TWH (Developments) Ltd v United Mizrahi Bank and others

Bankers’ charge over freehold tenanted property coupled with assignment of right to receive rents from tenant – Rental payments ceasing – Whether right to appoint receiver triggered by default of chargee – Whether rental payments intended to be only source of repayments for first three years of loan – Whether tenant’s financial difficulties put the agreed security “in jeopardy” In March 1995 the plaintiffs (the chargees) purchased a tenanted commercial building in High Street, Newport, Gwent (the building), with the aid of a £300,000 term loan facility afforded by the defendant bank. To obtain the facility the chargees executed three documents, each dated March 1 1995: (i) a facility agreement which recited inter alia that the advance was conditional upon due execution of the other two documents; (ii) a charge over the building in standard form but stating that the agreement should prevail to the extent of any discrepancy between the documents; (iii) an assignment to the bank of the right to receive the rents payable by the tenant. The facility agreement further provided that the loan would be repaid “out of the rental income deriving from the property” by instalments to be made “coterminous with the lease” and that after three years any outstanding money on loan would be paid in full. By the terms of the charge the bank’s power to appoint a receiver arose on a “default” by the chargees, instances including (i) a failure to pay any moneys within 14 days of the same becoming due; (ii) the bank reasonably concluding that “any security constituted pursuant to the Agreement shall be in jeopardy”. Over the period May 1 1995 to April 15 1996 the bank received five rental payments totalling some £59,000, the last being for £3,333. On September 11 1996, the bank, having ascertained that the tenant was on the verge of insolvency and that no solvent party would take an assignment from the tenant, made a formal demand for payment and on September 18 appointed two receivers in respect of the building. The chargees commenced proceedings in December 1996 and claimed that the appointments were invalid, arguing that no instance of default had occurred because no payment otherwise than by the tenant was required during the first three years of the loan and because the bank had no reason to believe that the principal security, the freehold building, was in jeopardy. Held The appointments were valid 1. The chargee could not rely on the imperfect wording of the facility agreement, in particular the problematic use of “coterminous”, in order to contend that the rentals were intended to be the only source of repayments over the first three years of the term. Since such an arrangement made no business sense in banking terms, much clearer wording would be required to establish such an intention. 2. (Obiter) Given various cross-references between the three documents and their simultaneous execution they should be read as parts of a single transaction in which the assignment of the rents was integral to the security afforded by the charge over the building. In that context the “security”, in the wider sense contemplated by the agreement , was placed in jeopardy by the drying-up of the rents, a conclusion partly supported by Re New York Taxicab Co Ltd [1913] 1 Ch 1 and Cryne v Barclays Bank [1987] BCLC 548. Linden Ife (instructed by Wedlake Bell) appeared for the plaintiff; Gabriel Moss QC and Sandra Bristoll (instructed by Nabarro Nathanson) appeared for the defendant bank and receivers.