The applicant, Urban Ventures Ltd (“Urban”) and the second respondent, Dunbar Bank Plc (“Dunbar”), were the holders of second and first charges, respectively, over properties owned by two companies in administration (TBAC and Billsop). Urban applied for a declaration that its second charge ranked in priority over Dunbar’s first charge as a consequence of new facility letters being agreed with TBAC and Billsop and unpaid interest and fees being added to their accounts. The application required the High Court to review and clarify the scope and meaning of “further advances” within s.49 (3) of the Land Registration Act 2002 (LRA 2002), in order to ascertain whether Dunbar’s actions deprived them of their priority.
Urban and Dunbar both advanced money to TBAC and Billsop in relation to several properties, however, it was agreed that the transactions were materially identical. The Court therefore approached the resolution of the matter with reference to loans made to TBAC in relation to the former Balham Bowling Club.
This loan transaction between Dunbar and TBAC was detailed in a facility letter dated 28 September 2006, the terms of which included that TBAC was to borrow £2,470,000 in order to re-finance their borrowings with Heritable Bank. A first Legal Charge dated 26 October 2006 in favour of Dunbar was entered on the Charges Register at the Land Registry indicating that Dunbar was under an obligation to make further advances which would have priority to the extent afforded by s.49(3) LRA 2002.
Several new facility letters were agreed, extending the term of the original facility. On 26 March 2009, Dunbar wrote to TBAC with terms that were generally similar to the original facility letter; however the amount of funds specified represented the current balance at the time after taking into account interest and fees which remained outstanding. Three further facility letters which were not materially different to the March 2009 facility letter were sent, except that the amount of the facility in each letter was increased to the current balance including further interest and the term of the facility was amended.
Land Registration Act 2002
Section 48 LRA 2002 holds that unless the register contains an entry to the contrary, registered charges over the same land will rank according to the order which they are entered on the register and not according to the order in which they are created.
Section 49(3) LRA 2002 provides that a proprietor of a registered charge may make a further advance ranking in priority to a subsequent charge if the advance is made pursuant to an obligation which was registered in accordance with the relevant rules as at the date of the creation of the subsequent charge.
Dunbar had originally applied for the obligation for further advances to be registered under rule 108 of the Land Registration Rules 2003 which allows a person applying to be registered to also register their obligation to make further advances.
It was agreed by the parties that in order for the priority to benefit from the protection afforded by s.49(3) LRA 2002, it is necessary that the further advance is made pursuant to an actual obligation and that there was no such obligation in this case. Therefore, the issues which remained were firstly, whether or not the facility letters from March 2009 onwards were each considered to have effected a further advance and secondly, whether the debiting of unpaid interest and fees to the account constituted the making of further advances.
The starting point for the Court was to have regard to the ordinary meaning of “further advance”. It was considered clear that this phrase referred to an advance of additional funds, therefore Dunbar’s submission that no new money was advanced after the original facility letter was considered compelling. However, Urban submitted that the terms of the facility letter in March 2009, and the subsequent facility letters, deem there to have been a repayment and a new advance notwithstanding that there was no actual repayment or further advance.
Urban’s submission was based on a new paragraph contained in the facility letters from March 2009 onwards, which read “this offer is in substitution of and not in addition to all our previous facility letters to you which shall be deemed cancelled”. Urban considered that in light of the wording of this paragraph, the original contract was rescinded and a new contract made and therefore it must follow that the original advance was considered to have been repaid and a new advance made.
The Court, however, was not inclined to accept this interpretation. The Court referred to the obvious objections to this interpretation on the basis of the ordinary meaning of the words used and their purpose in the context of the relationship. The Court noted that the facility letters lacked any mention that they were intended to give rise to a deemed repayment, which would have been included if it was intended, and that a further advance would not make commercial sense as its only effect would be to rescind the priority of Dunbar’s charge. The Court considered that the intended purpose of the facility letters was clearly to alter the terms of the contract so as to comply with Dunbar’s current standard terms rather than rescind it and enter into a new contract.
The Court considered that even if it was intended that the parties were to enter into a new contract, it would not follow that a new contract would mean a new advance had been made, rather it would mean that there was a new contract in relation to an existing advance. It was held that no reasonable reading of the facility letters or review of the facts would lead to the conclusion that a new advance had been made.
Urban’s secondary submission was that the debiting of unpaid interest and fees to the account constituted the making of further advances. The Court noted that the original facility defined the indebtedness as including “all monies from time to time due in connection with the facility”. Urban submitted that in allowing a substantial part of fees and interest to remain unpaid and by debiting them to TBAC’s account, Dunbar made further advances to TBAC. The Court did not consider that there was any evidence that Dunbar did allow interest and fees to remain unpaid, however, they did note that including the outstanding amounts in the amount advanced under the March 2009 and subsequent facility letters did change their status. The Court stated that the unpaid fees and interest were no longer due and payable but unpaid; they would now require a demand to make them payable.
The Court did not consider that this treatment of the outstanding amounts could be sensibly regarded as a further advance being made, and that the outstanding amounts are simply amounts owed which are secured by the terms of the charge.
This decision indicates that a common sense approach to contractual construction and the meaning of “further advances” will be applied by the Court. They will have regard to the ordinary meaning of “further advance” when considering whether a further advance has been made and the Court will examine the intentions of the parties and the fact of whether an actual further advance has been made when reaching its conclusion.
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