The recent spate of litigation in CMBS transactions by noteholders to obtain interpretations of their rights directly in the English courts rather than through the note trustee raises two distinct questions: do investors have standing as a matter of both the transaction documents and general contract law to launch such proceedings and secondly should they be able to?

A typical limited recourse CMBS transaction will contain a general restriction on noteholders proceedings directly against the issuer to enforce their rights under the transaction documents (that right being reserved for the note trustee). On its face that should prohibit noteholders launching proceedings where the issuer is named as a defendant. However, depending on the wording of the clause on question, it could be argued that proceedings launched under Part 8 of the Civil Procedure Rules (“Part 8 Proceedings”) which are aimed at resolving matters of interpretation are not caught by such restrictions even if the issuer in such proceedings is technically listed as a defendant.

At law the situation is slightly different, in a global note structure an investor will hold their entitlement through the clearing systems (and related intermediaries) and while we refer to such investors as ‘noteholders’ in the colloquial sense (as such persons will be beneficially entitled to a proportion of the interest and principal paid by an issuer) they do not have a direct contractual relationship with the issuer. The actual ‘noteholder’, as a matter of contract law, is the holder of the global note and without direct rights being granted to the ultimate investors in the issuance (e.g. through additional deeds of covenant or drafting in the transaction documents), such investors will not arguably have the locus standii required to launch proceedings against as issuer (as they are not a party to the relevant contracts). In order to get around this restriction, the English courts would have to look through the global note structure and grant direct rights to the ultimate investors. The courts have been reluctant to do so and have adopted a ‘no look through’ principle (as recently affirmed, although not in a CMBS transaction, in Secure Capital SA v Credit Suisse AG [2015] EWHC 388 (Comm)) in relation to notes held in the clearing systems.

The second question is whether the ultimate investors should be able to launch Part 8 Proceedings in order to interpret certain provisions of the transaction documents. There is, of course, an advantage in achieving certainty of interpretation when it comes to ambiguous provisions of the documents and should a genuine ambiguity in interpretation arise, it is open for the relevant transaction parties to agree that it would be sensible for a noteholder to lead and indeed launch Part 8 Proceedings (rather than having a note trustee front their position). However, the obvious danger in allowing any and all ultimate investors to launch such proceedings without the consent of the other transaction parties is that multiple proceedings could be launched either simultaneously or consecutively significantly increasing the costs of the transaction and ultimately impacting junior noteholder recoveries. In addition, without the ability of the note trustee to ‘filter’ investor concerns and allegations, the process is open to abuse as investors could launch Part 8 Proceedings which do not purely deal with matters of interpretation but seek to obtain access to additional information and/or involve disputes of fact. In such circumstances, the issuance of Part 8 Proceedings would likely be disputed by the transaction parties but that in itself will come at a cost to the transaction. As in most cases, the drafting of in the individual clauses will be key. Better start reading those terms and conditions closely…

Happy Holidays all!