In a recent Irish Court of Appeal case, two brothers unsuccessfully sought to rely on the equitable doctrine of consolidation to defeat the validity of a cross-security arrangement with their bank.
AIB Mortgage Bank advanced an initial loan to two brothers and subsequently advanced further money to the borrowers and a third brother by way of a second loan.
Both loans were secured over certain real estate assets by way of mortgages. The mortgages secured all amounts owed by the borrowers to the bank across both loans and any other arrangement, ie “all monies” security was put in place.
The first loan was performing, however, the second was non-performing. Following unsuccessful negotiations with the borrowers on the second loan, the bank demanded repayment of both loans by way of separate demand letters. The bank used the event of default of the second loan as a reason to issue the demand repayment for the first loan.
The borrowers proceeded to sell the secured properties which had been financed by the first loan. The bank issued a redemption letter in connection with the disposal which did not refer to the cross-security arrangement, i.e. there was no reference to the secured properties also securing the second loan.
The property sale proceeds were in excess of the amount required to repay the first loan. It was only when the bank released the surplus sale proceeds to the borrowers that it realised that the surplus should have been paid to the bank as repayment of the second loan.
The High Court upheld the validity of the bank’s cross-security arrangement. It determined that it could not be clearer that both the loan contracts and the deed of mortgage and charge provided that the security being provided were in connection with all present and future liabilities to the bank.
The Court of Appeal
The borrowers argued in the COA that, notwithstanding the clear terms of the loan and mortgage documents signed by them, the mortgages were subject to the equitable doctrine of consolidation. The COA was invited to render the bank’s claim on the surplus invalid owing to the bank’s failure to comply with the doctrine.
Doctrine of consolidation
The doctrine of consolidation is a centuries-old equitable doctrine applied by the courts, which provides that if the same person mortgages two different properties to a lender and seeks to redeem just one of the mortgages, the lender can require the person to redeem both mortgages, or none of them. Otherwise, the lender could be left with inadequate security for the remaining mortgage. The doctrine does not arise if there is a legal right to redeem a particular mortgage, eg a permitted disposal under a loan agreement.
The COA noted that the doctrine should not be conflated with the principle of a cross-security arrangement, which is a “separate and wholly discreet process”. The COA also noted that the doctrine cannot be invoked by the borrower, i.e. it is the lender’s right to invoke the doctrine.
Irish law excludes a lender’s right to consolidate mortgages, although the parties can agree that this exclusion should not apply to a particular security arrangement.
The High Court and COA judgments both paid particular attention to the express contractual terms of the mortgages which had been agreed to by the borrowers. The COA determined that there was ample evidence based on the drafting that the borrowers had “expressly and unequivocally” entered into a cross-security arrangement. The judgment noted, in particular, the definition of “secured monies”.
The judgment is a helpful restatement of a lender’s right to rely on clearly agreed cross-security arrangement. In ascertaining whether or not a security document has been limited in a particular way, the courts will apply the usual rules of contractual construction in its review of the documentation and any agreements varying the parties’ agreement. This is to be welcomed from the perspective of Ireland as a location to conduct lending activities.