The recent decision in CBRE Loan Servicing Limited v Gemini involved the classification, as either principal or interest, of rental payments, sale proceeds and surrender of lease premia received by a Master Servicer under a Cash Management Agreement.  The agreement formed part of a complex securitisation structure and the classification affected how the funds were to be applied under the payment waterfall in that agreement, and therefore the economic interests of the varying classes of noteholders. 

The Court looked at the agreement in the overall context of the securitisation and loan documentation and looked to characterise the receipts in the hands of the Master Servicer (rather than the noteholders).

The Court took the view that the classification should be determined using commercial common sense and the common law principles applicable to distinguishing capital receipts and income receipts in a business context, rather than to apply the common law rules on appropriation of payments made by a debtor to his creditor, as contended for by the junior noteholders. 

On that basis, the Court characterised the rental payments as interest. Conversely, the proceeds of sale of the properties and the premia received on the surrender of leases represented the underlying capital value of the security for the loan and so were characterised as principal. 

See Court decision here.