Triggering the rules preventing tacking—a rare practical example

Triggering the rules preventing tacking—a rare practical example

When does a lender make a further advance which engages the rules preventing tacking? Ben Valentin, barrister at Fountain Court Chambers, considers the Court of Appeal’s approach to that question in Urban Ventures Ltd v Thomas.

Original news

Urban Ventures Ltd v Thomas and others [2016] EWCA Civ 30, [2016] All ER (D) 28 (Feb)

The Court of Appeal, Civil Division, in dismissing the appellant’s appeal, held that the present was not a case in which ‘tacking’ arose, and the second respondent retained its priority as first chargee in respect of an advance it had made. The second respondent had made loans available to two companies and, as security, obtained a first legal charge over their properties. The appellant made subsequent loans to the companies and obtained second and third legal charges over the properties. The court found that when the second respondent redocumented its original loan and rolled up unpaid interest and fees, that had not constituted a further advance and so the rules against tacking did not apply.

What was the background to the case?

The case concerned lending to two London property companies that in 2006 refinanced their borrowings with the second respondent, which took first charges over the companies’ properties. A second lender, the appellant, advanced money to the companies, with second-ranking security. When the companies became insolvent, the administrators sold the properties and distributed the sale proceeds to the second respondent. The lending was significantly underwater, and there was a deficiency so far as the second respondent was concerned and nothing, therefore, to satisfy the lending advanced by the appellant. Nonetheless, the appellant applied to the Companies Court for declarations that its lending should take priority over that of the second respondent on the thesis that all of the latter’s lending constituted further advances following its re-documentation of the lending in about 2007. The appellant argued that, on a proper interpretation of the terms of the second respondent’s new loan documents, it had cancelled its original loan facilities and then re-advanced monies to the companies after the appellant had issued its loans, thereby losing its previous priority position. In addition, it contended that, by rolling up unpaid interest and fees, the second respondent had made a further advance to the same extent. The application was dismissed by the Companies Court (Nicholas Strauss QC, sitting as a Deputy Judge of the High Court) and the Court of Appeal upheld that decision.

What is tacking and when is it used?

‘Tacking’ describes the principle by which a lender, with a charge on property securing an original loan, is able to use the same charge to secure a further advance and thereby obtain priority for the further advance over sums secured by any second or subsequent charge. The tacking principle is therefore of everyday importance to any secured lender where the borrower has subsequently entered into secured lending with other lenders. The principle is now found in sections 48 and 49 of the Land Registration Act 2002 (LRA 2002) for registered land, and section 94(1) of the Law of Property Act 1925 for other property. However, it is also important, for second and subsequent charge-holders, that the principle is kept within well-defined limits so that their interests are not prejudiced by further lending by the first-ranking charge-holder, after the second charge has taken effect. Accordingly, LRA 2002, s 49 identifies the limited circumstances in which a further advance may be secured by a higher-ranking charge.

What is meant by a ‘further advance’ in LRA 2002, s 49(3)?

There is no statutory definition of what constitutes a ‘further advance’, and no court has previously considered the question in the context of a case about tacking. That was the central issue in the instant case.

What did the court decide?

In rejecting the argument put forward by the appellant, the Companies Court had adopted the ordinary meaning of ‘further advance’ as an advance of further or additional funds. Applying this test to the facts, the court concluded that the re-documentation of the second respondent’s lending had not involved the advance of further or additional funds, not least because no moneys had ever been repaid (as the relevant account statements made clear). Similarly, the court held, since interest and fees were due as part of the original indebtedness secured by the charge, it made no difference that the lender had decided to roll up unpaid interest and fees with the outstanding principal amounts when redocumenting the loan.

The Court of Appeal agreed that the words ‘further advance’ had to be given their ordinary meaning, and that, as a result, when applied to the facts and the relevant documents, it was clear that there had been no further advance. Both courts therefore held that the rules that prevent tacking of further advances were not engaged and that the second respondent was entitled to the sale proceeds, as first charge-holder, in priority to the appellant.

What should practitioners note from this case?

Cases about the operation of the tacking principle in a practical setting are comparatively rare. Apart from confirming that the rules that prevent tacking are only engaged where genuinely new money is advanced, the case is a timely reminder to lenders that those with second-ranking security cannot lightly displace the priority position of a lender with first-ranking security, provided that the provisions of LRA 2002, ss 48 and 49 are carefully followed. The case also illustrates the realistic and commercial approach adopted by the English court when applying long-standing principles to modern banking disputes—in dismissing the application and appeal, both courts had given careful consideration to the purpose served by the tacking rules and to the adverse impact which the appellant’s argument might have had for the lending market generally, had it been held to be correct.

Ben Valentin appeared for the second respondent in this case.

Interviewed by Robert Matthews.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

First published on LexisPSL Banking & Finance. Click here for a free trial.

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About the author:

Suzanna has wide-ranging experience in banking and finance transactions with particular emphasis on advising lenders in the context of real estate finance and trade finance and advising on export credit agency-supported aviation finance transactions. Suzanna qualified as a solicitor in 2001 with Theodore Goddard (now Addleshaw Goddard LLP) and has since gained experience with Barclays Bank PLC (secondment), UK Export Finance and Crédit Agricole CIB, before joining LexisNexis®.