Charge created over after-acquired property — Borrower taking long lease of development land and immediately granting sublease for almost entire term — Whether chargee’s interest limited to dry reversion — Appeal dismissed
By an agreement dated 27 March 1998, Viasystems Tyneside Ltd (the company) acquired a non-transferable three-year option to take a 125-year lease (the headlease) of development land located in the Tyneside Enterprise Zone (the land) at a price to be fixed according to an agreed formula. Pursuant to a facility agreement dated 29 March 2000, the company granted a debenture to a group of banks, entitling them to a first charge (the debenture charge) over all present and future freehold and leasehold property “now or from time to time hereafter owned” by the company. On 15 March 2001, the company exercised the option, and at the same time agreed to grant an underlease to G Ltd, for a term three days shorter than the headlease.
On 28 March 2001, the freeholder executed the headlease in favour of the company, which immediately thereafter executed the agreed underlease. A payment of £5.3m was made to the freeholder out of some £9m received from G Ltd, which had raised that amount by way of a banker’s charge over the underlease.
On 20 September 2001, receivers were appointed under the debenture charge. In High Court proceedings, it was held that the interest secured by that charge was no greater than the dry reversion expectant upon the expiry of the underlease. Before the Court of Appeal, the parties adversely affected by that decision contended that the sequence of events was such that the company had to be seen as the owner of an unencumbered headlease at the time the land became subject to the charge, which could only have occurred before the grant of the underlease.
Held: The appeal was dismissed.
Applying the reasoning of the House of Lords in Abbey National Building Society v Cann [1991] 1 AC 56, the court had to look at the substance, rather than the form, of the transactions that gave rise to the competing interests. This approach had to be adopted generally in disputes concerning priority as between equitable interests. There was no reason why it should be limited to cases, like Cann, of a purchase of property coupled with a grant of a security.
In the present case, it would be wholly unreal to regard the company as the owner of an unencumbered 125-year term on the execution of the headlease. In commercial terms, the exercise of the option and the obligation to grant the underlease were directly connected. Completion of the two leases took place together, and the purchase price for the headlease was satisfied out of the money paid by G Ltd, it being immaterial that the company might have been able to obtain funding from another source. The fact that, for conveyancing purposes, it was necessary to execute the headlease before the underlease did not allow room for any “moment in time” argument. The substance could not be affected by a mere conveyancing technicality.
Guy Newey QC and Andrew Westwood (instructed by Weil Gotshal & Manges) appeared for Viasystems Technograph Ltd, Forward Acquisition Ltd and Viasystems Mommers BV; Peter Arden (instructed by Hammond Suddards Edge, of Leeds) appeared for Angus Matthew Martin and Ian Brown; John De St Croix, solicitor advocate (instructed by Norton Rose) appeared for Julian Richard Whale, Peter Terry and Michael Vincent McLoughlin; David Hodge QC and Katherine Holland (instructed by Pinsent Curtis Biddle, of Leeds) appeared for Grantax Developments Ltd and the Bank of Scotland.
Alan Cooklin, barrister
