(FORMERLY GMAC COMMERCIAL MORTGAGE BANK EUROPE PLC, NOW KNOWN AS CAPMARK MANAGEMENT PLC)  EWHC 1605 (CH)
The claimants are the joint trustees (the “Trustees”) of a Jersey property unit trust (the “Trust”), formed as a vehicle for holding real property in the United Kingdom (the “Property”). The vendor contributed the Property to the Trust in exchange for units which were sold to Cantabria Investments Limited for a purchase price of £28.1 million (partly funded by a term loan arranged with the defendant). The Property was mortgaged pursuant to a debenture made between the Trustees of the Trust (as legal owners of the freehold interest in the Property) in favour of the defendant (as security agent) to secure the term loan.
Following a change in the rating law in the United Kingdom, the Property became subject to unoccupied property rates in excess of £1m (the “Rates”). The Property was unoccupied for some time resulting in the rating authority obtaining an order for recovery of the Rates against the Trustees as the legal owners entitled to possession of the Property.
In April 2009 the term loan became repayable and following a failure to meet the repayments, receivers of the Property were appointed and the Property was subsequently sold for less than the amount owing pursuant to the secured term loan. This resulted in the Trustees having insufficient assets in the Trust to settle the Rates.
Pursuant to the terms of the trust instrument, the Trustees are entitled to be indemnified out of the trust assets for all expenses reasonably and properly incurred by them (which would include any liability for payment of the Rates) and they have a lien over the trust assets for that purpose.
The main issue in this case was whether the Trustees’ indemnity and lien ranked in priority to or behind the defendant’s security.
The Trustees’ case was that their right of indemnity and lien ranked ahead of the mortgage in favour of the lender.
This claim rested on the construction of the debenture, or alternatively, on a term to be implied in the debenture. It was submitted that since the debenture was entered into by the Trustees in their capacity as trustees, the debenture would affect only those assets held by the Trustees which were available to be applied for the purposes of the Trust (i.e. for the benefit of the beneficiaries under the Trust). The Trustees sought to claim that:
- such assets did not includee assets required to satisfy the indemnity in favour of the Trustees; and
- to the extent assets were needed to satisfy the Trustees’ right of indemnity, they were not trust assets at all but belonged to the Trustees.
The High Court disagreed with the Trustee’s submissions, stating that it was the property, not the property subject to the Trustees’ lien, which was mortgaged. The debenture made no express reservation for the Trustees’ lien. Indeed, the Trustees’ costs and expenses were not mentioned at all in the waterfall provisions contained in the debenture. Moreover, the Trustees covenanted to indemnify the defendant and any receiver against all costs, expenses and liabilities incurred in the execution of their powers under the debenture.
The Court also rejected the suggestion that the trust assets were the Trustees’ personal assets to the extent that they were required to satisfy the Trustees’ right of indemnity or lien.
This case provides a useful example of the Court’s approach to a claimant’s attempts to construe terms in a debenture which are not obvious. It also sets out the circumstances when it is possible to imply terms in a debenture.
Perhaps more significantly, this decision highlights an important issue for local service providers acting as trustees of trusts having, as their only or principal asset, real property in the UK. The Trustees in this case found themselves liable to the rating authority for the payment notwithstanding that the Trust had no assets to meet this liability. Since the liability was non contractual, there was no opportunity for the trustees to expressly agree with the rating authority that their liability should be limited to the assets of the trust in accordance with Article 32 of the Trusts (Jersey) Law 1984. in the absence of express limited recourse wording, the Trustees would either have had to settle the liability or sought to rely on the established position regarding the unenforceability of foreign revenue laws in Jersey. To the extent that the Trustees had any UK situs assets that could have been enforced against without recourse to the Jersey courts, this option may not have been feasible.
In our opinion this UK case, in combination with other topical developments such as the aggregation provisions under the UK’s Carbon Reduction Energy Efficiency Scheme, is likely to make trust companies review their existing policy and procedures around real estate structures. Since it is not possible to limit non contractual liabilities to the assets of the trust, local service providers should ensure that assets which give rise to non contractual liabilities, such as real estate, are either:
- held by private/SPV trust companies (rather than their professional operating trust companies) to the extent title needs to be held directly; or
- held by trustees indirectly via an underlying company or a limited partnership with a corporate general partner.
The use of limited companies in this way will ensure that if a non contractual liability arises it remains appropriately ring fenced.