Mortgage – Registration – Priority – Land Registration Act 2002 – Lenders holding first and second legal charges respectively over properties owned by companies – Second respondent as holder of first charge substituting new facility letters for original ones and adding unpaid interest and fees to loan account – Priority between registered charges – Section 49(3) of 2002 Act – Whether appellant’s second charge taking priority on ground that first charge securing “further advances” not made or obliged to be made at date of date of charge – Appeal dismissed
The second respondent held a registered first legal charge over various properties to secure lending to two companies which later went into administration, with the first respondents appointed as joint administrators. The appellant held a second legal charge, also registered, over the same properties to secure its own lending to those companies.
A dispute arose over the priority to be accorded to the two charges. The appellant applied for declarations and consequential relief in its favour. It contended that its charge took priority over that of the second respondent, notwithstanding that it was later in date, by virtue of the “anti-tacking” provisions in sections 49 and 50 of the Land Registration Act 2002; it argued that the second respondent’s charge had lost its priority since it now secured “further advances”, within the meaning of section 49(3), which had not been made by the date of the charge and which the second respondent was not obliged to make under the terms of that charge.
The second respondent had originally lent under a loan facility in the sum of £2.47m and “all monies from time to time due… in connection with the Facility”. The loan had originally been repayable by 2007 but had been extended several times. In March 2009, the borrower companies had been asked to sign new facility letters, containing the second respondent’s current standard terms. Further new facility letters had been signed over the course of 2009 to reflect the amount of the balance then outstanding. No new sums had been lent; nor were there any accounting entries showing any notional repayment of the original advances or the making of new advances, although unpaid fees and interest due in respect of the original advance had been added to the facility.
The appellant submitted that the new facility letters should be interpreted as deeming the original advances to be repaid and “further advances” made. Rejecting that contention and dismissing the claim, the judge held that, on the proper interpretation of the new facility letter, there had been no “further advances” but simply a variation of the contract in respect of the original advance and the unpaid fees and interest due in respect of it; consequently, the second respondent’s charge retained its priority: see [2014] EWHC 1161 (Ch); [2014] 2 EGLR 179; [2014] EGILR 65. The appellant appealed.
Held: The appeal was dismissed.
“Tacking” described the means by which a creditor, with a charge securing an original advance, was able to use the charge to secure a further advance and so obtain priority for the further advance over sums secured by any second or subsequent charge. Because of the potential prejudice to the interests of the holders of second or subsequent charges, the circumstances in which tacking was permitted were severely restricted; however, the restrictions on tacking would be engaged only if the proper legal conclusion, on the undisputed facts, was that further advances had been made.
There had been no new advance pursuant to the new facility letter in March 2009, or any subsequent facility letters. An advance was a payment of money on terms that it would be repaid, in other words a loan. The borrower companies had not repaid any money to the second respondent pursuant to the March 2009 facility letter and the second respondent had not paid any moneys to them. Nor had the parties agreed that the companies should be treated as repaying the existing loan, with the second respondent immediately re-lending that amount. There was nothing in the March 2009 facility letter to that effect. Continuing or leaving outstanding an existing loan was not the making of a new or further advance: Devaynes v Noble; Re Clayton’s Case (1816) 1 Mer 572 distinguished.
Consequently, there had been no new or further advance in or following March 2009, nor anything which the law would deem to be a new or further advance, nor any agreement between the parties that the second respondent should be treated as making a new advance. That conclusion did not turn on whether the March 2009 facility letter took effect as a variation of the earlier facility letter or as a replacement for it. Properly construed, the March 2009 facility letter, and the subsequent facility letters, were in fact restatements, with relatively minor variations, of the original facility letter rather than the complete extinction of the original facility letter and its replacement with a new contract. However, even if their effect had been to replace, rather than vary, the previous facility letter as amended, their purpose was still to set out the terms applying to the existing advance. A new contract would not necessarily involve a new advance but could instead take effect as a new contract relating to the existing advance.
The addition of unpaid interest to the loan account did not amount to the making of further advances. The addition of the unpaid sums to the principal amount stated in the facility letters did not alter their character as interest which had not been paid. From the start, the indebtedness secured by the first legal charge included interest accruing under the facility letter. In the absence of an express arrangement between the parties to that effect, unpaid interest could not be treated as a new or further advance.
Per curiam: In view of the shortfall in the recovery of principal on the second respondent’s loans following the realisation of the charged properties, it was academic whether the unpaid which had been added to the principal amount under the new facility letters amounted to further advances. The proper treatment of such fees would depend on a careful consideration of whether, and in what ways, section 49 of the 2002 Act, and by a parity of reasoning section 94 of the Law of Property Act 1925, applied to the creation of new liabilities which fell within the terms of the charging provision of the first mortgage or charge, an issue on which the court had not heard argument.
Gary Cowen (instructed by Moon Beever) appeared for the appellant; Marcia Shekerdemian (instructed by DLA Piper UK LLP) appeared for the first respondents; Ben Valentin (instructed by Freshfields Bruckhaus Deringer LLP) appeared for the second respondent.
Sally Dobson, barrister
