Loan – Securitisation – Commercial property – Rental income from UK properties being used to pay interest under loan as part of securitisation – Loan being accelerated following default – Claimant master servicer under securitisation structure applying for ruling as to treatment of various receipts – Whether rent from and proceeds of sale of properties being classified as interest or principal – Ruling made.
A complex securitisation structure set up in 2006 related to a bank loan of £918,862,500 advanced to a number of Guernsey-registered limited partnerships, who used the funds to refinance a portfolio of commercial properties in England, Wales and Scotland. The income derived from the properties was intended to service the commitments of the borrowers under the loan. The securitisation was effected by the first defendant issuer, which purchased the loan and its related security from the original lender and funded the purchase by issuing £918,862,000 of secured floating-rate notes which fell due in July 2019. The notes were constituted by a trust deed entered into between the first defendant and the second defendant trustee. The loan itself was repayable three years earlier, and subject to acceleration upon the happening of various specified events of default.
The rental income from the UK properties was used to pay the interest due under the loan, which was in turn used to pay the interest due under the notes. From October 2009, the interest due under the loan was no longer paid in full by the borrowers on the due dates, and the value of the properties declined. The substantial fall in value, and the failure to pay the interest on the loan in full, constituted events of default, with the result that the loan was accelerated so that the full amount became due.
The acceleration was effected by the claimant, in its role as the master servicer and the special servicer under the securitisation structure. Following the acceleration of the loan, administrators were appointed in Guernsey and England over the general partners of the borrowers, and receivers were appointed over the properties in England and Wales. The claimant also entered into a supplemental hedging agreement with the bank which agreed not to terminate certain interest rate hedging transactions scheduled to expire in 2026, provided that a programme for disposal of the properties was followed.
The administrators and receivers collected the rental income from the properties which remained unsold and paid it over to the claimant, which applied it in payment of the periodic payments due under the hedging transactions, which ranked in priority to the principal and interest on the loan. The remainder of the rental income was then paid over to the first defendant. In accordance with the agreed disposal programme, some of the properties were sold. The proceeds of sale were paid to the bank as the counterparty to the hedging transactions, which were then partially unwound. Once no further amounts were due under the hedging transactions, the proceeds of sale, and any surrender premiums paid by tenants of the properties, as well as the rental income, would be paid to the defendant.
The claimant issued proceedings under Part 8 of the Civil Procedure Rules to determine whether, on the proper construction of the relevant contractual provision, the various receipts should be characterised as principal or interest. The ninth and tenth defendants appeared to represent various noteholders.
Held: The contract was construed accordingly.
(1) The language used by the parties would often have more than one potential meaning. The exercise of construction was essentially one unitary exercise in which the court had to consider the language used and ascertain what a reasonable person, with all the background knowledge reasonably available to the parties in the situation in which they were at the time of the contract, would have understood the parties to have meant. In doing so, the court had to have regard to all the relevant surrounding circumstances. If there were two possible constructions, the court was entitled to prefer that which was consistent with business common sense. Where the parties had used unambiguous language, the court had to apply it. To the extent that a difference of approach might be called for in interpreting a complex suite of interlocking commercial documents, the resolution of an issue of interpretation was an iterative process, which involved checking each of the rival meanings against other provisions of the document and investigating its commercial consequences. It was also import to place the document to be construed in the context of the overall scheme and read its individual sentences and phrases which placed them in the context of that overall scheme. The instrument had to be interpreted as a whole in the light of the commercial intention to be inferred from the face of the instrument and from the nature of the debtor’s business. Detailed semantic analysis had to give way to business common sense: The Antaios [1985] AC 191, Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, Rainy Sky SA v Kookmin Bank [2011] UKSC 50, [2011] 1 WLR 2900, Napier Park European Credit Opportunities Fund Ltd v Harbourmaster Pro-Rata CLO 2 B.V. [2014] EWCA Civ 984 and Arnold v Britton [2015] UKSC 36, [2015] 2 WLR 1593 considered.
(2) In the present case, the fact that the terms “principal” and “interest” were left undefined suggested that the determination was not envisaged as one requiring any legal sophistication, but merely the application of commercial common sense. Viewed in that way, the receipts had to be characterised as principal or interest depending on their source, and the role which they played in the context of the loan and its security, viewed as a matter of commercial common sense. Adopting that approach, the rental payments were to be characterised as interest (or revenue, or income – for present purposes, the terms seemed interchangeable), whereas the proceeds of sale of properties should be characterised as principal, because they represented the realised capital value of a property which stood as security for the loan. The position in relation to premiums received on the surrender of leases could in theory be more debatable, because the circumstances and basis of calculation of the premium might vary from case to case. However, the type of surrender contemplated was one where the premium paid represented the capitalised value to the landlord of the remaining term of the lease. On that basis, the premium should be characterised in the same way as the proceeds of sale of the property, i.e. as principal.
The consequences of treating sale proceeds and surrender premiums as principal were well in line with what the parties might reasonably be expected to have contemplated when the securitisation was put in place and the notes were sold to investors. In particular, treatment of those receipts as principal was consistent with the way in which the proceeds of sale or disposals of properties were treated as a repayment of principal under the loan before the loan was in default. Accordingly, on the true construction of the loan and securitisation documents as a whole, rent from the properties was to be classified as interest, but the proceeds of sale of properties and surrender premiums were to be classified as principal.
John Brisby QC and Sharif Shivji (instructed by Paul Hastings (Europe) LLP) appeared for the claimant; Richard Lissack QC and Farhaz Khan (instructed by Taylor Wessing LLP) appeared for the ninth defendant; Richard Sheldon QC and Sue Prevezer QC (instructed by Quinn Emanuel Urquhart & Sullivan LLP) appeared for the tenth defendant.
Eileen O’Grady, barrister
