The High Court considered a clause in a deed of postponement which concerned the payment of debt once a corresponding loan was determined (ruling that the provision was included “for the avoidance of doubt” and did not override the priority arrangements otherwise provided in the deed, and that if the court’s interpretation was incorrect then the clause could be rectified to get to the same position).
If you are considering priority or intercreditor arrangements, please feel free to contact a member of the DWF Finance and Restructuring team to assist with this process.
Background
Jak Property Jersey Limited (JAK) lent funds to Mulbury Homes (Greg Street) Limited (Mulbury) in connection with the purchase of a property in Salford (Property). Together Commercial Finance Limited (Together) also provided funding to Mulbury in connection with the development of the Property. The Borrower granted security over the Property to both Together and JAK and the two lenders entered into a Deed of Postponement (DoP) to regulate their competing security.
The DoP provided that JAK postponed its charge to Together’s charge.
The development of the Property ultimately failed and enforcement proceedings were raised by both JAK and Together. Together appointed an LPA Receiver who sold the Property, and £1,200,000 was retained from that sale of the Property. The issue to be determined in the case was who was entitled to receive this amount.
Deed of Postponement
Clause 13 of the DoP was the key clause of the dispute. Clause 13 stated:
It is hereby agreed and declared between the First Chargee [Together] and the Second Chargee [JAK] that if the term of the loan agreement associated with the Second Charge comes to an end before the term of the loan agreement associated with the First Charge all sums due and payable by the Chargor pursuant to the Second Charge will be paid to the Second Chargee in accordance with the loan agreement associated with the Second Charge notwithstanding the priority of the First Charge provided by this deed.
Counsel for JAK stated that this clause is unambiguously clear that, if the loan made by JAK to the Borrower comes to an end before the loan made to the Borrower by Together comes to an end, all sums due and payable to JAK will be paid to JAK, notwithstanding the priority otherwise granted to Together. Together’s counsel instead took the view that clause 13 was included as a mechanism whereby JAK could receive funds directly from the Borrower notwithstanding their position as second charge holder (and that the clause had been included for the “avoidance of doubt” (ie notwithstanding the priority arrangements, if JAK called up its loan prior to Together terminating Together’s loan agreement, JAK would be entitled to receive payment from the Borrower, and the debt due to JAK from the Borrower would not, itself, be subordinated to the debt due to Together)).
Decision
His Honour Judge Cawson KC concluded that there was sufficient ambiguity in the wording to require a wider exercise than just considering the words of the clause and that a consideration of commercial circumstances and notions of commercial common-sense pointed in favour of Together’s interpretation.
Together’s interpretation was therefore favoured and Together was entitled to be paid out of the proceeds of the sale of the Property.
Despite this finding, the judge also considered Together’s counterclaim (that, if the meaning and effect of clause 13 of the DoP is to somehow give priority to JAK, the DoP contained an error which was a common mistake made by the parties to the contract). Judge Cawson KC determined that the parties had the common intention that clause 13 should take effect as a form of “avoidance of doubt provision” and that the “subordination” provided for by the deed did not extend to the debts due from the Borrower to JAK and Together (it only extended to priority of the Together charge over the JAK charge). The counterclaim for rectification would have therefore also been successful, with the following rectified wording endorsed in the case:
“13. Expiry of Term
It is hereby agreed and declared between the First Chargee and the Second Chargee that if the term of the loan agreement associated with the Second Charge comes to an end before the term of the loan agreement associated with the First Charge all sums due and payable by the Chargor pursuant to the Second Charge will be payable to the Second Chargee in accordance with the loan agreement associated with the Second Charge notwithstanding, but without any alteration to, the priority of the First Charge provided by this deed.”
Key Takeaways
The decision is a helpful reminder of the importance of precise drafting in priority documentation and intercreditor arrangements. If you are considering entering into any such arrangements, please feel free to contact one of the DWF Finance and Restructuring team, who would be happy to assist with this process.
If you wish to discuss any of the points mentioned in this article, please contact one of our experts.
Thank you to David Hill and Tasha Walker for creating this article.
