, with respect, your Honour, in relation to that. It would subvert the Torrens system, it would subvert the rules of conveyancing. Property law cannot depend upon the personal characteristics of tenants or of mortgagees or such like.

KIRBY J: What is so difficult about requiring you to give notice as from which moment the tenant is on notice and obligations fixed? You are in a position to do it and legal rights run from the moment you do it.

MR MYERS: But they do not, with respect, your Honour.

KIRBY J: Well, I know that is your proposition. You may be right.

MR MYERS: There is an enormous body of law that says that they do not.

KIRBY J: Well, that will have to be considered, but if the law does not stand in the way, the conveyancing practice, which I have expressed, is a much simpler and more logical and more just practice. You are in position to put them on notice. You do not bother to do so.

GUMMOW J: I am sure I used to do it as an articled clerk: buy the property; tenants in there; mortgagee; he acted for the mortgagee; give out a notice, but make the whole thing quite beyond doubt.

MR MYERS: Well, some mortgagees may do so and the position in New South Wales may well be different from the position in Victoria.

GUMMOW J: I do not thing to do what Justice Kirby says to you would be some sort of novel and absolutely intolerable burden upon conveyancers.

MR MYERS: I was going to really controvert the statement that was made and it relates perhaps to a statement that your Honour Justice McHugh made towards the end yesterday, "Well it would be but a little step". We say it would not be a little step, it would be a huge step.

McHUGH J: That is what I was just going to put to you, because may be this case is a very narrow case. It is really about substituted performance for the payment of rent. Let it be accepted in your favour that after default the tenant and the mortgagor could not vary the covenants; for example, they could not vary the use of the shop, for example, if there was a covenant to that effect, and all the other covenants, but the common law - to use the words of Justice Buller - in its wisdom and liberality and benevolence, to protect the tenant, enable the tenant to pay the rent and discharge his liability. Now may be the mortgagor is liable in some way, but why should not the tenant be protected by substituted performance?

MR MYERS: But the tenant did not pay the rent.

McHUGH J: No, but substituted performance for the payment.

MR MYERS: Then you say that the mortgagor can interfere with the mortgagee's property. The mortgagor can give away, can compromise the covenants of the mortgagee.

McHUGH J: But that is what the mortgagee has in effect done anyway because, until the mortgagee gives notice, he lets the mortgagor collect the money. The mortgagor can take the money down to the casino if he wants to and do what he likes with it; it is his money. So, if he wants to make substituted performance and say, "Well, I'll take a horse instead of the payment for cash", why can he not do it?

MR MYERS: Because the covenant belongs to the mortgagee.

McHUGH J: I know it does, but so does the covenant to receive the rent, and yet, by the benevolence, wisdom and liberality of the common law, until the tenant receives notice, even at common law and before the Statute of Anne, the tenant was discharged if he paid the rent to the landlord.

MR MYERS: In accordance with the covenant. Therein is the issue. It does come to a narrow point but the question is whether you allow the mortgagor to interfere with the covenants of the mortgagee. It may seem to be a short step but it is a huge step.

McHUGH J: Well, I am not sure that it is.

MR MYERS: It will be the first time ever, ever, that a court has allowed such. This is with a history of 200 years.

GUMMOW J: Well, you say that. There is a lot of writing in the United States on this in the 1920s and 1930s during the Depression when these questions loomed very large. One of them is a note in the University of Pennsylvania Law Review in volume 80, page 269, which deals with a lot of these questions and with the Statute of Anne which they inherited in various States and with Trent v Hunt and so on. I would want to be satisfied that there was not anything in there that touched all of this before I quivered in shock at the thought of doing something that was forbidden after 200 years.

MR MYERS: If your Honour pleases, I can only deal with the argument that has been put forward, and there has not been any reliance upon any such authorities, presumably because United States property law may have taken a different turn from our property law.

GUMMOW J: I do not think so.

MR MYERS: In any event within our jurisprudence, there is not - - -

GUMMOW J: There is no Australian authority.

MR MYERS: No English authority either, with respect, your Honour.

None that anyone appearing in this case has found and this case has been before a few courts in one form or another.

GUMMOW J: Yes, but in this rather parochial tunnel, I fear. Things broaden a bit when it gets here because we look at more than the decisions in England and in Victoria. We just have to and if someone like Chancellor Kent or Holmes or those great figures, or Storey, said something about this well, one looks at it, but - - -

MR MYERS: But, with respect, your Honours should not be striving to overturn the established property law. Your Honours should be striving to uphold it.

McHUGH J: No, but we should be seeking to give effect to the core principle, the underlying principle, and if Justice Buller was right in Birch v Wright, then the common law rule which protected the tenant before he got notice was based on the common laws liberality and wisdom and, in effect, benevolence.

MR MYERS: But, your Honour, that is where the tenant is performing the covenant. If the tenant is not going to perform the covenant he needs to come to the owner of the covenant and get his consent, and really, that is what it boils down to.

KIRBY J: That may well be what the law requires but if one is looking at the way this area of the law should operate on the whole range of tenants, mortgagees are in a better position to come to the tenant than the tenants are to come to the mortgagee. They are much better organised. It may be you are right about the law but if when one is looking at the practical - I was a solicitor for six years and from the practicality of a solicitor advising people, it is much easier for the mortgagee to go to tenants than tenants go to mortgagees.

MR MYERS: I am appearing in the cause of a poor little bank, and, your Honour - - -

KIRBY J: No, that is a completely irrelevant comment. The Bank is entitled to have the law applied equally but a bank is in a good position and a mortgagee, normally, is in a good position to go to the tenant because the tenants will not be, often, in a good position to go to the mortgagor.

MR MYERS: But section 81, with respect, your Honour, does not make the distinction your Honour is making and that, in the end, is all I can say. Now, if I try to justify that I can say that we have a system of title by registration of which persons dealing with the property have notice and if you know you are dealing with another person's covenant you come and ask him, "Can I have your consent?"

KIRBY J: And notice will often be purely theoretical, the tenant will not know. That is a theory. That is another of the myths of the law that everybody, because it is on a register, that the tenants, in all their variety will have notice of it. Well, I just do not really accept that. I mean, that is what the law requires us to assume, that in reality, out there in the sticks, that people have got tenancy arrangements. They do not know about it. They may have legal notice and they do not know, whereas you know. You are a mortgagee. You are in a much better position.

MR MYERS: Yes. Your Honour, I would only repeat, with respect, that in the law of property and mortgages and so on, justice lies at the level of having clear, well-established, formulated rules applied in a clear rigorous way, and not at the level of the individual case.

McHUGH J: I know, one has to look at these cases in terms of categories, in effect. You cannot look at the individual case, but I do not know that that assists you much in a case like this, because, otherwise, if the appellant's argument is rejected, it means that somebody in your position could stand by for years, let this go on, and then go and sue for the arrears.

MR MYERS: Yes.

McHUGH J: Yes, I know.

MR MYERS: And the reasons is simply the tenant is protected when the tenant is performing the covenant, and that is the underlying principle. Your Honours have asked me several times what the underlying principle is, and I keep giving the answer that it is the mortgagee's covenant and the tenant is protected.

GUMMOW J: No, no, but the question is what is the underlying principle that gives this special protection, or whatever you like to call it, to the lessee and the landlord, after default and before notice, as to receipt of rent?

MR MYERS: The tenant is protected if the tenant performs in accordance with the covenant.

GUMMOW J: Yes, why should the tenant be -yes, but it is not in performance of the covenant, because privity is now, you say, and it is right, I think, with the mortgagee.

MR MYERS: Yes, but it is in accordance with the covenant, in the sense that I am using it, your Honour, privity aside.

McHUGH J: Privity of an estate - - -

MR MYERS: The tenant is performing the covenant. The tenant just does not know who the covenant is with, and so, if the tenant performs the covenant, the tenant is protected, and that is the principle.

GUMMOW J: Yes, but why. Why is it protected.

MR MYERS: Because the covenant belongs to the - - -

KIRBY J: Why do they have the advantage of their stupid mistake?

MR MYERS: I beg your Honour's pardon. I did not quite understand.

GUMMOW J: Why does the tenant have the protection of its stupid mistake, paying the wrong person?

MR MYERS: Well, that is the - - -

GUMMOW J: Why should the law concern itself with that?

MR MYERS: Well - - -

GUMMOW J: It seems to, but why?

MR MYERS: If the tenant does not have notice, well it is the liberality or generosity of the law, but the line is drawn at the point where the tenant is performing the covenant.

KIRBY J: No more liberality, no more generosity.

McHUGH J: I am not sure that the tenant is not performing the covenant. I know you - yesterday I put you that it seemed to me that you are insisting that there must be payment in Australian dollars. Supposing an equivalent sum was paid in US dollars, or by several hundred-weight of sugar, or something of that nature, or in jewellery each week, why would that not be - - -

MR MYERS: Well, because there has to be performance of the covenant. That is the answer, your Honour, and that is where the line is drawn. We say it is a very clear line; there is no problem about it; no injustice to the tenant. If the tenant is performing the covenant - fine. If the tenant is not going to perform the covenant, go and get the mortgagee's consent. And here, there is no doubt what the covenant was. Justice Hayne decided that as res judicata between the parties.

May I just say something about a principle of unconscionability which appears to relate to the estoppel case that was raised. I said yesterday that the estoppel case was not run in these proceedings beyond the arbitration. I just want to give a couple of references to make that plain. First of all, there is Mr Justice Hayne's judgment which shows how he dealt with the estoppel matter. It is at page of 511 of the report, the passage I want to refer to. If I start at line 27, I think:

It was submitted on behalf of Figgins Holdings that the bank had consented to the variation effected by the deed of 1 February 1991. It may be accepted that the bank knew of the transaction at least in March 1991 and I am prepared to assume that notwithstanding the fact that at least one later schedule of tenancies made no reference to the tenancy of shops G19 and G20 that the bank is to be taken as knowing at all times after March 1991 of the fact that Figgins Holdings and Lamina had agreed that thereafter rental should be paid at a nominal rate and that the tenancy may be surrendered upon the making of certain payments.

Figgins Holdings pointed to no positive act or statement on behalf of the bank as constituting consent. Rather it was submitted that the bank knowing of the transaction, its consent should be inferred from its silence. It was submitted that the bank "could not stand by" in those circumstances and later assert that it had not consented. Why it could not stand by was not explained in argument, counsel for Figgins Holdings expressly disclaiming any reliance upon doctrines of estoppel. Indeed, that disclaimer was inevitable given that there was no evidence at all that Figgins Holdings had acted in any way in reliance upon any act or omission on the part of the bank.

Then his Honour makes the finding about consent.

The estoppel argument was sought to be revived before the learned arbitrator, and in the appeal book at pages 86 to 89 - I am not going to read these passages - the learned arbitrator deals with the estoppel argument, and about line 15 of page 89 he says it was not open to raise the estoppel argument, there was an issue estoppel resulting from Justice Hayne's decision.

CALLINAN J: He said two things, I thought, Mr Myers. He said that. I thought he also said that the estoppel argument was really barred by the Anshun principle if he was wrong with respect to it being a clear issue estoppel in the conventional sense.

MR MYERS: Yes, he did. Your Honour is quite right correct, with respect, and there was no appeal from that decision. It was open to the appellant in this Court to appeal from the arbitrator's decision in respect of that and he did not.

CALLINAN J: Would that be an error of law?

MR MYERS: Well, it would have been if the learned - - -

KIRBY J: He just misunderstood the facts.

MR MYERS: - - - arbitrator was incorrect about whether there was an issue estoppel or Anshun. In my submission, that would be an error of law.

CALLINAN J: He would need to make factual findings to apply Anshun and then he would apply the principle of law in Anshun to those facts.

MR MYERS: And one can see how he does it at pages 86 to 89 of the appeal book, and I do not want to take the Court's time by reading it. So, what the Bank did was merely not interfere. There is nothing illegitimate or unreasonable about a Bank standing back and allowing the mortgagor to try and do the best he can. If the Bank does not do that it is damned if it does, damned if it does not. It will be subject to criticism if it intervenes too soon; subject to criticism, apparently, if it stands back.

KIRBY J: But in your theory, as you said in answer to Justice McHugh, it can go on for years. It can go on for years and - - -

MR MYERS: Yes, it could.

KIRBY J: Whereas in that time you could have given the notice.

MR MYERS: It can go on for years and as against its mortgagor it cannot be criticised for not standing on its rights and enforcing them harshly, and if the tenant is not observing the covenant and does not have the consent of the mortgagee one asks, "Why should not the tenant be given the benefit?" That is what is being asked here.

KIRBY J: If you are obliged by the law to give a notice - if the result of this case is that the mortgagee is obliged to give the notice, then does that not work better in terms - I mean, it may not be possible, you may be right about the force of the law but just looking at the variety of the knowledge and understanding that tenants will have of the mortgagee's position, at least if the law is that you have to give the notice then that alerts the tenant whereas they might go on making all sorts of arrangements in ignorance over a very long period.

MR MYERS: One has to ask, first of all, what would the notice say? It would not say, "I am a mortgagee".

KIRBY J: Well, why not? "I am a mortgagee, I am exercising my powers and I give you notice that henceforth the rent is my rent and you must make arrangements on that basis". It is a much clearer way to deal with the problem.

MR MYERS: It is another way.

KIRBY J: You could just sit quietly by and months and years and decades can go by and then you can come back later and make your demands and say, "These covenants are my covenants. I didn't tell you, but they're mine".

MR MYERS: Yes, but the law tells one that.

GAUDRON J: And you could go back, could you not, to a time prior to default by the mortgagor, lessor, on your argument? If you say the critical thing is performance of the covenant, you could go well back beyond default.

MR MYERS: It depends on the force of the concluding words of section 81(1), whether it is a statutory redemise or not.

GAUDRON J: I do not see why it would depend on that. If you say the principle is performance of the covenants, full stop - and let us assume an arrangement like this had been made 12 months prior to default.

MR MYERS: With respect, your Honour, it does depend upon whether there is a statutory redemise because it depends upon whether there is privity of estate. If there is a statutory redemise, until that statutory redemise has come to an end, the covenant does not belong to the mortgagee. It belonged to the concurrent tenant, the mortgagor by virtue of the statutory redemise.

GUMMOW J: Yes, but as an adjunct of its mortgage and as a security.

MR MYERS: Yes, of course.

GUMMOW J: And there is a problem in all of that because, if it gets this money and there is never any default, in advance of a default, you say, it gives a notice, it gets its money. How does it have any entitlement to retain it in equity if there has been no security? This demise is not simply a legal demise; it was a demise which is upon security.

MR MYERS: I do not call in issue the obligations of the mortgagee to account. The mortgagee has to account strictly for what the mortgagee receives. That is the other side of the coin with a mortgage but we are not dealing with that side of the coin in this case, your Honour.

GUMMOW J: I wonder on any account that did take place failure to give notice when it could have been given would be an irrelevant factor taking in accounts in equity.

MR MYERS: No, your Honour, there is no authority for that. As a matter of principle - - -

GUMMOW J: None against it though, is there?

MR MYERS: - - - the thing does not depend upon notice; it depends upon the privity of estate. The answer to the learned presiding Judge's question is that it all depends upon the theory of the statutory redemise but, if there is a statutory redemise and there is a severance of the reversion so that there is a concurrent lease, during the term of the concurrent lease the covenants belong to the mortgagor. So you cannot go back beyond default under section 81(1) but you can go back to default.

McHUGH J: You have emphasised that the tenant should pay because the tenant has not performed a covenant.

MR MYERS: Yes.

McHUGH J: That looks at it from the tenant's point of view but, since the rent attaches to the reversion and the reversion is in you and you are entitled to the benefit of the covenant for rent, if you do not insist on it being paid to you, why are you not taking away reliance on the covenant in terms of payment of rent?

MR MYERS: With the utmost respect, your Honour is not allowed to put arguments about waiver and estoppel here.

McHUGH J: What about waiver?

MR MYERS: Your Honour, waiver was dealt with by the learned arbitrator as well. Those arguments were put - - -

McHUGH J: But this is a question of waiver as a matter of law, in which the law - - -

MR MYERS: If, with respect, it is a question of waiver as a matter of law, it is not a question of waiver, it is a matter of law.

McHUGH J: Well there are cases, and I dealt with them in my judgment of Verwayen, in terms of waiver, and there were various categories of waiver - anyway.

MR MYERS: Your Honours, may I at last refer to some of these cases that I have been threatening to refer to?

KIRBY J: I suppose you could say in answer to the thing that is worrying me, that in a proper case where standing by had led to a reliance in some way to the disadvantage of the tenant, you may well get cases of waiver or you may well get cases of estoppel.

MR MYERS: Of course, and that issue was sort of run and then abandoned before Justice Hayne, and eventually it was - - -

McHUGH J: Was waiver as such run?

KIRBY J: I think we were told yesterday it was.

MR MYERS: Yes it was. Page 86 of the court book, I am directed to:

I now turn to consider the other defences pleaded by Figgins. Figgins contended that the Bank acquiesced in or consented to rental of $1 per month or that it waived, abandoned or was estopped from claiming rent at the higher level.

And then the learned arbitrator said that none of those was available and this was the part that I said I would not read, but it is fairly clear. At the top of page 88:

In my view, the defences pleaded in paragraphs 26-30 are precluded by estoppels arising from the Supreme Court proceedings.

And there was a thorough examination of what had happened before Justice Hayne, and that was, as I say, waiver, abandonment and estoppel.

McHUGH J: No, but in Matthews v Smallwood Mr Justice Parker, who was a great equity judge, said in the context of whether the lessor had abandoned the right of re-entry, that "waiver of a right of the entry can only occur where the lessor, with knowledge of the facts upon which his right to re-enter arises, does some unequivocal act, recognising the continued existence of the lease." Now that is a different context, but, nevertheless, you are entitled to the rent on default and you do nothing about it; you let the landlord or the mortgagor continue to receive the rent. Why do you not waive it in that - - -?

MR MYERS: But mortgagees, merely by doing that, do not waive. Your Honour, if there were a case being running on the facts of estoppel, waiver and so forth, and there was an attempt to run that, but the facts did not support it.

McHUGH J: Well, what about election? In Sargent Mr Justice Stephen thought these cases were cases of election, that some of these waiver cases were cases of - - -

KIRBY J: Yes, but that would involve factual matters. Was that run? If it was run, then it has been determined. If it was not run, then election would require factual questions.

MR MYERS: No, it was not run. Election, as such, was not run. But there were no inconsistent rights. There were no inconsistent rights that the mortgagee had. The mortgagee just did not enforce a right. Just excuse me a moment. Yes, I beg your pardon, I am wrong. Election was pleaded to in paragraph 27. It is page 86.

GUMMOW J: Yes, line 30.

MR MYERS: I did not realise that, line 30. It is that - maybe I should have read those four pages. Now, could I go to some of the older cases? The cases that I am referring to are dealt with at paragraphs 3 through to 9 of our written submissions but there are some passages that I would like to draw attention to. I do not believe that I need refer, by reason of the argument, to anything more than a few words of Birch v Wright 99 ER. There, in an old case, a little over 200 years old, Mr Justice Ashurst says - it is below (379), in the next paragraph:

But as for the rent due antecedent to the time of the demise, there is no doubt but this action is maintainable. For the State of the 4th of Ann. having rendered attornment unnecessary, and having put the party in the same situation by the conveyance as if the tenant had attorned, he is to be considered in possession; and then, as there is no deed between these parties, he may maintain this action for use and occupation. Moss v Gallimore (a) is expressly in point -

and I am going to come to that case -

and stronger than the present case. So that the plaintiff may recover all the rent due at the time of notice given which remained in his hands, and must be considered as landlord from such time, provided the tenant be not prejudiced by the payment of any rent before notice.

That is the principle. Then, if I could refer to the case of Watts v Ognell 79 ER 167. I am going to read from page 168 where it says "Thirdly". Perhaps if I read all of the paragraph what is said will be clearer:

Thirdly, the declaration is not good, because it is not alleged, that the lessee upon this grant by fine, attorned, nor that he had any notice of the use limited; for otherwise he is not chargeable for the rent, in debt brought against him : for it was said, if a fine be levied to a use, cestui que use shall know without attornment, because he hath not any remedy to compel the lessee to attorn; yet the use being limited to the conusee himself (as in this case it is), he hath means to have an attornment before the fine ingrossed, therefore he shall not avow without attornment; and if he might be without attornment, yet notice ought to be given to the lessee, for otherwise he should be at mischief; for the use might be limited, and he, not having cognizance thereof, might peradventure pay his rent to his ancient lessor; and therefore it is not reason he should be charged without notice given to him, which ought to be shewn in the declaration.

And so on:

And of this point the court doubted : but afterward they resolved that the action was well brought, and he needed not shew any notice in the declaration; for in no declaration in an avowry notice is shewn : but they agreed, that the lessee is not bound to pay without notice; and if he hath paid it to his ancient lessor it is a good excuse for him, and he may plead it; and if he hath not paid it, the action gives him notice to pay it to the grantee; and then he is chargeable for all which is not paid.

And, again, of course, it establishes the principle. Could I go back to Moss v Gallimore 99 ER 182?

KIRBY J: That means that although it is the mortgagee's covenant, it is subject to a restriction because until notice the obligation to pay does not arise.

MR MYERS: No, the obligation to pay on the covenant arises. It is just until notice he does not know who to pay.

KIRBY J: But when notice is given?

MR MYERS: He knows who to pay.

KIRBY J: And does the obligation to pay include arrears at that point?

MR MYERS: Yes, it does, and that was what the test case that I just read said; no question of that. That was established, my learned junior is reminding me, in 1607. I am being a bit modest in saying it is 200 years. In Moss v Gallimore there is a headnote which I will just direct attention to:

A mortgagee, after giving notice of the mortgage to the tenant in possession under a lease prior to the mortgage, is intitled to the rent in arrear at the time of the notice -

the same point that I have been addressing, your Honour -

as well as to what accrues afterwards, and he may distrain for it after such notice.

There is a passage in the reasons of Lord Mansfield which I should like to read, beginning at the bottom of page 183 - that is below page 282.

GUMMOW J: This is the one that is set out in the appeal book, is it not?

MR MYERS: Some of it is but not all of it, your Honour. I do not want to read more than necessary but I will have to go over a little of it. He said:

This however is entangled with difficulties. The question here is, whether the mortgagee was or was not entitled to the rent in arrear. Before the Statute of Queen Anne, attornment was necessary, on the principle of notice to the tenant; but, when it took place, it certainly had relation back to the grant, and like other relative acts, they were to be taken together. Thus livery of seisin, though made afterwards, relates to the time of the feoffment. Since the statute, the conveyance is complete without attornment, but there is a provision, that the tenant shall not be prejudiced for any act done by him, as holding under the grantor, till he has had notice of the deed.

That provision of course is payment of the rent. It is not payment of something in substitution of the rent. The statute does not contemplate that.

Therefore the payment of rent before such notice is good. With this protection he is to be considered, by force of the statute, has having attorned at the time of the execution of the grant; and, here, the tenant has suffered no injury. No rent has been demanded which was paid before he knew of the mortgage. He had the rent in question still in his hands, and was bound to pay it according to the legal title. But having notice from the assignees, and also from the mortgagee, he dares to prefer the former, or keeps both parties at arm's length. In the case of execution it is uniformly held, that if you act after notice, you do it at your peril. He did not offer to pay one of the parties on receiving an indemnity. As between the assignees and the mortgagee, let us see who is entitled to the rent. The assignees stand exactly in the place of the bankrupt. Now, a mortgagor, is not properly tenant at will to the mortgagee, for he is not to pay him rent. He is so only quodam modo. Nothing is more apt to confound than a simile. When the Court, or counsel, call a mortgagor a tenant at will, it is barely a comparison. He is like a tenant at will. The mortgagor receives the rent by a tacit agreement with the mortgagee, but the mortgagee may put an end to this agreement when he pleases. He has the legal title to the rent, and the tenant, in the present case, cannot be damnified, for the mortgagor can never obliged him to pay over again the rent which has been levied by this distress. I therefore think the distress well justified; and I consider this remedy as a very proper additional advantage to the mortgagees, to prevent collusion between the tenant and the mortgagor.

In other words, "Go and ask the mortgagee, if you are going to affect his covenants, if you are not going to perform the covenant."

McHUGH J: Justice Ashhurst, in the same case, makes an important point that the mortgagor is the tenant at will when you have an under-tenant, because otherwise the tenancy at will would be determined by the under-tenancy. You just cannot have it, so he seems to have put it on the basis that:

the mortgagor is, therefore, only a receiver of the rent for the mortgagee, who may, at any time, countermand the implied the authority, by giving notice not to pay the rent to him any longer.

MR MYERS: Yes, that is so, your Honour. I want to refer now to four cases that featured somewhat in the judgment below: De Nicholls v Saunders, Ashburton v Nocton, Cook v Guerra and Smallman v Castle. I will refer to them in that order, and my learned junior has very helpfully prepared for me something I should like to share with the Court, a crib sheet which sets out the complicated facts in a little line, so I will not have to worry too much about these facts.

So De Nicholls v Saunders: your Honours can see at a glance what the facts were and what the result was. There is a lease; there is a mortgage; there is a pre-payment of rent; then there is notice from the mortgagee to pay; then there is some rent due and some rent due, and although there was a pre-payment of the two amounts of rent due at the right hand side, the tenant was held obliged to pay them again, because that was not rent paid under the covenant. That was not paid in performance of the covenant. Now, the headnote explains those facts. If I could take your Honours to page 593, and the decision of his Lordship Justice Willes. The defendant is the mortgagee:

It is impossible in this case to give judgment otherwise than for the defendants. The question is, whether, where there has been an assignment of a reversion, payment of rent to the assignor before rent-day takes away the rights of the assignee to the rent so completely, that is he should give notice before rent-day of the assignment the payment would still be good. There would be an obvious injustice in that even if the payment were made before the assignment, because a person who bought the reversion on the faith that the rent was becoming due would be defeated by a transaction between the landlord and tenant of which he had no notice. But that would not be so strong a case as this, because a release by the landlord of all rent before assignment would be good against an assignee of the reversion; but this is a case in which a person gets an assignment of the reversion, and obtains a right to give notice to the tenant to pay the rent to him before payment is made to the assignor, and in which, therefore, the landlord had no power to accept payment or give a release at the time the payment was made.

So, no authority to do anything other than receive the rent.

It is clear that the common law authorities which say that payment before notice is good against a mortgagee, and which are represented by Watts v Ognell, have no application to the present case; they apply only to a person fulfilling his obligation to one who, at the time t is fulfilled, is the apparent reversioner -

again, performing the covenant -

which is similar to payment to a creditor who has assigned the debt without notice to the debtor. These cases depend upon a rule of general jurisprudence not confined to choses in action, though it seems to have been lost sight of in some recent cases - viz. that if a person enters into a contract, and, without notice of any assignment, fulfils it to the person with whom he made the contract, he is discharged from his obligation; that is a rule which is declared rather than enacted by 4 Anne, c. 16, s. 10. That statute did away with the necessity for attornment, but protected the tenant in cases where he had paid the rent due from him before notice of the assignment; this provision of the statute, however, clearly applies to the fulfilment of an obligation to pay rent imposed by the lease. There has been no such payment here -

and so on.

McHUGH J: Yes. Well, there is an important point made in that case in your favour, I suppose, and that is, and it is very similar to this case, that if the mortgagor had purported to release the tenant from the obligation to pay rent for the rest - - -

MR MYERS: It could not do it.

McHUGH J: Could not do it.

MR MYERS: And the point of principle is made very clear; it is performance of the covenant.

McHUGH J: And you say there is no real distinction between the two cases.

MR MYERS: Your Honours, may I go to Lord Ashburton v Nocton (1915) 1 Ch 274. Again there is a little line on the crib sheet. The passage, and I hesitate to read more than necessary, that states the principle is at page 290, towards the top of the page:

The other question which arises is whether the payment by the tenant to the judgment debtor of rent in advance, after the plaintiff had obtained a charge, but before the appointment of a receiver, was a valid payment against the plaintiff. It was conceded that if the plaintiff's security had been a legal mortgage such a payment of rent in advance would not be valid against the mortgagee. A legal mortgage carries with it the right to the accruing rent, if the mortgagee intervenes and claims the rent before it has been paid to the mortgagor, after the due date, and a prepayment to the mortgagor before the due date is not valid against a legal mortgagee: De Nicholls v Saunders. It was insisted, however, that as the plaintiff's charge is an equitable one only, such a payment was valid against him. I see no ground for any distinction in this respect between legal and equitable mortgages, as an equitable mortgagee by obtaining the appointment of a receiver can enforce payment of rent due from tenants. In the present case, the appointment of a receiver was obtained before the rent became due. In Seymour v Lucas a judgment creditor was held to have no right to receive the rents, as, although he had a charge on the land, he had not taken any steps to enforce it. Here the plaintiff obtained the appointment of a receiver before the rent was due, and duly demanded it. A payment by a tenant of rent which has actually become due to a mortgagor before any claim by a mortgagee is valid, whether the mortgage be legal or equitable. A prepayment is not really a payment of rent, as was pointed out by Justice Willes in De Nicholls v Saunders. He said: "Payments of rent before it is due is not a fulfilment of the obligation imposed by the covenant to pay rent, but is, in fact, an advance to the landlord, with an agreement that on the day when the rent becomes due such advance shall be treated as a fulfilment of the obligation to pay the rent." But in that case, as in the present, when the day for payment arrived, the landlord was not in a position to give a discharge for the rent. Here the receiver claimed it before the due date. A prepayment will be good, to the amount of the rent which becomes actually due, before notice has been given to the tenant by the mortgagee, although not as to the residue: Cook v Guerra.

Now if I can take your Honours to Cook v Guerra (1872) LR 7 CP 132, again it is on the crib sheet. The passage which we rely upon is at page 137: "It was urged on behalf of the defendant" down to the end of the page. I will not read the first two paragraphs, because they set out the argument and one can infer readily enough what it is. I will only read out aloud the third paragraph:

The question is not whether the letter gives such notice in terms, but whether, from the letter and the circumstances, the court ought to infer that the letter brought such knowledge to the mind of the defendant or his attorney, or both. Now, the defendant or his attorney knew that Banchini had claimed the premises as mortgagee from Lamb, and, consequently, they knew that Lamb was raising money by mortgaging the reversion; that the claim made on behalf of the plaintiff was not to dispossess the defendant, but only to be paid by him the rent; that such a claim could hardly be founded upon any other alleged right than one resulting from a grant of the reversion.

And again, the point of principle is made.

In Smallman v Castle, that is the Irish case; it is (1932) IR 294 in the reasons of President Sullivan, on page 297 the principle in De Nicholls v Saunders and Lord Ashburton v Nocton is approved in that last paragraph. I shall not read it aloud.

Could I refer also to Municipal Permanent Building Society v Smith (1888) 22 QBD 70. It is not on the crib sheet. The facts are very simple and set out in the headnote:

Where a lease is made by a mortgagor in possession under the powers given by the conveyancing and Law of Property Act, 1881, the mortgagee, on giving notice to the tenant and going into possession, is entitled by virtue of the Act to enforce the covenants and conditions in the lease in the same manner as if he had been a party to it, and such right cannot be affected by any collateral agreement between the lessor and the lessee.

There are some statements of principle in Lord Esher's reasons on page 72 from:

If he desires to avail himself of his rights -

under the lease, down to the end. Again, I will not read it aloud. Lord Justice Fry's reasons, from the beginning through to the whole of his short judgment makes the point of principle again, with respect, very clearly. Just taking some words at the bottom of page 72:

The statute in fact gives the mortgagor power to create a term out of the estate of the mortgagee, and so to convert that estate into one expectant on the term granted by the lease.

So, the reason that the mortgagee has the rights is that he is the reversioner:

That would seem to shew that it was intended that the mortgagee should have the rights of a lessor under the lease. If this were not so it would follow that the mortgagee's estate would be diminished -

and so on. That is all I wish to refer to there.

May I now take the Court to Robbins v Whyte, a case which I referred to just in passing last evening in response to the question of Justice Gummow?

GUMMOW J: Just before you leave Lord Justice Fry in Municipal Permanent, at page 73 the last paragraph of his judgment.

MR MYERS: Yes.

GUMMOW J: What is the collateral agreement that is being spoken about there?

MR MYERS: A prepayment. This is another prepayment case.

KIRBY J: It was collateral because it was between the landlord and the tenant and not affecting the mortgagee.

GUMMOW J: You say there was a collateral agreement here?

MR MYERS: Yes. Well, that is one way of looking at it, yes.

GUMMOW J: Yes.

MR MYERS: Robbins v Whyte. I do not want to have said anything that misleads your Honours abut that case. The collateral agreement - it is in truth a prepayment case but the collateral agreement was a loan that was treated as offset against the rent - a pre-existing loan.

GUMMOW J: Yes, but you would say that this waiver arrangement was of the same character?

MR MYERS: Yes, your Honour. Robbins v Whyte - did I give your Honours a citation - (1906) 1 KB 125.

KIRBY J: That is not on this crib sheet.

MR MYERS: No, it is not. The facts are simple. I only had the benefit of the crib sheet for the hard ones.

KIRBY J: I have become very dependant on this, it is very clear.

MR MYERS: The headnote sets it out:

A mortgagor in possession, who has granted a lease under the statutory power.....of the Conveyancing Act.....has no power to accept a surrender of the lease without the concurrence of his mortgagee.

And the observations of Lord Justice Fry, to which I have referred, were applied. They are applied - one needs to go at the bottom of page 129, but I think there is an authority directly relevant to the point about ten lines up:

I have to decide, that is the case of Municipal Permanent Investment Building Society v Smith.

And then over the page the words that I have referred to are quoted.

GUMMOW J: Otherwise "no merger", he says.

MR MYERS: Yes. I shall not omit to direct your Honours' attention to the last sentence on page 130:

The result, therefore, is that, in my opinion, the surrender which purported to have been made on November 25, 1904, had no effect in law, and consequently that the lease is still subsisting, and the plaintiffs are accordingly entitled to the rent for which they now sue.

KIRBY J: All of these are of a one and they really support the proposition you raise at the very outset, namely, why should, by an arrangement between A and B, they be able to affect rights which before belonged to C.

MR MYERS: Yes, your Honour.

KIRBY J: It is as simple as that.

MR MYERS: It is, your Honour, yes. Now, before at last departing from this part of my argument there are just a few matters that I wish to deal with. First of all, in the course of his submissions, my learned friend Mr Castan yesterday, before the luncheon adjournment said that at common law a mortgagor had a right to quiet enjoyment. That is wrong, with respect. The mortgagor does not have that. That has to be found in the mortgage itself. The simple common law or old title lease, the mortgagee can take possession before the ink is dry. That is basic law and there is no right of quiet enjoyment. The right of quiet enjoyment has to be found in the words of the mortgage.

CALLINAN J: That cannot be the position with Torrens land, though, with registered titles.

MR MYERS: No, it cannot. Very often, of course, there was a right of quiet enjoyment conferred expressly by the mortgage and where there was, and if the mortgage was for a fixed term, a redemise was implied, but it depended upon those words. My learned friend referred, in particular - if I could take up his written submissions - to a statement of Mr Justice Harper. It is on page 8, paragraph 12 of the appellant's written submission. He said that this statement encapsulated the case and was absolutely correct. Your Honours will see at once that although it encapsulates the case it is absolutely wrong. Mr Justice Harper begins by saying "default by itself changes nothing." His very first words contain the fundamental error. It overlooks the effect of section 81(1).

GAUDRON J: Well, that is one of the great unresolved issues, is it not?

MR MYERS: With respect not, I think, your Honour.

GAUDRON J: Well, the concluding words of the section 81(1).

MR MYERS: Yes, it is, in that sense, yes, your Honour.

GAUDRON J: Yes.

MR MYERS: But it does not affect this case because there had been a default.

GAUDRON J: No.

MR MYERS: But a default under section 81 may be important. Rights may depend upon default. They do not depend upon notice. Mr Justice Harper has just, with respect to his Honour, got it wrong. The rights of the mortgagee, if they depend upon anything, depend upon default, not notice. He has got it the wrong way around. And he refers to a New South Wales' case which is not considering anything like section 81.

KIRBY J: What page was that, I am sorry?

MR MYERS: That was page 8, paragraph 12 of the appellant's outline.

McHUGH J: That statement is wrong, is it not?

Likewise, it is possession, not default, which creates the relationship - - -

MR MYERS: Yes, it is, and it does encapsulate our friend's case and is, with respect, wrong. Your Honours, at page 82 of the reasons of the learned arbitrator which my friend relied upon, that is the page where Moss v Gallimore was quoted from and I meant to say when I was - - -

GUMMOW J: Cases like Moss v Gallimore and these English cases you have been taking us to, how do they fit in the Torrens system in the light of section 74? For example, the notion of a power of sale has to come out of the statute now and it does in section 77, does it? Notions of foreclosure, for example, come out of section 79.

MR MYERS: Yes, they do.

GUMMOW J: How does this - - -

MR MYERS: It is because of section 81.

GUMMOW J: You have to nail your flag on 81, do you not?

MR MYERS: Yes, I do, your Honour. It is 81 because it is only the first mortgagee. This is the discourse that your Honour and I had yesterday. Section 81 of the Victorian Act and section 116 of the Western Australian Act put a first mortgagee under the Torrens land in a different position.

GUMMOW J: But this notion of dealings with the reversion and so on and creation of rights, et cetera, at common law does not really spring out of a statute clearly, I would have thought.

MR MYERS: Well, section 81 does.

GUMMOW J: Other than section 81.

MR MYERS: That is what section 81 does.

GUMMOW J: What is this "right of quiet enjoyment" spoken of there?

MR MYERS: What does it do?

GUMMOW J: "A right of quiet enjoyment under default"?

MR MYERS: That is just, in our submission, a recalling of the fact that very often in old title mortgages the mortgagor was given a right of quiet enjoyment until default.

GUMMOW J: Yes, but you said "redemise". I cannot see how that would work with the Torrens system.

MR MYERS: Well, that is the issue that Connolly v Ryan left open. Justice Hayne decided, I believe, in this case that there was a statutory redemise, but certainly it is left open in Connolly v Ryan and it is not essential for this case, so the Court by no means has to tackle that issue.

GUMMOW J: But this right that is being spoken of in all these cases which - it is said that this right that the - Justice Kirby put to you the example of A and B and then that cannot be interfered with by something agreed between A and C.

MR MYERS: Yes.

GUMMOW J: All of that learning does not readily fit in section 81, does it?

MR MYERS: With respect, it does, your Honour:

have the same rights and remedies at law and in equity as he would have had if the legal estate in the mortgaged land had been vested in him as mortgagee.

Certainly, there is no decided case. Mr Justice Newton, for example, who was a very learned judge, with respect, in these sort of matters in the Abattoir's Case, if I can call it that - I just cannot call it to mind - he accepted as correct the view that I am advancing to your Honour, and indeed I do not know of any case in which section 81 has been dealt with where this sort of view has not been accepted as correct. Mr Justice Hayne gathers them together in the related case which is in the - - -

CALLINAN J: And you would say the words "legal estate" is a language consistent with the old system, rather than with the Torrens system.

MR MYERS: Yes, it is. As Justice Gummow pointed out yesterday, when my learned friend was putting his argument, one does not strictly speak of legal rights under the Torrens system. But here, it is legal estate.

CALLINAN J: Mr Myers, it may not need to be here expressly, or indeed it may be, I just cannot pick it up, but section 77(4) of the Transfer of Land Act states what the effect of a sale by a mortgagee on default is, and provides that the purchaser takes the estate free from liabilities and mortgages, but you notice it makes a reference to leases, subsequent to the mortgage.

MR MYERS: A lease to which the mortgagee has consented in writing, or to which he is a party, yes.

CALLINAN J: Yes; and is there a provision, or is no provision necessary, to enable the purchaser, from a mortgagee exercising power of sale, to take free of unregistered prior leases? One would expect that to be the position, I just have not - - -

MR MYERS: Section 42 is the feasibility provision of this Act.

CALLINAN J: It may just stem from that, I suppose, yes.

MR MYERS: Section 42(2)(e) has a saving in respect of:

the interest.....of a tenant in possession of the land -

So, the question would be, "Was this tenant in possession of the land when the mortgage was taken?". If the tenant was in possession of the land when the mortgage was taken, the tenant would have a superior title to the mortgagee; but, in only that event.

CALLINAN J: Registered or not?

MR MYERS: Registered or not.

CALLINAN J: The lessee, even with an unregistered lease?

MR MYERS: Yes.

CALLINAN J: That is which section?

MR MYERS: That is 42(2)(e):

Notwithstanding anything in the foregoing the land which is included in any folio of the Register or registered instrument shall be subject to.....

(e) the interest (but excluding any option to purchase) of a tenant in possession of the land;

So, the interest of a tenant in possession is protected whether registered or not.

CALLINAN J: And regardless of whether the mortgagee is exercising power on a sale or not.

MR MYERS: Yes, that is so.

CALLINAN J: It is an absolute protection, in other words.

MR MYERS: Yes; the question would be, "Is the mortgage subject to this interest? Was this tenant a tenant in possession at the time a mortgage was given?". If he was a tenant in possession at the time a mortgage was given he would be protected. The power of sale could not clear it away.

CALLINAN J: And all of the covenants in his favour would also be similarly protected, is that right?

MR MYERS: Yes.

CALLINAN J: If there had been performance - and I know that is the question in this case - under those covenants, there could not be any revisiting of that performance.

MR MYERS: That is so.

CALLINAN J: You get back to Justice McHugh's questions to you before. If there had been performance by some other mode, then there would have been performance of the covenants and there could not be any revisiting of them.

MR MYERS: Yes, if there had been performance, but performance by another mode, with respect, is not something that I could accept.

CALLINAN J: I understand that is the question but I am really putting these two questions to you in following what his Honour Justice Gummow put to you to see what effect, if any, what bearing the fact that this Torrens system land has on it. I am not sure myself.

MR MYERS: It does not have - - -

CALLINAN J: I am not too sure about that.

MR MYERS: It does not have much bearing at all.

CALLINAN J: I am not too sure about that.

GUMMOW J: The concepts of merger, for example, have spoken on some of those cases. That cannot have anything to do with this.

MR MYERS: No, that is true. But my answer to your Honour is really I am not going beyond what is expressed or, if one likes, implicit in section 81(1). The propositions that I am putting to your Honour are not controversial in the light of the comments in the cases, the learning in the cases and the texts about section 81. Professor Sykes' book, The Law of Securities, deals with all this very thoroughly and exactly and unravels it all, as he always does.

If it were not for section 42(2)(e), we would not be here because SEAA would have taken free of the lease. I was simply going to refer your Honours to page 82 of the book and to that quotation from Ross v Gallimore. At line 30 the learned arbitrator says:

This passage -

the passage from Ross v Gallimore - I would invite your Honours to look at this -

seems to suggest that notice to the tenant is required before the tenant is obliged to pay rent to the mortgagee.

That is wrong, in my respectful submission. It is not just quibble to say that it is wrong. The tenant is always obliged to pay rent to the mortgagee but until notice he will get a discharge by paying it to the mortgagor, by performing his covenant towards another person. But it does not follow - - -

McHUGH J: And that is borne out by the cases which establish that if the rent is in arrears, the mortgagee can recover it.

MR MYERS: Yes, and that statement is the learned arbitrator's first step; that is where he first puts his foot on the wrong road.

GUMMOW J: I had better look at that closely. Whereabouts is the false step?

MR MYERS: At line 30, page 82, your Honour, Moss v Gallimore.

GUMMOW J: Yes.

MR MYERS: I do not want to labour it, but you can see the point readily.

GUMMOW J: And you say that there is this obligation to pay the mortgagee as between mortgagee and tenant.

MR MYERS: Yes.

GUMMOW J: And when received by the mortgagee it then becomes a matter of account as between mortgagee and mortgagor?

MR MYERS: Yes, it does, your Honour.

GUMMOW J: Yes.

MR MYERS: And, with respect, your Honour, that is so conventional that it - now, the one last matter that I want to - - -

GAUDRON J: Well, is the mortgagee a trustee of it for the mortgagor?

MR MYERS: No, but he is liable to account - not a trustee.

McHUGH J: But for me the dilemma of this case is, notwithstanding the authorities that you have referred us to, that you say the common law rule protects the tenant because he has performed his covenant but the common law also protects or empowers the mortgagor by enabling him to keep the money or to keep the rent that has been paid. Now, none of these cases explained why that is so. It seems to me there must be something wider. I can fully understand and accept and, indeed, at the moment I propose to follow the proposition that the tenant cannot release, the tenant cannot prepay to defeat the rights, but when a payment is due and payable and the mortgagor receives it, the tenant is discharged and the mortgagor seems to be entitled to keep the money as his own and not as the mortgagee's money. He does not have to account to him.

MR MYERS: No, he does not. He does not, but - - -

McHUGH J: But why? What is the underlying principle? Why does the common law intervene in - - -

MR MYERS: The underlying principle is that the mortgage is a security. That is the underlying principle.

GAUDRON J: But you say it is the mortgagee's covenant.

MR MYERS: Yes, it is.

GAUDRON J: But he is not trustee.

MR MYERS: No, he is not trustee.

GAUDRON J: Well, if it is somebody else's covenant I do not see why he is not trustee.

McHUGH J: Yes, exactly. One would say, having regard to the various cases, Robbins v Whyte and all the other cases you have referred to, this rule should not exist. As a matter of logic, this rule that the tenant is discharged by making the payment to the mortgagor should not exist. It is logically inconsistent with these other rules that you have pointed to, such as prepayment, such as release, cannot stand with them, but it does.

MR MYERS: But it is because the tenant - may I respectfully inquire of your Honour, is your Honour referring to the rule that the tenant gets a discharge or the rule that the mortgagor - - -

McHUGH J: Both, but for present purposes, sufficient about the tenant getting the discharge.

MR MYERS: Well, the tenant gets the discharge because he has performed the covenant as best - - -

McHUGH J: But he has not. He has not paid it to the person who is entitled to receive it.

MR MYERS: That is so.

McHUGH J: Yet the common law says he gets a discharge. It is irrational having regard to the other propositions derived from the cases to which you have referred us.

MR MYERS: But he does not know to whom the covenant is owed. He has not been given notice. He has done everything that he can do. He has performed the covenant.

McHUGH J: Yes.

MR MYERS: But if he wants to vary the covenant or do something other than perform the covenant - I am repeating myself.

McHUGH J: Yes, I understand.

MR MYERS: Now, the notion that the mortgagee is liable to account but the mortgagor can keep the rent, with respect, does not have anything to do with this case.

McHUGH J: I am not sure it does not. I am not sure it does not throw some light on what is at the bottom of this. May be it does not, you may - - -

MR MYERS: Well, if it is an argument that is put forward about authority conferred on the mortgagor, it does not have anything to do with the case because there is no authority, in fact, conferred.

McHUGH J: No, this talk of authority is a fiction.

MR MYERS: If we have to deal with ostensible authority then it cannot be satisfied for the sort of reasons that I adverted to earlier this morning, and I took your Honours to the reasons of Mr Justice Williams in that tax case, that is really where one takes it. Also in answer to your Honour's question, I just remind your Honour of that passage from Trent v Hunt that I read yesterday. It is at page 525 of the Exchequer Report. I do not know what page it is of the Exchequer Report, and I have already read it to your Honours, but it is a statement of principle:

The circumstances shew that the real owner of the rent (the mortgagee) is willing that the mortgagor should receive the rent, and have it for his own absolute use. He also expects, of course, that the interest due to him will be regularly paid -

Your Honours remember the passage - - -

McHUGH J: Yes.

MR MYERS: I think I referred to that in response to a question of your Honours yesterday, so we have gone round - it might seem I have gone round the mulberry bush. May I just say a word about Stocks v Dobson? It is the last thing that I wish to say on this branch of the argument. Stocks v Dobson was a case dealing with priorities between debts. It is remote from this context concerning mortgages but the crucial difference between this case and Stocks v Dobson is that in Stocks v Dobson there was no notice. Here, the tenant knows of the existence of the mortgage or has notice of the existence of the mortgage. That is the point about the Torrens system and it is a distinction that is so crucial to an understanding of Stocks v Dobson in the present context.

If your Honours please, may I say something briefly about the two matters raised by the notice of contention? The two issues were issue estoppel and the appointment of a receiver. We have prepared written submissions on both of those. First of all, issue estoppel. We rely upon the oft-sighted passage in Blair v Curran of Mr Justice Dixon. The answer that the appellant ventured to make yesterday to the issue estoppel contention was to say, well, there is not res judicata; that was their answer. The question really is whether the decision of Justice Hayne was a judicial determination, which concludes not merely as to the point actually decided, but as to a matter which it was necessary to decide and which was actually decided as the groundwork of the decision itself, though not then directly the point in issue, and the question is, was there any arrears of rent? And the matter before Mr Justice Hayne arose simply this way. The Bank sought a declaration that it was not bound by the lease, because the option to renew the lease had not been exercised. It was said that the option to renew the lease had not been exercised because the rent had not been paid, and the rent had not been paid because the deed did not bind the Bank.

So it was absolutely crucial and essential to his Honour's reasoning, and it is all set out, and I will refer to the passage, that his Honour conclude that the rent had not been paid. Now, in the end, the case went off on a different point, under the Retail Tenancies Act, but one could only get to the Retail Tenancies Act if one had decided that the option had not otherwise been exercised. It was not as though his Honour Mr Justice Hayne was deciding that the option had been properly exercised and the Retail Tenancy Act did not matter.

The argument is really as simple as that. It is set out rather fully in our written submissions and, if I can just take your Honours to Mr Justice Hayne's decision really quickly to point out the crucial point. His Honour's relevant reasoning really begins at the middle of page 509 line 31 and it continues over to page 512 about point 4 of the page:

I consider the defendant should have leave to amend its defence in the manner sought and leave to rely on the written submission that has been made.

And, in my respectful submission, there is an issue estoppel for that reason.

The final submission that we wish to make concerns the appointment of a receiver. Again, there are written submissions, paragraphs 27 and 28. It does not matter, for the purposes of these submissions, by what means or what was the source of the appointment of the receiver. He could have been a court receiver, he could have been appointed under the mortgage, he could have been appointed under a charge, he could have been appointed by the mortgagor or the mortgagee. It really does not matter. The point is that the appointment of a receiver is notice. If the case based on notice is good, there could not be clearer notice than the appointment of a receiver.

KIRBY J: Is that your argument also in relation to the contention that you should not be entitled to penalty interest?

MR MYERS: Our argument that we should be entitled to penalty interest is simply that the so-called penalty interest is provided for by a clause in the mortgage, clause 2.39, and it is in the appeal book at page 21, and it is the same argument as the argument in connection with the rent. It was a covenant that was still existent, so - - -

KIRBY J: The suggestion is that until notice to the tenant, you should not be able to get penalty interest. Did the terms of the covenant answer that?

MR MYERS: That depends upon the terms of the covenant, and it is at - - -

KIRBY J: I am referring to page 4, paragraph (e) of the appellant's submissions.

MR MYERS: Yes, and if I can direct your Honour to page 21 of the appeal book, clause 2.39, a covenant:

to pay to the Lessor interest on any moneys due and unpaid pursuant to this lease -

So, if we succeed on the primary point, we succeed on that covenant. If your Honours please, they are the submission on behalf of the respondent.

GAUDRON J: Thank you, Mr Myers. Yes, Mr Castan. MR CASTAN: Your Honours, firstly in relation to what might be called the general principles, as they have been expounded by my learned friend. He has paid much attention to what is, in substance, not really in issue in this matter, namely that there are some deemed rights which arise under section 81, which give to what is otherwise a statutory charge constituted by section 74 of the Transfer of Land Act, some of the rights:

the same rights and remedies

it is said,

at law and in equity as he would have had if the legal estate in the mortgaged land had been vested -

and then makes much of the fact that there, therefore, has been no discharge here because the rent was not actually paid. It was paid or discharged in some other way.

There are a large number of assumptions in that and he speaks of notice - the notice issue - touched on in the cases to which he has referred, as though that is satisfied by the fact that the mortgage is on the register. Of course, the notice that the courts are talking about is not notice of the kind that there is a mortgage existing somewhere and it is on the register; the notice that they are talking about goes to the most fundamental essence of the sequence of events that happens in the case of this sort of situation with a mortgagee, including the situation when one looks to the operation of section 81(1) type deemed rights, and that is, is the mortgagee electing to go into possession of the rents and profits or electing not to do so? It is true, of course, that they are the rights which exist and your Honours have given examples about A and B agreeing about what will happen as to an entitlement as between A and C, but the mortgagee has the capacity to elect either to go into possession of the rents and profits or to leave the mortgagor in possession of the rents and profits.

KIRBY J: Is this the argument of election that you fought and lost before - - -

MR CASTAN: No, no, that is a different notion of election. What I am talking about in election here is the choice. I am not using election in the sense of electing in that sense. The election I am talking about is that which exists in the law of mortgages. As between landlord and tenant there is a choice that a mortgagee gets to make in a situation in which, yes, the mortgagee has the rights, which my learned friend has stressed so forcefully; they are the entitlement, he is the reversion owner of the legal right of the reversion. But he is permitting after breach, he has a choice - perhaps "election" is causing some confusio. The mortgagee has a choice. He can choose to step in and say, "Fine, now I am in charge of the rents and profits here", or, he can choose to say - and this is by way of explanation of the mystery, if I can call it as posed by your Honour Justice McHugh - to the mortgagor, "Well, albeit, they are moneys which are due to me in this technical mortgage sense, by reason of the vesting of the legal estate. I am choosing to leave you there", and for good reason in many cases. The reason is that, of course, if he goes into possession of the rents and profits, he says, "Now, I will take them", he takes on the liability to account; he takes on the responsibility of managing the estate, and so on and so forth. And this is all discussed in these old cases.

So that it is not simply a matter of saying, "Well, these are the legal rights of the mortgagee"; yes they are, but the mortgagee then makes a choice and chooses to say to the mortgagor, "But, notwithstanding that I can step in at any time, I am not stepping in, I am letting you run the property."

KIRBY J: That does sound like waiver; that does sound like estoppel; that does sound like election, and those matters were argued, were they not, before us?

MR CASTAN: No, it is not that, it is an application - - -

KIRBY J: Well, it sounds awfully like it to me.

MR CASTAN: All we are saying is that there is a simple sequence of steps.

KIRBY J: If you can establish that, if you can establish election or waiver or estoppel, then the law will protect you but, if you cannot, then the law will take its course.

MR CASTAN: Yes, but the law includes the law of old law mortgages, to adopt the terminology, or the law that is made applicable by section 81(1). That includes the decision made by the mortgagee to leave the mortgagor in possession of rents and profits and to receive payment of them and to keep payment and to apply that money, as it is said, over at the casino or perhaps to pay interest if he is a good mortgagor and to spend the money at the casino if he is a very derelict one. But that is not to the point and not the mortgagee's business to deal with that money. It is the mortgagor's money. One does not need to go to those doctrines. The common law, the strict law, deals with that. Can I refer your Honours to - - -

GUMMOW J: Just before you leave that point, I thought in answer to Justice Gaudron Mr Myers made the point that as a matter of privity in covenant, even in advance of default, the obligation of the tenant was to make payment to the mortgagee, even in advance of any question of default.

MR CASTAN: We would not accede to that.

GUMMOW J: Do you disagree with that?

MR CASTAN: Certainly where you have in section 81(1) specifically the provision for quiet enjoyment until default, that could not apply under the statute, whatever might be the position in the absence of those words. They must be given at least the meaning that there could not be - what is happening is that there is the, one can call it the implied redemise, there is the permission - - -

GUMMOW J: So do you say this notion of right to quiet enjoyment until default brings up and turns into a statutory right, if that is the way to put it, the common law permission or election or whatever you call it or authority whereby the mortgagor can collect the rents and go to the casino?

MR CASTAN: Yes, your Honour. It is dealt with by - - -

GAUDRON J: Is it a statutory head lease?

MR CASTAN: It is a statutory head lease. It is dealt with by Professor Sykes, and it may be useful to take your Honours to the passages at pages 261 to 262 of the fifth edition of Sykes on Securities. Your Honours have been, I think, supplied with the extracts. I would seek to take your Honours to the passages because Professor Sykes seeks to articulate the way in which this works - not in the context, I might say, of a situation precisely as here where the question really is, as I will come to and as we originally put, only a question about is there good payment made according to law? Ultimately that is all this turns on, in our submission. But he does deal with the question of prior to default and after default. At page 261, in discourse of discussion of the Western Australian and Victorian positions, he says after the second paragraph:

What therefore we are directed by ss 81 and 116 to imagine then is a state of things wherein the rights of the mortgagee are qualified by a right in the mortgagor of quiet enjoyment until default. Now the opinion has been previously expressed that the doctrine of Doe d. Parsley v Day does not exclude the existence of a demise under this type of provision. The statutory provisions elude the rule of that case by explicitly giving a right; they do not import a mere covenant. What we have to imagine then are the rights of a mortgagee having a legal title qualified by a demise until default.

I think that is the answer to your Honour Justice Gummow's question.

How are these rights qualified when the premises were subject to a lease at the time of the mortgage? We have not to inquire into the rights the mortgagor directly in such a situation, but the rights of the mortgagee.

That is what my learned friend has been seeking to impress upon your Honours:

It appears that where premises are already let and the reversion is later assigned to the mortgagee who then demises it, the demise can operate only as a concurrent grant or lease of the reversion which involves relinquishment to the grantee of the normal rights incident to the reversion for the period of such demise. In such a case no attornment of tenancy by the original tenant to the grantee is necessary. The mortgagor thus has a right to the rents and profits and this means a right to sue for them, not merely to receive them. The mortgagee has given up such right. It would appear then that the mortgagee, placed in the position conjured up by ss 81 and 116, is debarred from suing the tenant for rent or damages for breach of covenant or proceeding in ejectment whether because of the determination of the term or the occurrence of a forfeiture. Now the mortgagor would have these rights because he or she still, in reality, has the legal estate, and the fact that the mortgagee does not enjoy them means that the mortgagor can take the appropriate proceedings without obtaining the consent of the mortgagee. The general result of Connolly v Ryan is therefore applicable where the property is subject to a tenancy.

Now we come to default:

The position is changed where the mortgagor has defaulted. It is submitted that in such a case we are still directed by ss 81 and 116 to imagine that the mortgagee has the legal estate. The mortgagee is not notionally stripped of her or his imaginary trappings just because of the fact of default. Nor is the mortgagor deprived by default of her or his real possession of the legal estate. The position therefore is in structural essentials the same, but the rights of the mortgagee are not qualified by a right to possession but merely by a de facto possession or receipt of the rents and profits. The result seems to be that the mortgagor cannot sue for any relief against the tenant without first obtaining the written consent of the mortgagee. This applies to proceedings for rent, damages for breach of covenant or ejectment. The rule that a tenant is estopped from questioning the title of her or his landlord in legal proceedings would not apply because the express provisions of the sections in point remove that rule. All remedies by action then belong to the mortgagee, the mortgagor cannot sue without consent and there is no need to endeavour to invoke the more limited ss 78 and 111 of the respective Acts.

The same position would theoretically govern the general question of the right of the mortgagor to bring actions against third parties, that is to say, apart from the question of rights against the tenant. However, the main cause of actions against third parties which is affected by s 81 is that in ejectment, and obviously the principle and decision of Connolly v Ryan -

is in - - -

KIRBY J: But do not those words, "all remedies by action belong to the mortgagee" lay emphasis upon the proposition that landlord and tenant cannot, by their private arrangements, affect the rights which belong to the mortgagee?

MR CASTAN: And if we are talking about affecting the rights, ultimately, what we come down to in response to your Honour is the question, has there been payment by some means known to law. If the mortgagee has chosen, after default, to leave the mortgagor in de facto possession of rents and profits, has chosen to do so.

KIRBY J: But save for cases of estoppel or waiver or election, he has chosen, as you put it, or has let the tenant remain in possession, not disturbed the relationship between tenant and mortgagor, but that does not affect the rights that belong in law that Professor Sykes has explained to the mortgagee, unless you can prove estoppel, waiver or election.

MR CASTAN: Yes, but the right to payment is a right in the mortgagor to receive those rents and profits. The mortgagor still continues able to receive those rents and profits until the mortgagee chooses - - -

KIRBY J: But to receive the rents and profits which by this stage, in the theory of the law, belong to the mortgagee and that you cannot, by your unilateral actions, A with B, diminish the rights of C. That is only logical.

MR CASTAN: It is not a matter of diminishing them. The only question is whether they are - - -

KIRBY J: You are. If you agree on a different rent you are diminishing the rights of the mortgagee to receive the rent covenanted.

MR CASTAN: But the mortgagee is not entitled to actually receive the money until - the rents - until the mortgagee takes possession of rents and profits.

KIRBY J: Well, that is the question, why is not the mortgagee entitled? The mortgagee is entitled to the benefit of the covenants.

MR CASTAN: Yes, but - - -

McHUGH J: No, that cannot be right, Mr Castan, can it, because if there are arrears owing before notice is given, the mortgagee is entitled to those arrears, if they are owing. So, his rights cannot depend upon giving notice, it depends upon the fact that upon default the reversion is vested in him.

MR CASTAN: He is only entitled to those arrears after he takes possession of rents and profits. When he does so he is entitled to rents and profits as from the date of the notice and any arrears but - - -

McHUGH J: Yes, I know, but what I was joining issue with is your statement to the effect that he was not entitled to the rent until he had given notice, or effectively given notice.

MR CASTAN: He is not but his entitlement then includes arrears, with respect, your Honour. The fact of the permission given to the mortgagor to continue to receive rents and profits continues. The statement, those are the rights or those are the entitlements of the mortgagee, is stating something that is of no significance if the doctrine includes the entire - as my learned friend concedes properly that it does - that while the mortgagee permits the mortgagor to stay in possession of rents and profits the mortgagor takes them for himself or herself. The mortgagor is - - -

McHUGH J: Well, I am not even sure the word "permission" is appropriate. There is a passage in Justice Dixon's judgment in Partridge v McIntosh & Sons Ltd (1933) 49 CLR 468 which intrigues me where his Honour says:

But a statutory mortgagee under the Real Property Act has no immediate right to possession of the mortgaged premises as against the mortgagor. He cannot be considered as having let the mortgagor into possession under him.

And just contrast that with the common law position. So, his Honour seems to take the view that you really cannot talk about the mortgagee having let the mortgagor in possession under him.

MR CASTAN: Well, my learned friend property concedes and all the cases make it clear, that the mortgagee choosing not to go into possession of rents and profits, and for good reason, because the mortgagee then becomes liable as the landlord, liable, perhaps, for substantial back rates or whatever other liabilities might exist responsible to keep premises and maintain premises and a whole range of possible liabilities. The Bank may well have stood by here and chosen not to go into possession and chosen to exercise the power of sale in the way it did, never having gone into possession, for very good reason. Very good reason, because there is substantial liabilities attaching to going into actual possession. So, notwithstanding default, one of the things that happens, one of the possible ways in which the events may play themselves out will be that the Bank or mortgagee will choose not to go into possession of rents and profits. In doing so, the mortgagor remains in possession of rents and profits and as my learned friend concedes, takes them for himself, can spend the money at the casino.

Now, once it is conceded that that is so, speaking of those moneys that are being paid by the tenant as moneys due, debt due to the mortgagor, has an air of unreality about it. The reality is that the mortgagor is in charge of the property and is permitted to continue in charge of the property and can receive payment by any means known to the law. The notion that it can only be received by means of a specific number of dollars paid in Australian currency in such and such a way is simply contrary to what we would respectfully submit is sound principle. Interestingly, although ultimately our learned friends were successful in the Court of Appeal, the very submission that my learned friend has been putting here, this very submission, was rejected at page 302 by the Court of Appeal. His Honour Justice Brooking specifically adverts to Mr Myer's submission that money must change hands for payment to be made and his Honour goes on to deal with the cases of setoffs of mutual indebtedness, and payments made in satisfaction, payments made pursuant to bona fide compromises, and their Honours correctly below, in our respectful submission, acknowledged that there could be those kinds of payments.

Ultimately they came to the conclusion, erroneously, as we would respectfully submit, that the kind of payment made here, that is to say, a deed of variation combined with progressive payments of a peppercorn rental, did not amount to a discharge, and that is to be determined, in our respectful submission, not by reference to any of the doctrines that have been articulated so forcefully by my learned friend, because they do not answer the question of whether there has been a payment known to the law. What my learned friend has stated in a forceful way, is what is, in effect, not really contested and never has really been contested in this matter. What he has failed to deal with is the question of what happens to the mortgagor left in possession of rents and profits.

CALLINAN J: Mr Casten, that passage from Professor Sykes book at page 262, if it has the sort of meaning that you are trying to give it, it seems to me is inconsistent with the passage that was cited by Justice Hayne at page 248, which seems to me to be the passage that is really dealing with the effect of section 81. In other words, I do not think the passage at page 262 has any bearing on this problem at all. I think the passage at page 248 may have, tentatively I think that, where section 81 is expressly discussed, and that was cited by Justice Hayne in - - -

MR CASTAN: Yes, your Honour, and it speaks of the implied redemise.

CALLINAN J: There is no doubt, is there, that the pre-statute position was that the right to receive the rent commences from the time of the assignment or the mortgage and not from the notice, assuming - and it may not be a complete answer to you. You are saying that the rent had in fact been received or there had been substituted performance in some way.

MR CASTAN: There is a difference between the right to receive the rent and the collection of it and, in effect, the fact that the mortgagee has this right to receive the rent is meaningless in the sense of affecting the matter of what will amount to payment and what will amount to discharge, if, in fact, the mortgagee has not exercised that right but has, in effect, said to the mortgagor, "I do not want to go into possession of rents and profits. I do not want to exercise the right which I have. You stay there and collect it, and, not as my agent; I am permitting you to stay there and it is yours. You be in possession of rents and profits, because if I go into possession of rents and profits, I do not want to have the burden of running this building or meeting all those arrears of land tax, rates or whatever else the burdens might be associated with these buildings."

Might I take your Honours to Rose v Watson which I think my learned friend referred to - no? He did not. Rose v Watson (1864) 10 HL Cas 671, and it is at page 1191 of the English Reports, if that is what your Honours have. I, perhaps, should read the full paragraph in the middle of the page:

Having thus adverted in a few words to the principal topics.....I may refer also.....to the subsidiary parts of the case..... And first, it has been pressed on your attention that the purchaser's claim, being partly in respect of different sums of money paid under the contract after the date of the notice of the mortgage given to the purchaser by the Appellants, ought to be disallowed.....and that he ought not in respect thereof to be allowed any lien upon the estate. I think that the Appellants are entirely precluded by their own contract from advancing any such argument. The mortgage to the Appellants being made subsequently to the contract of sale, and, of course, subject to that contract, conveyed to the Appellants only that which the vendor was entitled to under that contract. And they were content at the time to let their case remain upon that footing; for, by the notice which they gave to the purchaser, they did not at all attempt to interfere with the contract. They left the purchaser still bound and liable to perform that contract; and in conformity with its terms the purchaser was bound to pay those sum of money, as interest, to the vendor, who was the assignor of the present Appellants. The Appellants might, if they had chosen so to do, have given notice to the purchaser to pay those sums of money to themselves; but having merely a mortgage, and not choosing to interfere with the possession by the vendor of the mortgaged property, the Appellants left the mortgagor in the ownership of that property; they left him in the possession of his rights under the contract, and they left the present Respondent bound of necessity to continue to make the payments under the contract, because there was no notice on the part of the Appellants that they desired to interfere with that contract, or to give the money payable under that contract a different destination from that which the contract assigned to it. I think, therefore, my Lords, that there can be no doubt that the present Respondent was not only justified, but in fact was bound to continue to make the payments under the contract which the contract prescribed; and those payments were made until the Respondent found that the vendor was not in a condition to perform, but was altogether unable to make good that which, in truth, is regarded in a Court of Equity as substantially part of the contract, namely, the representations which accompanied the contract when it was made.

And then if I can go over to page 1192 in the speech of Lord Cranworth towards about three-quarters of the way down the page, he says:

My Lords, the only part of the case which, I confess, did, for a short time, create a doubt in my mind, was with reference to the payments made after the mortgage. But I think that my noble and learned friend has put the question quite upon the proper footing. When a man mortgages his estate, although there may be notice that there is such a mortgage, all persons who are indebted to the mortgagor in any way, in respect to that estate, must go on and deal with all contracts which have been entered into with the mortgagor, just as if no such mortgage had taken place; unless, indeed, the mortgagee having a right to interfere, does interfere, saying, "Pay no longer". It is upon this principle that tenants are not only at liberty to pay, but are bound to pay their rents to the mortgagor until the mortgagee interferes to stop them.

I think it is actually that passage that - I am not sure that the previous passage is the passage that I intended to refer your Honours to. The second passage makes the point that, and it is made throughout the case, there are numerous references in the authorities, your Honour, to the position that arises, that is, my learned friend has readily conceded to your Honours arises when a mortgagee - - -

GAUDRON J: I do not see how that analysis can stand in the face of section 151. I noted earlier in one of the old cases there was a reference, so these cases were to be decided by the principles which govern an equitable assignment, but section 151 seems to put that right out of contention.

MR CASTAN: But what section 151 is saying - and we have relied on it - is precisely the heart of the case we make, which is that nothing affects the validity of the payment of rent by the lessee to the person making the conveyance or grant. So that what my learned friend's argument really comes down to, given 151 and the common law principles, is that no, there has not really been a payment of rent. That is why we have said what this case ultimately turns on. We would respectfully say what my learned friend has not really addressed in the course of all of his submissions to the Court is the question of whether or not there has been in substance any form of payment in this case known to the law. Talking about varying the rights and affecting the rent does not affect the matter if there has been a payment known to the law.

In a situation in which the mortgagor is permitted by the mortgagee to remain in possession of the rents and profits, receives the rents and profits and receives payment of them by some other form, then the mortgagee is in no better position ultimately when he does take possession of rents and profits or, as in this case, transfers the reversion to a purchaser under his powers of sale, than if the payment had been made by the payment of money or by the payment of goods or by the payment of any other form.

He has nothing to complain about because there are no arrears in the relevant sense if there has been effective discharge given by the person who is being permitted to receive those rents and profits in the interim. That is what has happened here for three years.

KIRBY J: How do you distinguish the pre-payment cases shown in Mr Pearce's cunning little crib?

MR CASTAN: Well, interestingly on that, it is very interesting to look at that, as it is called, crib sheet, because what it reveals is that in each case what is held is that the liability to pay with respect to rent due after the notices, is held to prevail. In De Nicholls v Saunders the whole point of the case is that, yes, a pre-payment with respect to rent due after notice from the mortgagee on 24 March 1869, is of no benefit to the tenant in relation to rent which falls due on 25 March 1869. The tenant is liable to pay the mortgagee the rent due on 25 March 1869 and in June and so on. That is absolutely against my learned friend. The question is, of course, in relation to where he is concerned with payments - - -

GAUDRON J: Well, what would be against him - and I do not know if the facts of those cases bear it out - is that if there were a pre-payment, say, of six months and notice was given at the end of three months, and the mortgagee was precluded from recovering only for the first three months. Now, do the factual situations bear that out?

MR CASTAN: Well, we would say they do, that the principles that emerge from the cases make it clear. The prepayment is applied progressively to rent as the rent falls due, and for the first three months it has been paid.

KIRBY J: I do not know about that, I thought that the pre-payment is viewed as something entirely between landlord and tenant?

MR CASTAN: No, your Honour. Lord Ashburton v Nocton (1915) 1 Ch 274 deals with precisely the situation that has just been posed to me by your Honour the presiding judge. In fact, at 290 a comparison is made with De Nicholls v Saunders, and the difference between the prepayment in relation to future obligations, towards the foot of the page. Perhaps I should start about two-thirds of the way down page 290:

A payment by a tenant of rent which has actually become due to a mortgagor before any claim by a mortgagee is valid, whether the mortgage be legal or equitable. A prepayment is not really a payment of rent, as was pointed out by Willes J in De Nicholls v Saunders. He said: "Payment of rent before it is due is not a fulfilment of the obligation imposed by the covenant to pay rent, but is, in fact, an advance to the landlord, with an agreement that on the day when the rent becomes due such advance shall be treated as a fulfilment of the obligation to pay the rent." But in that case, as in the present, when the day for payment arrived, the landlord was not in a position to give a discharge for the rent. Here the receiver claimed it before the due date. A prepayment will be good, to the amount of the rent which becomes actually due, before notice has been given to the tenant by the mortgagee, although not as to the residue: Cook v Guerra. Green v Rheinberg was a clear case, as there the landlord had, prior to the mortgage, released the rent to the lessee and tenant in possession, and under the doctrine of Daniels v Davison the subsequent mortgagee was affected with notice of the interest which the tenant had in the land. If the arrangement between mortgagor and tenant for prepayment of rent, or for setting off future rent against money due from the tenant to the mortgagor, be made subsequent to the date of the mortgage, such arrangement will be treated as a collateral bargain between those parties and not binding upon the mortgagee.

He may have a collateral bargain, but the question is whether the prepayment, in the prepayment cases, occurs prior to the point at which the notice is given.

CALLINAN J: What about, Mr Castan, if three years in advance were paid and the present value was reduced in dollars of the day terms to the present value, how would you assess it then, and then a notice was given, say, 18 months later? Would you have to take account of the bargain which involved present value or - - -

MR CASTAN: Yes, and if there is a bargain by which payment has been made with respect to the period prior to the notice, there has been payment known to the law with respect to the rent falling due up to the notice in your Honour's example, the 18 month point. As to the future rent, the prepayment which has been received by the mortgagor is not good as against the mortgagee and the tenant who - - -

CALLINAN J: But would it be the present value of 18 months or would it be in dollar terms 18 months of rental?

MR CASTAN: With respect to the ongoing period after the notice?

CALLINAN J: No, the period before the notice.

MR CASTAN: In the period past there has been good consideration, there has been a discharge given for the whole of those rental payments as they fell due and it would not matter what the - - -

CALLINAN J: How do you calculate what is the amount of the advance, then?

MR CASTAN: One does not need to, with respect, your Honour. In the example posited by your Honour the landlord and the tenant have agreed on a sum which they have said, allowing for the present value of money, will cover three years rental. As the rent falls due there is the notional acquittal by reference to that sum as between them. At the point at which notice is given by the mortgagee his concern is only the future.

CALLINAN J: With the future, yes.

MR CASTAN: And so long as there has been payment by a method known to the law with respect to the period up until then there are no arrears. The real question comes down to that question that has been posed in the course of argument, are there, in truth, any arrears or have they bargained for the actual payment by a means known to the law.

McHUGH J: Mr Castan, can I ask you a question - I should have directed it to Mr Myers, I think - notwithstanding section 151, how does a mortgagee get the right to the rents without attornment?

MR CASTAN: Notwithstanding - - -?

McHUGH J: Section 151. Section 151 says that,

(1) where land is subject to a lease -

(a) the conveyance of a reversion

et cetera

shall be valid without any attornment of the lessee.

MR CASTAN: He does not.

McHUGH J: Sorry. There is - - -

MR CASTAN: Sorry, I am answering in anticipation.

McHUGH J: The mortgagee has - there is no conveyance of the reversion. A mortgage is a statutory charge on the land. Then you have 81 operating on an "as if" basis, but until notice is given - in this case, Mr Myers' argument has proceeded on the basis that, even before notice is given, there is a legal right in the mortgagee to the land upon default.

MR CASTAN: Legal right to the land?

McHUGH J: To the rent.

MR CASTAN: To the rent?

McHUGH J: To the rent, and that is our understanding. That is fundamental to his argument.

MR CASTAN: Yes, but he does not deal with what happens to that legal right when the mortgagee chooses not to actually exercise it - - -

McHUGH J: But the pointing to you - perhaps I have become confused with all the arguments in this case - but how does it come about that the mortgagee gets the right to the rent without attornment?

MR CASTAN: He does not. In the absence of section 151 of the Property Law Act - - -

KIRBY J: You say section 151 relieves him of the obligation of attornment?

MR CASTAN: Yes, your Honour.

McHUGH J: Why does it? That is the question I am asking.

MR CASTAN: Section 151 says:

Where land is subject to a lease -

(a) the conveyance of a reversion.....

shall be valid without any attornment -

In the absence of section 151, it would not be valid without attornment. It would not create the relationship.

GUMMOW J: But Mr Myers says 81 picks up 151. He has to say that.

MR CASTAN: I understood your Honour to be positing a hypothetical.

McHUGH J: What I was putting to you is in terms 151 does not apply to create the relationship because there is no conveyance of the reversion when you have a mortgage. It is only a statutory charge on the land.

MR CASTAN: Yes, and then my learned friend says section 81 treats it as though - - -

McHUGH J: That is the question, is it not, because it is an "as if" clause?

MR CASTAN: It is an "as if". We do not concede that it amounts to a conveyance. It creates the rights and remedies at law in an equity.

McHUGH J: It creates the rights that you would have if the legal estate was vested in you.

MR CASTAN: Yes, your Honour.

McHUGH J: But then, as I understand it, he says that that picks up 151. It is not readily apparent to me at the moment how it does that.

MR CASTAN: I can only respond to that by saying, it might be best addressed to him.

KIRBY J: You did not take that point below though, you have not argued that below.

MR CASTAN: That point of analysis of the section?

KIRBY J: Yes.

MR CASTAN: No, we did not, but the whole issue of the application of these sections was debated at length below.

KIRBY J: I realise that, but in all the debates and at every level, arbitrator, Justice Harper, Court of Appeal, this point was not being debated.

MR CASTAN: That is true, your Honour.

McHUGH J: There may be a simple answer to that.

MR CASTAN: We still come back, your Honours, to what is really in essence a simple proposition and one that my learned friend did not advert to, and he did not respond to your Honour Justice McHugh's question about it; he did not deal with the aspect of the relationships and the structures that exist in the situation in which the mortgagee, having certain rights, and he made much of those rights, but the mortgagee chooses not to exercise them and deliberately so, and frequently so, as we see from the cases; chooses not to go in and become a mortgagee in possession and chooses not to do so in a variety of cases, for a variety of good reasons, and they were discussed in a number of the cases. The burdens that fall upon the mortgagee in possession of rents and profits, the obligation to account, and so on and so forth. There are good reasons why that frequently happens, and perhaps we can assume - I do not think there is any express evidence about what they did and why they did it - but no doubt good reasons why they having known of this particular arrangement for three years, or two and a half years until they appointed a receiver and three years until they actually went into possession - sorry, did not even then go into possession; were studiously avoiding going into possession and ultimately only created rights in another reversioner by selling the land pursuant to the power of sale.

They were concerned not to do that, for whatever reason. And my learned friend has not really dealt with, and not offered, any analysis of what is occurring, when that mortgagee, with all those rights that he has talked about, is choosing deliberately not to exercise them. He is saying, yes, I have the legal right to this rent, but on no account pay it to me, I do not want it.

KIRBY J: Well, it is one thing to keep collecting it but it is another thing for you to start varying it.

MR CASTAN: The question is not a matter of - there are two things occur here, your Honour, there is a deed of variation and then there is a continuing payment.

KIRBY J: Well, you knew the mortgagee's interest at that stage and yet you did not seek the mortgagee's consent, you did not seek to involve the mortgagee and yet these are, in at least one sense, the mortgagee's rents.

MR CASTAN: No. While there is a mortgagor left in possession it is the mortgagor who is entitled to payment and entitled to payment on his own account, he is not just collecting as an agent, and in dealing with him he is the only - - -

KIRBY J: And ignoring the interests of the mortgagee which at that stage has become very real.

MR CASTAN: But so long as we effect payment by a means known to law we have discharged our obligation and we obtain a good discharge from the mortgagor. I am reminded of a passage in Trent v Hunt that responds. Might I just respond to your Honour Justice Kirby as to the way in which, in Trent v Hunt at 525, the matter is expressed, where it is put:

The circumstances shew that the real owner of the rent (the mortgagee) is willing that the mortgagor should receive the rent, and have it for his own absolute use.

And then it goes on to deal with this notion that my learned friend - - -

KIRBY J: But who would have thought that the Bank here was willing that you should have it for your own absolute use. No-one would have thought that. You would not have thought it.

MR CASTAN: No, that is exactly what all parties would think. While the Bank determines not to exercise the undoubted rights it has - - -

KIRBY J: In a sense, this case - I mean, the answer given by the Court in this case does not really matter, except to the parties, so long as it is clear and so long as it settles conveyancing practice very clearly, but it has to be done consistently with hundreds of years of mortgage law, consistently with the statute of the Parliament of Victoria, and consistently with what one would think is sensible conveyancing practice. If one looks only at the last, there are some reasons which would say, well, the mortgagee is in the best position to take the steps and give the notice and once it does that, well, there is no real problem. But, on the other hand, it is slightly offensive to principle that you, knowing of the interest of the mortgagee, can go ahead and just fuss around and make arrangements with the tenant which derogate from the interests of the mortgagee.

MR CASTAN: Your Honour asserts we know of the interest of the mortgagee - - -

KIRBY J: You have the mortgage and you are in default.

MR CASTAN: No, we are a tenant and we know nothing of the mortgage.

KIRBY J: I am sorry, yes.

MR CASTAN: We know nothing of the mortgage other than the knowledge that my learned friend relies on, he says, but there is the register, you know, you could go over - - -

GAUDRON J: Do you say it is not so much the mortgage that is critical as knowledge of the default, on your argument.

MR CASTAN: And we certainly have no knowledge of the default.

CALLINAN J: It is not only that notice was not given, there has been no step taken at all on default until the appointment of the receiver that might be available to a mortgagee. There has been no attempt at foreclosure, there has been no attempt to exercise the power of sale. Nothing has been done at all. That is right, is it not?

MR CASTAN: Precisely, your Honour; and the relevant notice that we say matters is the notice seeking to take possession of rents and profits. The notice says "From today on pay me". That is the notice. The tenant is entitled to deal, and properly must deal, and can only deal, with the mortgagor.

GUMMOW J: Does that notice render the mortgagee a mortgagee in possession, relevantly?

MR CASTAN: In possession in the relevant sense; possession of rents and profits, pay me.

GUMMOW J: Yes. So mortgagees have to be fairly careful about giving that sort of notice?

MR CASTAN: Very careful, because the way it has been put, it is said, "Look, we have been deprived of all this rent because it has not been paid, or it is standing in arrears", but of course the position is the other way around. The mortgagee does have to be very careful, because going into possession will carry with it considerable obligations as well as, of course, the right to collect from then on.

McHUGH J: I know, but can I just add this: this whole argument has been conducted as if the Bank is the litigant. But, as Justice Gaudron has pointed out to me, of course, SEAA is the plaintiff, and that explains 151 and its effect in this particular case, because there has been a conveyance of the reversion. So, a person that is claiming the money here is not the Bank, it is the plaintiff on the record, so I think for the purpose of legal analysis there are some problems about just simply talking about the Bank here. What we are really talking about is what attaches to an estate and whether, there having been a conveyance of the reversion to SEAA, that they can enforce it.

MR CASTAN: Not only enforce it but they seek to say that there is now arrears of rental.

McHUGH J: Well, I know.

GUMMOW J: The security is gone. The power of sale is exercised.

MR CASTAN: The power of sale is gone. The power of sale has been exercised. The security is gone, but they nevertheless say, "There's three years of back rental unpaid, arrears of rental, and penalty interest and some outgoings. We want all of that and we want that on the basis that you obtained a discharge from the mortgagor who was left in possession but that's not good as against us".

McHUGH J: I must say I want to ask Mr Myers a question later and that is whether or not his client could have commenced this action for these arrears of rent at any time during the mortgage, having regard to the terms of 151 and 81.

MR CASTAN: I would not seek to provide his response to that. The point I was seeking to make in going back to this matter is the way in which particularly your Honour Justice Kirby has put it assumes that there is some principle of law that needs to be relieved against or alleviated in order to bring about a result that will make sense in terms of what your Honour has described as conveyancing practice. In our respectful submission, that is not so. It ignores the fundamental aspect of what occurred here and what in numerous of the cases their Honours have addressed, namely, the question of the status of the mortgagor who is left in possession by the mortgagee who, albeit, accepting all that my learned friend has so forcefully put, it does not respond to the ultimate question that is in issue here.

The mortgagee is the owner of all those right, or has all sorts of rights, but has chosen not to exercise them, not by way of estoppel, has actually said to the mortgagor, "You stay"; knows of the breach and says, "You stay". So the mortgagor is left there. The authorities are clear, the mortgagor collects the rent, and collects it on its own behalf, and keeps the rent. It is its money.

KIRBY J: But on the face of things, that would be authorising him to stay, but not to vary the covenants as to rent.

MR CASTAN: No, your Honour, to stay and to give a good discharge for payment by any means known to the law. The only basis on which my learned friend can succeed, we would submit, is not by reason of any of these grand principles, which are not really in controversy. It is to demonstrate that the payment was not - there was no good discharge given, that there was not a payment made.

KIRBY J: So the logic of your argument is that the mortgagor and the tenant could agree to change the nature of the use of the demised premises?

MR CASTAN: They could agree, yes, they could agree to the management of the demised premises, and if that involved - the effective management, as it is put in - - -

KIRBY J: In a way prejudicial to the mortgagee?

MR CASTAN: Well, your Honour says prejudicial. Whether or not it is - - -

KIRBY J: Affecting the security of the mortgagee? That seems unlikely.

MR CASTAN: Well, certainly, it is clear from the authorities that what the mortgagor can do, if permitted to remain and if the mortgagee chooses not to go into possession, that there is this, what is described in at least some of the cases as this management of the property. The practicality of that is obvious. Somebody has to actually, as it is put, your Honour, make allowances to tenants let at the best rent possible, and so on. So there is the necessity for someone to run the show, and that involves dealing with the property, and if it involves a particular property which was previously used as a fruit shop, and can no longer be used as a fruit shop, but is best used, rather than left empty, as a shoe shop, yes, then there can be a variation, so long as it is the ordinary exercise of the powers of a landlord, and the proper exercise of powers of a landlord.

If there is evidence of some kind of colluding to, in effect, defraud a mortgagee of some kind, of course the case is a different one, but in the course of dealings between landlord and tenant - and I use the term "landlord" meaning the person who is permitted to remain in charge of the property - if there is a discharge, a payment known to the law, then that is an end of the matter; the mortgagee has not enforced the rights which undoubtedly are the mortgagee's rights. Saying he has those rights does not tell you anything if he is in fact, for three years, and as many of the other cases illustrate, it is not an uncommon situation, going into rents and profits carries with it burdens, so frequently the cases turn on that very issue, and if they have not chosen to do so, the mortgagor is left with the task and responsibility and capacity to give a good discharge for payment by some means known to the law.

GUMMOW J: How does section 81 connect with the situation that the relevant party here is not the mortgagee, but the successor, by registration? What has section 81 got to do with the position of the present registered proprietor?

MR CASTAN: We include in our submissions a specific submission that says that SEAA is not entitled to enforce these rights, and we do, by way of additional submission, specifically - - -

GUMMOW J: In other words, how do they get privity of estate? How does the present registered proprietor claim any privity of estate in respect of this rent?

McHUGH J: With the Bank. This estate has passed under a power of sale. Is there any privity between the mortgagee and the purchaser? I would have thought not.

MR CASTAN: Well, section 141 of the Property Law Act is a section which does provide - - -

GUMMOW J: What does that say? You had better tell us.

MR CASTAN: Section 141 of the Property Law Act 1958 of Victoria is the section which actually provides that the rent and the benefit of a lessee's covenants run with the reversion.

GUMMOW J: Yes.

GAUDRON J: Yes.

MR CASTAN: And we would assume that this claim for supposed - - -

GAUDRON J: You see, what has happened is - that might all be well and good if SEAA had taken a transfer of the mortgage.

GUMMOW J: Exactly.

GAUDRON J: But SEAA has taken a transfer of the fee simple pursuant to a power of sale which the mortgagee has really as attorney of the mortgagor.

GUMMOW J: That is right. To get as ample estate as can be given, registered estate.

MR CASTAN: Yes, well, that brings us back to the submission which we have set out - - -

GAUDRON J: While you are interrupted, can I ask at this stage how much longer you expect to be?

MR CASTAN: Sorry, your Honour, I would have thought another 15 minutes.

GAUDRON J: And Mr Myers wishes to reply, I imagine?

MR MYERS: I am going to be asked a question which, subject to the questions that are asked of me - I think I am going to be asked two - I will be able to answer in a couple of minutes.

GAUDRON J: Well, in that case we will adjourn until 2.15pm. I am sorry, did you say - - -

MR CASTAN: We would be content to sit on if that - - -

GAUDRON J: In that case we will sit on, I think.

MR CASTAN: If the Court pleases. Yes, paragraph 27 at page 17 of our submissions summarises our position on this, and we simply assert that SEAA does not have a right to recover the alleged arrears of rent and outgoings, and arrears thereon. I think that should read interest thereon - that is a mistype, your Honours, in the third line of paragraph 27. It is alleged arrears of rent and outgoings and interest thereon.

GUMMOW J: That misstates the position, too.

MR CASTAN: Yes, because it assumes reversion. It seems it is a transfer or assignee - - -

GUMMOW J: It is not the way powers of sale and the Torrens system work. It is not a chain of old-system title.

MR CASTAN: No. It proceeds on the false assumption that we are still under section 81, once we have effected the transfer, which is obviously not the case. What we say is that at the date of contract of sale there was still no notice given by the Bank, so there has been no requisite notice of the kind indicating intent to go into possession of rents and profits; that there was nothing owing, and the mortgage was discharged, and we say that SEAA does not stand in their shoes.

GUMMOW J: What is the section that deals with the effect of a power of sale having a transfer - - -?

MR CASTAN: It is section 77 of the Transfer of Land Act.

GUMMOW J: Yes.

MR CASTAN: And subsection (4) provides that:

Upon the registration of any transfer.....all the estate and interests of the mortgagor or grantor of the annuity as registered proprietor.....vest in the purchaser.....freed and discharged from all liability on account of such mortgage.....of any mortgage charge or encumbrance.....subsequent thereto except -

leases and so on which are consented to, or mortgages:

for any reason binding upon the mortgagee -

and so on.

MR CASTAN: A common provision, and the leasehold interest is protected by section 42(2)(e) - I think my learned friend referred to section 42(2)(e) - which protects an unregistered lease, notwithstanding what is on the register, and section 42(2)(e) is regarded in Victoria at least as the, so to speak, security of tenure provision. Yesterday some of your Honours expressed some surprise that leases are not registered in Victoria, but section 42(2)(e) is regarded as the protective provision.

GUMMOW J: Yes, the New South Wales section is different; a much narrower protection, so you have to register.

MR CASTAN: I am not familiar with the New South Wales position. Your Honours, in seeking for underlying principles to those concepts relating - there was some discussion this morning about the words used in Birch v Wright and particularly the reference to the wisdom, benevolence and liberality of the common law. There is a reference in Birch v Wright also harking back to Watts v Ognall in the early part of the 17th century, which refers to strong proof of how much equity and good sense is applied in this area and, in our respectful submission, the underlying principles are illustrated by the passage by his Honour Justice Buller in Birch v Wright where he says, "to avoid the mischief of the tenant being required to pay twice", and that is the ultimate principle that had been developed in this arena.

KIRBY J: But that is to pay the rent covenanted as between the landlord and the tenant originally, the successor to which is the mortgagee.

MR CASTAN: Yes.

KIRBY J: Not some other rent which privily they reach agreement upon between themselves.

MR CASTAN: Ultimately the question is whether the tenant is - the mischief is to avoid the tenant having to pay twice. Now, how - - -

KIRBY J: Define the rent? The rent is the rent as it originally was when the mortgage applied.

MR CASTAN: The question is whether it has been paid, with the greatest of respect, your Honour. Has it been paid? It may have been paid by, as it is said, the delivery of a canary or it may have been paid by whatever, but so long as it is paid - - -

KIRBY J: Yes.

MR CASTAN: Yes, so long as it is paid by some means known to the law. In our respectful submission, the suggestion that the mortgagor left in possession dealing with the tenants, collecting the rent on his own behalf for himself cannot collect something which is otherwise good consideration in law and otherwise is good payment is, with the greatest of respect, an untenable proposition. The latter is not to be regarded as some kind of holy writ that it can only be paid by silver dollars handed over in a brown paper bag or some other - - -

KIRBY J: No, it is the rent, in inverted commas and in brackets. It is not some other thing that - - -

MR CASTAN: Yes, but the question is one of payment and discharge, not of some magic associated with the dollar amount. It either has been paid and discharged or it has not, with the greatest of respect, your Honour. Talking about it as though it is the rent and so on, if there is no good consideration - it has not been paid or it is an idem pactum or for whatever other reason it is said is not paid, then it is in arrears. If it has been paid, it is not in arrears. One does not magically look at it and say there is some interest of - because it is the mortgagee's right to pay the rent, which the mortgagee has not chosen to exercise for that particular - - -

KIRBY J: We are back to square one. But here there was other consideration, as you pointed out.

MR CASTAN: Precisely.

KIRBY J: But your theory must run with a case where there is truly just a $1 payment a month.

MR CASTAN: If that is - - -

KIRBY J: That is your theory, is it not? Good consideration in law, $1 month.

MR CASTAN: There may be arguments - not quite, your Honour, because one then gets into the Stilk v Myrick-type of cases about whether or not a lesser sum is good consideration for a larger sum. It is not quite that simple.

CALLINAN J: And abstention from trading also.

MR CASTAN: Precisely, your Honour.

CALLINAN J: Could I just ask you a question, Mr Castan. Looking at section 77(4), upon the registration of the transfer to Mr Myers' client, nominal client, his client gets the interest of the mortgagor and the mortgagor would never have been able to sue for these so-called arrears. He would be met with all sorts of defences, is that not right?

GUMMOW J: He gets the title mortgagor purged of what previously was the statutory charge under section 74.

MR CASTAN: Yes, your Honour.

CALLINAN J: But he gets the interest of the mortgagor, he does not get - - -

MR CASTAN: He does not get anything more than that, and we would say all the - well, the mortgagor certainly could not sue for the rent. He was party to the variation and accepted the dollar.

CALLINAN J: Mr Myers really has not had an opportunity to deal with that argument.

GUMMOW J: What do you say about privity and estoppel and Justice Hayne's decision?

MR CASTAN: Privity, as it has been put by my learned friend, suggests that it runs counter to the whole doctrine upon which the mortgagor left in possession - - -

GUMMOW J: No, the Anshun point.

GAUDRON J: Or the issue estoppel in relation to Justice Hayne's decision.

MR CASTAN: I am sorry, your Honours, I was not - - -

GUMMOW J: The Commonwealth Bank not being a party here.

McHUGH J: They are different parties.

MR CASTAN: Yes.

GAUDRON J: And seemingly in different interests.

MR CASTAN: Yes. Well, we would respectfully submit that there is no estoppel as between SEAA and the tenant. There cannot be. There cannot be any estoppel as between different parties - the party who was not a party to the litigation that is said to found the estoppel, and that is apart - - -

GUMMOW J: Is there no privity of interest? Would it be sufficient?

MR CASTAN: Well, in our respectful submission, no. I must confess not to have fully addressed that issue but in our respectful submission, no, where SEAA takes, pursuant to the exercise of this statutory power of sale under section 77. There is nothing to suggest that some privity of interest harks back to - - -

GUMMOW J: There might be a privity with the mortgagor, I suppose, if anything.

MR CASTAN: The mortgagor has certain obligations in relation to the Bank and the decision of his Honour.

GUMMOW J: I understand.

MR CASTAN: The only other matter that I would seek to point out is that the result contended for by my learned friend has its bizarre aspects, if the doctrine is correct, in relation to the notion of penalty interest. If what my learned friend says is accepted and what we have put about the rights of a mortgagor left in possession is not correct, then there is a bizarre situation in which penalty interest - - -

KIRBY J: Why? That is the covenant.

MR CASTAN: Yes, and if that is the covenant, and the mortgagee leaves the mortgagor in possession of rents and profits, in effect, is saying, "You run this property. You collect the rent", and arrangements are made which are payment in a form known to the law and then the - - -

KIRBY J: Maybe that is the sanction. If you start fiddling with the arrangement, well you are altering it and therefore you will attract the penalty.

MR CASTAN: That would be the sanction if you did not pay, but not if you make a payment.

KIRBY J: If you did not pay the rent.

MR CASTAN: If you did not pay.

KIRBY J: Which belongs to the mortgagee.

MR CASTAN: Yes, we would respectfully submit that if you did not make payment in some form known to the law, that may be a penalty. If you do, to suggest you should be subject to such a penalty, has, as we would respectfully submit, a bizarre aspect.

There is one other matter I am reminded. We do rely, and I think it is in our submissions, on the fact that his Honour Justice Hayne, in relation to the estoppel point, was of course dealing only with the interpretation of section 14(5) of the Retail Tenancies Act, and his decision which cannot be taken for purposes of estoppel to go beyond that, since that is all that was essential for the purpose of his decision. That is in our written submissions.

GAUDRON J: Yes, thank you. Yes, Mr Myers. Now, questions?

MR MYERS: I think there are three questions.

GAUDRON J: Yes.

MR MYERS: The last of them concerns the issue estoppel argument. May I direct the Court's attention to page 69 of the court book. The argument about whether there was an issue estoppel and whether there was privity of interest was disposed of by the arbitrator and there was no appeal. Really, the nub of it is from line 20 through to line 29, and there my learned friend's clients left it. They did not appeal on that issue and they cannot raise it now in this Court by way of reply.

GAUDRON J: I am not too sure - I think we are at cross-purposes. The learned arbitrator did not take the view that they were estopped to the point where they had to pay the so-called arrears of rent.

MR MYERS: No, I am just dealing with the arguments about waiver estoppel.

GAUDRON J: I see, I am sorry, yes.

MR MYERS: I think the first question that I am asked - this is Justice McHugh's question - concerns how it is that the provisions of 151 apply to mortgages under - - -

McHUGH J: Yes, how the Bank could have - - -

MR MYERS: The answer is to be found in two sections of the Property Law Act, section 136:

The provisions of this Division shall apply to leases and sub-leases of land under the Transfer of Land Act 1958 notwithstanding anything in that Act contained -

and section 141 says:

Rent reserved by a lease, and the benefit of every covenant.....having reference to the subject-matter thereof, and on the lessee's part to be observed or performed.....shall be annexed and incident to and shall go with the reversionary estate in the land.....

Any such rent, covenant or provision shall be capable of being recovered, received, enforced and taken advantage of, by the person from time to time entitled.....to the income of the.....land leased.

It seems, with respect, to be very clear.

McHUGH J: How does the mortgagee get the reversion? How is the relationship - - -

MR MYERS: By operation of section 81.

McHUGH J: So, you have got to rely on 81.

MR MYERS: Yes, you do have to rely on 81. But the Property Law Act, Division 5, dealing with leases and tenancies, certainly contemplates that those provisions can sensibly apply to leases under the Transfer of Land Act.

GUMMOW J: Does it say that?

MR MYERS: Yes it does, that is what it says in section 136.

McHUGH J: Well, I know. One would have no trouble carrying it across, but it is the special situation of the mortgagee that it seems to me may create difficulties here.

MR MYERS: Well, the mortgagee, by - it is section 81, your Honour, and that is the argument. The third question that was implicit, I think, is: how is it that SEAA is suing and we are talking about the mortgagee? The question is, to go back to the beginning, how much rent was attached to the reversion that SEAA acquired, and - - -

GAUDRON J: But if it takes its estate through the mortgagor rather than the mortgagee, there may be different answers to that question.

MR MYERS: No, with respect, not, your Honour, we would say. It does not take its estate through anyone in that sense. It takes its estate by operation of section 77(4), and the question is: when it took its estate by operation of section 77(4), how much rent was attached to the reversion? And the answer to that question depends upon what happened between the mortgagee, the mortgagor and the tenant at some time past.

GUMMOW J: What do they sue on?

MR MYERS: With respect, who is "they", your Honour?

McHUGH J: SEAA.

MR MYERS: Oh, SEAA?

McHUGH J: Yes.

MR MYERS: They sue on the covenant in the lease under section 141.

GUMMOW J: But how do they get privity?

MR MYERS: Because of section 141. They have privity because they certainly have the reversion under 77(4). The question is: how much rent is attached to the reversion? And the answer to that question depends upon things that happened before they got the reversion and it is about those things that the debate has occurred before this Court.

McHUGH J: But what about on default? You see, what happens on default? On default, on your argument, there is an automatic relationship created between the mortgagee and the tenant by reason of section 81. Yet, what has happened here is there is a power of sale being exercised and the land has been transferred from the mortgagor to your client.

MR MYERS: The question is, at the time the power of sale was exercised, how much rent attached to the reversion?

McHUGH J: But the reversion, by reason of 81, was not in the mortgagor, was it?

MR MYERS: No. That is why the issue arises, because it was not in the mortgagor and the mortgagor could not reduce the amount of rent that was otherwise attached to the reversion.

McHUGH J: It just seems to me that section 81 leads to a rather strange result in this particular context, in the context of a power of sale. But in your argument, the mortgagor no longer has the reversion on default. It is down in the mortgagee.

MR MYERS: That is so.

McHUGH J: Yet it is the mortgagor's interest which is sold.

MR MYERS: No, it is not the mortgagor's interest which is sold.

GAUDRON J: It is the mortgagor's and mortgagee's, I suppose, you say.

McHUGH J: No, the mortgagee's interest was just a statutory charge.

McHUGH J: It is just a charge on the land.

GUMMOW J: It evolved. It registered. That is what the Torrens system is all about.

MR CASTAN: I agree it is what the Torrens system is all about, with respect, your Honour, but an interest arises by registration after the exercise of the power of sale and the question is how much rent is attaching to that interest? Section 77(1):

If within one month after the service of such notice or demand or such other period as is fixed.....do not comply.....in good faith -

shall -

sell or concur.....in selling the mortgaged or charged land.

GUMMOW J: If your client brought an action to recover the rent, how would it plead the promise to pay it?

MR MYERS: My client SEAA?

GUMMOW J: Yes.

MR MYERS: It would plead that it is the registered proprietor for an estate in fee simple in the land, there is a lease over the land and the lease provides for payment of such-and-such rent and this is how much rent has been paid. It is as simple as that. That is all we are doing here. One goes back to the question with which we started, how much rent is owing?

McHUGH J: Yes I know, but section 81 introduces this complication, because, on your argument, upon default, the reversion is in the mortgagee, not thereafter.

MR MYERS: Yes it is; that is what section 81 says.

GUMMOW J: You have to say it comes back to you in some way.

McHUGH J: It comes back to SEAA.

GUMMOW J: It comes back to the present registered proprietor.

MR MYERS: Yes it does, because the present registered proprietor - well one just looks at the register and one sees that the present - - -

GUMMOW J: I know. If your submissions are correct, why are we not even bothered about section 81?

MR MYERS: Because, section 81 determines the events surrounding - that we have been talking about, in relation to section 81, determines how much rent is attaching to the reversion when SEAA becomes the registered proprietor.

McHUGH J: But where is the statutory enactment which jets the statutory reversion in the mortgagee back into either the mortgagor or a purchaser from the mortgagor under a power of sale?

MR MYERS: Section 77.

GAUDRON J: Because the lease remains on the title?

MR MYERS: Yes. Section 77.

CALLINAN J: But there is no mortgagee available to take advantage of section 81.

MR MYERS: No, of course not.

CALLINAN J: No mortgagee available so you really cannot have a greater right than the mortgagor, and the mortgagor would have been met with a defence, surely.

MR MYERS: No, no, no. With respect, your Honour, the question is what was the rent attaching to the reversion, and for that purpose you do need to investigate the relationship between the mortgagor and the mortgagee.

McHUGH J: Yes, but, perhaps the fallacy of what you are putting to us, it maya not be - that section 81 creates two reversions, or at least a statutory reversion, as opposed to a reversion.

GAUDRON J: A fictional reversion.

McHUGH J: A fictional reversion.

GAUDRON J: And you are not suing on a fictional reversion here, but on a real reversion.

MR MYERS: I concede, immediately, and this is an issue which no-one has touched upon, but I concede, immediately, that all section 81 does is to say that the mortgagee is to be treated as if it had the reversion. It does not take the reversion away - no, no, no; I have not put that, and I am not putting it. It does not take it away, but one still has to face the question, in that event, which reversion, as it were, has priority. It is obvious that it is the - I am putting it very loosely, your Honour.

GUMMOW J: The word "priority" is loaded.

MR MYERS: If there were two reversions, as it were, the effect of section 81 is not to take a reversion away, it is to create a reversion. Professor Sykes deals with this in his book, and it would make a nonsense of the provisions concerning mortgages if the reversion which is created by operation of section 81 is not, as it were, paramount.

McHUGH J: Not necessarily. In fact it might well conform to the section, that while the mortgage is on foot, the mortgagee has the rights given by section 81. The moment those 81 rights go, then the matter is to be determined as if 81 was not in the picture; you go back to the ordinary law.

MR MYERS: All I can say to that, your Honour, is that it is an argument that has not been put. One is conscious - - -

GUMMOW J: It has its attractions though, so it has to be - - -

MR MYERS: Well, it is a superficial allure, I submit, your Honour; that attraction is sufficient for many purposes, of course. Your Honours may want to grapple with that issue. It has not been raised - - -

GAUDRON J: You say, do you not, that there just simply was no release?

MR MYERS: That is right, and so what is attaching to - - -

GAUDRON J: But it must follow from that that the mortgagor could go behind its deed.

MR MYERS: The mortgagor? No, the mortgagor is not a party to these proceedings. The question simply is - - -

GAUDRON J: No, but at any stage it could have gone behind its deed.

MR MYERS: No, your Honour, I am not saying that at all. I am not suggesting that it could have done that at any time and there is not a breath of that suggestion. The question is really: what is the rent that attached to the reversion? And, if your Honours please, that is the way I framed it when we began, and that is the question. There is a curiosity about section 81 that it creates without taking away, but that is nothing more than a curiosity.

GUMMOW J: You keep saying this has not been put but it is put in paragraph 27 of the appellant's outline. It may have renewed vigour beyond that which the author originally intended.

CALLINAN J: In fact it may have been torpid before half an hour ago.

MR MYERS: There is a great deal put in the appellant's outline, no doubt. The contention that we advance in dealing with it is simply this, that the reversion - I am losing my train of thought - the contention that we advance is that SEAA is now the reversioner entitled to sue under section 141 - - -

GAUDRON J: On a real reversion?

MR MYERS: No. It is - we are dealing with legal rights, if your Honour pleases. Legal rights are fictions. They are created. A statutory reversion - - -

GUMMOW J: Which is the highest thing you can have.

MR MYERS: They are both statutory reversions, if one wants to look at two reversions.

GAUDRON J: But is not the 89 one a fictional, in the sense of "as if"?

MR MYERS: But that is just a mode of language. They are rights created by statute and the mode of identifying those rights is to say "as if". They could have set them out and attached - - -

GAUDRON J: As if and so long as this is the state of the register.

MR MYERS: Yes, I accept that, your Honour. Thus the issue is whether these machinations involving mortgagor and mortgagee and so forth reduce the rent that is attached to the reversion. That is how we put it. If your Honours please.

GAUDRON J: Yes, thank you, Mr Myers.

The Court is indebted to counsel for their assistance in this matter. We will consider our decision and adjourn until 10.15 am next Tuesday.

AT 1.16 PM THE MATTER WAS ADJOURNED