Property – Loan – Security — Appellants acting as trustees of property unit trust — Trust being formed as vehicle for purchase of property – Appellants obtaining purchase price by way of loan from respondent bank – Appellants granting security to respondent by deed of guarantee and debenture – Appellants failing to repay loan and respondent appointing receivers – Trust having insufficient funds to repay secured loan in full – Court rejecting appellants’ claim that right of indemnity taking priority over respondent’s security under debenture – Whether judge erring in law – Appeal dismissed
The appellants were the trustees of a property unit trust that had been formed, for tax reasons, as a vehicle for the sale and purchase of warehouse premises. The agreed sale price was £28.1m and the purchaser was CIL. The vendor contributed the property to the trust in exchange for units that it sold to CIL. CIL raised £21m by way of a loan arranged by the respondent and paid the balance from its own resources. The property was mortgaged to secure the loan by a deed of guarantee and debenture between the appellants and the respondent. The appellants were the registered proprietors and legal owners of the freehold of the property, as trustees of the trust, and the respondent registered the debenture in the charges register of the property.
When the trust acquired the property, it was subject to a lease at a rent that was sufficient to meet all outgoings. However, when the lease ended in 2008, the property remained empty. A change in the law from April 2008 imposed unoccupied property rates on premises such as the property after they had been unoccupied for six months, liability for which fell on the parties that were entitled to possession. The appellants, as freeholders, incurred a liability for such rates in excess of £1.3m.
Following the failure to repay the loan, the respondent appointed receivers, who sold the property for £14.63 million in February 2010, which raised insufficient funds to repay the secured loan in full. As trustees, the appellants were entitled to be indemnified out of the trust assets for all expenses reasonably and properly incurred, including the liability for the rates.
The High Court rejected the appellants’ contention that their right to be indemnified in respect of expenditure under the trust deed creating the trust took priority over the respondent’s rights as chargee under the debenture: see [2010] EWHC 1605 (Ch). The appellants appealed, contending that clause 17.6 of the debenture expressly gave them indemnity and lien priority over the respondent’s charge; alternatively, a term to that effect should be implied into the debenture.
Held: The appeal was dismissed.
Clause 17.6 was concerned with the appellants’ liability under the debenture, not with protecting them in respect of their liability to a third party. Accordingly, it did not have give the appellants’ rights of indemnity under the trust instrument priority over the respondent’s rights as chargee. As to the alternative argument, the alleged term was not necessary for business efficacy; it was not obvious and it conflicted with an express term of the debenture.
Clause 17.6 had to be read in its commercial context, including the legal and commercial circumstances in which it had been agreed. In particular, account had to be taken of the fact that it appeared in a document that contained other provisions, and whose purpose was to enable trustee-owners to charge the property as security for a loan.
In the absence of an express or implied provision to the contrary, where a trustee, acting as such, entered into a contractual obligation to another party, that party could enforce the obligation against the trustee and the trustee’s assets, as though the trustee had entered into the contract on its own account. In the instant case, the appellants, as trustees of the trust, accepted liabilities to the bank under the debenture. In the absence of any stipulation to the contrary, the respondent could have had recourse against each appellant under the relevant clauses of the debenture to the full extent of the trustees’ assets, whether held by each of them as trustees under the trust, beneficially or possibly as a trustee of other trusts.
Furthermore, the implied term for which the appellants contended was plainly unsustainable. The trust instrument conferred the trustees’ rights of indemnity and lien, without the requirement, which was contained in other clauses, for the respondent’s prior consent. That told against an implied priority of the lien over the mortgage and demonstrated that the question of trustees’ expenses had been considered without provision for priority being included in the debenture.
James Ayliffe QC (instructed by Teacher Stern LLP) appeared for the appellants; Raquel Agnello QC and Philip Hanks (instructed by LG LLP) appeared for the respondents.
Eileen O’Grady, barrister
