Key Points

If a suite of finance documents does not specify whether realisations should be treated as principal or interest a Court will make the decision for the parties


There was a securitisation of some real estate loans. Different categories of noteholder were ranked as senior or junior in terms of the payment waterfall. When there were defaults in some of the portfolio loans and receivers realised assets the servicer had to make a payment to noteholders based upon whether a receipt was to be categorised as principal or interest. The Court was asked to decide what receipts should be regarded as interest and what principal.


The Court decided that the receipts should be characterised as principal or interest depending on their source, and the role which they play in the context of the loans and its security, viewed as a matter of commercial common sense. Rent went to the interest fund. Surrender premia and sale proceeds to the principal fund.


The junior noteholders had argued that the common law rules of appropriation of payments should be applied to this structured financing in arriving at a proper construction of the waterfall provisions. The common law rule is concisely stated in Chitty on Contracts 31st edition, Vol. 1, para 21-068:

“Where there is no appropriation by either debtor or creditor in the case of a debt bearing interest, the law will (unless a contrary intention appears) apply the payment to discharge any interest due before applying it to the earliest items of principal.”

Here the judge pointed out that the correct result depended on the construction of the complex suite of documents agreed by the parties and in this context the common law rules were irrelevant.

CBRE Loan Servicing Limited v Gemini (Eclipse 2006-3) PLC