Background

AIB Mortgage Bank (the Bank) provided a loan to the borrowers, which was secured on a number of properties in Carlow (the First Loan).

The Bank subsequently provided a second loan to the borrowers and their brother, which was secured on a number of other properties (the Second Loan).

There was no default in respect of the First Loan; however, the Second Loan was in default. The Bank served a demand on the borrowers and their brother in respect of the Second Loan. The Bank then served a demand on the borrowers in respect of the First Loan because of the default by the borrowers in relation to the Second Loan.

The borrowers subsequently entered into a contract to sell certain properties which were secured by the First Loan. During the course of the sale, the borrower’s solicitors requested a redemption letter from the Bank setting out the sums due by the borrowers to discharge the mortgage over the properties for sale. The redemption letter from the Bank provided that on receipt of a certain sum the charge registered against each property would be vacated. The redemption letter erroneously did not refer to the amounts owing in respect of the Second Loan. The borrowers remitted the proceeds of sale to the Bank and the Bank released the surplus proceeds of sale to the borrowers. It was only at this point that the Bank realised the error in the redemption letter and the Bank sought orders from the court to restrain the disposition of the remaining secured properties.

The Doctrine of Consolidation

The borrowers argued that the equitable doctrine of consolidation applied and that unless the Bank was in a position to comply with the strict requirements of the doctrine, it could not consolidate the First Loan and the Second Loan. The doctrine of consolidation is a very old doctrine dating back to 1684 which provides that if the same mortgagor provides a mortgage over two different properties to a lender and seeks to redeem only one of the mortgages, then the mortgagee can require the mortgagor to redeem both mortgages. The right of consolidation is an equitable right which is subject to a number of conditions including:

  1. the legal dates for redemption of the mortgages must have passed;
  2. the mortgages must originally have been made by the same mortgagor, and
  3. the securities must be in existence at the time when consolidation is claimed.

The borrowers argued that condition 2 was not complied with as the borrowers had entered into the Second Loan with their brother and therefore the mortgagor in both loans was technically not the same.

The Bank disputed the application of the doctrine of consolidation and sought to rely on the express terms of the loan agreements and of the security.

Cross securitisation

The dispute made it all the way to the Court of Appeal (the Court). The Court looked at the definition of “secured monies” contained in the charges and noted that these referred to:-

“all monies and liabilities which the mortgagor covenants to pay to the Bank or discharge under the covenants hereinafter contained.”

The Court also considered the covenant to pay which referred to all monies and all obligations of the mortgagor to the Bank. The Court considered that the language contained in both the loan documentation and the mortgage documentation made it sufficiently clear that the Second Loan was cross-secured by the First Loan.

Findings of the Court

The Court, having found that the Second Loan was secured by the First Loan considered whether the doctrine of consolidation could have any application to the case. It noted that the doctrine of consolidation should not be confused with cross-securitisation. The Court was satisfied that the doctrine of consolidation was not applicable to the current case because it was not open to the borrowers acting unilaterally to attempt to compel the Bank to invoke the doctrine. The Court found that there was ample evidence, placing emphasis on the definition of “secured monies”, that when the borrowers entered into the First Loan, they expressly and unequivocally entered into a cross-securitisation arrangement and that all of the properties secured by the First Loan remain as security for the moneys due under the Second Loan. The Court found that the doctrine of consolidation could not be used by the borrowers to prevent enforcement of the agreements they had entered into with the Bank.

Conclusion

This case is welcome from a lender’s perspective and it shows that the Court will give effect to cross-securitisation provisions applying the normal rules of interpretation of contracts. It serves as a reminder that the doctrine of consolidation should not be confused with cross-securitisation provisions. It also illustrates the narrow use of doctrine of consolidation and confirms that this can only be invoked by the mortgagor.