According to the terms of their Agreement to Lease, McDonald’s were due to be returned their cost of construction when their Benalla restaurant opened its doors in December 2007 shortly after the landlord had already received an advance from Bendigo Bank to repay the chain’s build costs.
The lease that was finally signed in February 2008 – in the same form as had been annexed to the Agreement to Lease – contained no reference to reimbursement obligation and also contained an obligation to pay rent “without any deductions”, ie. a “no set off” clause.
Unfortunately McDonald’s delayed in seeking reimbursement until August 2008, by which time the landlord had taken steps to register a plan of subdivision over the site and had contracted to sell the burger chain lot.
When it did not get the payment as required, Big Mac ceased paying rent and lodged a caveat to protect its interests.
With no return from those measures, it issued court proceedings against the landlord and Bendigo demanding reimbursement of its $1.4 mil from the settlement proceeds of the sale of the lot on which the restaurant stood.
The sale price of the lot was insufficient to cover both the mortgage debt and McDonald’s bill so Bendigo notified the company of its refusal to honour the terms of Agreement for Lease to which it had given no consent.
It also contended that McDonald’s was not entitled to set off any rent etc under the lease by reason of the no set-off provision it contained.
With the landlord taking no part in the proceedings, the Supreme Court of Victoria found in Bendigo’s favour on the basis that the no set-off provision had been contained in both documents and was an important feature of the transaction. Nor was there any equitable right of set-off law or equitable lien. lease and Agreement for Lease should be construed as having no right of notwithstanding the obligation to repay the construction costs.
On appeal, the appeal judges considered “the two documents cannot simply be rolled together”. There was a clear separation in time between the coming into existence of the Agreement for Lease on the one hand and the lease on the other. The covenant in the Agreement for Lease to reimburse construction costs could not be considered to have been imported into the lease itself by mere implication and its covenants were personal and did not “touch and concern the land and do not run with the land”.
To hold otherwise would be unduly prejudicial to the bank who had no idea its advance hadn’t been paid to McDonalds until earlier litigation against the seller came to the lender’s notice in June 2009.
McDonald’s failed in its attempt to hold the mortgagee liable for its $1.4 mil investment with no remedy left to the burger giant, given the landlord itself is defunct.