Successive mortgagees executing deed purporting to place financial limit on priority claimable by first mortgagee – Limit expressed in terms of capital sum plus interest thereon – First advance providing for payment of compound interest – Second mortgagee claiming that “interest” for purpose of deed impliedly limited to simple interest – Claim successful at first instance – Appeal by first mortgagee allowed
In August 1987 the owners of a public house (the borrowers) created an all-moneys charge (the first charge) over that property in favour of the appellant (UCB), which at that time was trading under a different name and did not yet possess the status of a bank. The charge was made pursuant to a facility letter of June 1987 that provided, inter alia, for the charging of compound interest. In December 1987 the borrowers created a second charge in favour of a brewery concern. In August 1988 the respondent (Whitbread) advanced £200,000 to the borrowers secured on a charge that replaced the second charge. It was a condition of the advance that a financial limit should be placed on the priority enjoyed by UCB.
On the same day, Whitbread and UCB executed a “deed of priority”, which declared that the first charge would rank “so as to secure [in priority to the brewery charge] all moneys due and owing… to UCB by the Borrower such sum not to exceed the capital sum of one hundred and sixty thousand pounds together with interest thereon to date of repayment commission discount and other UCB’s costs and charges”.
The borrowers eventually defaulted and the property was sold. In or about December 1993 UCB received a sum of £254,013, being the proceeds of the sale and a fire insurance claim. UCB claimed that it was entitled to the entire amount on the basis that the limited debt included compound interest charged in accordance with the 1987 facility letter. Whitbread claimed to be entitled to approximately £68,000, contending that the expression “together with interest thereon” could only apply to simple interest chargeable on £160,000. Allowing Whitbread’s claim, the trial judge accepted the argument that: (i) a contractual reference to “interest”, without more, was intended to mean simple interest; and (ii) in charging interest on outstanding interest, UCB was capitalising the outstanding interest and could only do so, for priority purposes, up to the £160,000 limit. UCB appealed to the Court of Appeal.
Held: The appeal was allowed.
Whitbread’s arguments, which would have been relevant to the interpretation of a loan agreement, did not assist in the context of an agreement between two lenders. The question was how much money was actually charged to the borrowers by way of interest. The various references in the priority deed to the first charge as an “all-moneys charge” were themselves sufficient indication that compound interest might be charged. That indication was reinforced by the open-ended words “commission, discount and other UCB’s costs” under consideration. It was, accordingly, immaterial that Whitbread might not have known of the contents of the facility letter, and that (because of UCB’s status at the time) the priority deed could not be construed in the light of banking practice.
For those reasons, the compound interest fell within the otherwise neutral words “together with interest thereon”. This conclusion was fortified by views expressed in the Australian courts, viz that the compounding of interest did not alter its character, but only the mode of calculation; and that interest remained interest notwithstanding that it may have been capitalised as a matter of accounting practice between the lender and borrower: see Consolidated Fertilizers Ltd v Deputy Commissioner of Taxation (1992) 107 ALR 456, citing Bank of New South Wales v Brown (1983) 151 CLR 514.
Timothy Hill (instructed by Glovers) appeared for the appellant defendant; Brian Dye (instructed by Halliwell Landau, of Manchester) appeared for the respondent claimant.
Alan Cooklin, barrister
