Preamble

In the recent case of Urban Ventures Limited v (1) Simon Robert Thomas and Nicholas O’Reilly as Administrators of The Black Ant Company Limited (in Administration) and Billsop Properties Limited (in Administration) (2) Dunbar Assets Plc [2016] EWCA Civ 30, the Court of Appeal has upheld the High Court’s interpretation of “further advances” by concluding that:

  1. varying an existing facility letter;
  2. entering into a replacement facility letter; and/or
  3. rolling up unpaid interest and fees payable under the original facility letter in a replacement facility letter,

will not automatically constitute “further advances” in the context of ranking of registered security and anti-tacking provisions in the Land Registration Act 2002 and The Land Registration Rules 2003.

The background

This case concerns two borrowers, The Black Ant Company Limited (“TBAC”) and Billsop Properties Limited (“Billsop”). TBAC owned a freehold property known as the Former Balham Bowling Club (the “Property”), which was secured by way of a first legal charge in favour of Dunbar Assets plc (“Dunbar”) and by way of second and third legal charges in favour of Urban Ventures Limited (“Urban”). There was no deed of priority in place in respect of the security granted by TBAC.

TBAC and Billsop went into Administration in August 2011 and the Administrators subsequently sold the Property. Urban disputed that Dunbar had priority in respect of the Property as a result of purported “further advances” made by Dunbar following Urban’s charges being registered at the Land Registry.

The following facility letters and variation letters were issued to TBAC:

Click here to view table.

Both the 1st Dunbar Facility Letter and the 2nd Dunbar Facility Letter were headed “Loan Facility – No.13 Account”. The 2nd Dunbar Facility Letter was drafted on almost exactly the same terms as the 1st Dunbar Facility Letter except that (i) the amount of the facility increased from £2.47m to £2,593,400 (to reflect the amount of accrued but unpaid interest under the 1st Dunbar Facility Letter); and (ii) the purpose changed from refinancing current borrowings with a third party lender and rolling up interest to “continue to fund [TBAC’s] existing borrowings”. Crucially, in Urban’s view, the 2nd Dunbar Facility Letter provided:

“This offer is in substitution of and not in addition to all our previous Facility letters to you which shal be deemed cancelled.”

Urban’s argument is that pursuant to the 2nd Dunbar Facility Letter and the Further Dunbar Facility Letters, Dunbar cancelled the original advance made in 2006 and continued to make “further advances” to TBAC, which engaged the restrictions on “tacking” thereby prejudicing Dunbar’s original priority position.

The issues and the court’s decision

Tacking

Tacking describes the mechanism whereby a first ranking lender can “tack” further advances onto the original advance and capture both under its first ranking charge in priority to any amounts which, in the interim, have been lent by a second ranking lender. Due to the potential prejudice, tacking is subject to various restrictions detailed in section 49 of the Land Registration Act 2002 and section 94 of the Law of Property Act 1925. The restrictions on tacking only apply if there have been any “further advances”.

Replacement v variation

Urban argued their case on the basis of the words of Lord Haldane in Morris v Baron & Co [1918] AC 1 as follows: the 2nd Dunbar Facility Letter makes “manifest the intention...of a complete extinction of the [1st Dunbar Facility Letter], and not merely the desire of an alteration, however sweeping, in terms which wil stil leave it subsisting”.

However, this was rejected by both courts as it was deemed to be obvious that the parties were simply altering the terms of the 1st Dunbar Facility Letter to include Dunbar’s up to date standard terms. In the words of Mr Nicholas Strauss QC, in the High Court:

“Essentialy al that has happened in this case is that Dunbar required TBAC and Bilsop to sign up to date versions of their standard terms, and added unpaid interest and fees in respect of the original advances to the account”.

Does it matter?

It was Urban’s case that as the 2nd Dunbar Facility Letter replaced (rather than varied) the 1st Dunbar Facility Letter, this constituted a “further advance”. However, Lord Justice David Richards in the Court of Appeal endorsed Mr Nicholas Strauss QC’s view that:

“...I do not accept the argument that the intention of the parties in this case was to enter into a new contract, but even if it had been intended, it does not folow that such a new contract would mean that there was a new advance. On the contrary, it would simply mean that there was a new contract relating to an existing advance. Whether or not there was a new contract, neither the parties, nor any reasonable reader of the facility letters with knowledge of the facts, would have said that a new advance had been made. In my view, Urban’s main argument in this case is artificial and wrong”.

Further advances

The Court of Appeal reiterated that it was common ground that TBAC never made any payments to TBAC to repay the original advance made under the 1st Dunbar Facility Letter. Also, there were no accounting records of Dunbar showing a notional repayment of the original advance the making of further advances. Lord Justice David Richards concluded that:

“So far as is relevant for present purposes, an advance is a payment of money on terms that it wil be repaid, in other words a loan...Continuing or leaving outstanding an existing loan is not the making of a new or further advance”.

Clayton’s Case

Urban attempted to use Clayton’s Case (1815-15) 1 Mer 572 (which provides a rebuttable presumption that, in the case of a loan, the first monies paid into an account extinguish the first advances made out of that account) but the courts held it was of no assistance to Urban because there was no running account nor payments into the account, save for some payments in respect of interest.

Fees

Whilst the Court of Appeal upheld the decision that fees payable under the 1st Dunbar Facility Letter were not converted into “further advances” by virtue of being rolled up in the later facility letters, it is worth noting that the courts did not address the priority of any fees charged by Dunbar on each facility renewal. This was held to be an academic issue due to the substantial shortfall.

What does this mean for practitioners?

This decision is good news for lenders holding first ranking charges and is an example of the courts looking behind the drafting of facility letters to assess the parties’ intentions and the factual matrix of repayments. However, where there are multiple lenders and security interests, we would normally recommend putting priority/intercreditor arrangements in place. This provides added contractual certainty and can regulate notification, consultation and enforcement procedures between the various lenders.

Interestingly, the Law Commission is currently consulting on the revision of the Land Registration Act 2002, and Chapter 18 of the consultation poses various questions about tacking and further advances. Practitioners who wish to respond have until 30 June to do so.