Construction of an 'all monies' legal charge

What does a recent decision from the High Court tell us about the scope and construction of an ‘all monies’ legal charge?

Original news

Ashwood Enterprises Ltd and others v The Governor and the Company of the Bank of Ireland [2014] EWHC 2624 (Ch)

The case considered whether or not a third party legal charge expressed as being 'all monies' could be construed more narrowly given the particular factual background.

What were the facts in this case?

On 26 June 2007, Bank of Ireland extended an initial facility of £27m to Inis Development Limited which was to develop a property held by two of its directors, the McFeelys, on trust for Ashwood Enterprises Limited (Ashwood). Inis' liabilities were secured by way of an 'all monies' third party legal charge over the property which was given by the McFeelys as mortgagors with Ashwood's consent. Ashwood also provided an 'all monies' guarantee of Inis's liabilities to the bank (the guarantee) and the McFeelys gave a personal guarantee.

A further facility of £10m was extended to Inis in May 2008 which was made for purposes which did not relate to the property.

In late 2008, the bank asked their lawyers to provide a summary of the finance documents relating to the property in connection with a proposed further borrowing. The email sent by the bank's lawyers initially stated that the legal charge only covered the initial facility of £27m. The email was then amended to make some corrections (including the impression that the legal charge was limited to the initial facility). It was claimed, however, that the wording of the corrected email could potentially still be read as stating that the legal charge only applied to the initial facility. The corrected email was then forwarded to the other side at the bank's request.

After seeing the board minutes relating to the proposed further borrowing, Ashwood raised concerns as to the scope of the guarantee, arguing that for tax reasons it should be limited to borrowings relating to the property only. The bank's relationship director at the time claimed that he asked the bank's lawyers to prepare a comfort letter excluding the further facility of £10m from the scope of both the legal charge and guarantee as he understood the concern to relate to the legal charge as well. The bank's lawyers claim the conversation related to the guarantee only. In the event, the comfort letter that was executed referred to the guarantee only.

It should be noted that the facts in this case are numerous and complicated and the case itself needs to be referred to for a full understanding of the background and various arguments.

What were the key issues in this case?

The key issues in this case were as follows:

  • Could the legal charge be construed as limited to the initial facility of £27m, given that 'all monies' clauses have been construed narrowly in previous cases and the further facility was of a fundamentally different character to the initial facility?
  • Could an email from the bank's solicitor that stated that the legal charge was limited to the initial facility be a binding collateral warranty by the bank that only the initial facility was secured and if not did it in any event give rise to an estoppel against the bank?
  • Could the comfort letter be construed as effectively carving out the further facility of £10m from the scope of the legal charge?
  • Were the claimants entitled to rectification of the comfort letter on the basis that they had agreed that the legal charge would not extend to the further facility?
  • Was the purported appointment of receivers by the bank in fact an appointment by the bank as agent for National Asset Management Agency of Ireland (NAMA) and therefore invalid?

What did the court decide?

Could the reference to 'all monies' be construed as limited to the initial facility?

In relation to the first issue, the court applied established principles of construction. In particular, the judge reiterated the principle that the court must consider the language used and ascertain what a reasonable person—who has all the background knowledge that would reasonably have been available to the parties in the situation in which they were at the time of the contract—would have understood the parties to have meant. The judge commented that he must have regard to all relevant surrounding circumstances, including the fact that the legal charge was known to be registrable. As a result, the admissible background is limited to what any reader of such a document would reasonably be supposed to know. In addition, where the wording is clear and unambiguous, the court must apply it.

Applying these principles, the judge held that a reasonable person would have understood the parties to have intended the legal charge to extend to further advances made by the bank to Inis and to all its liabilities to the bank, not just to the initial facility.

Key factors in making this decision, were that:

  • 'Debtor's Obligations' were widely defined to include all of Inis's liabilities to the bank of any kind
  • the legal charge referred to the ability of the bank to grant Inis any new or increased facility without the mortgagor's consent and without affecting or releasing the security
  • although it may be unusual for a building to be used to secure loans for other projects, it is insufficient to cause the reasonable reader to understand the wording of the legal charge to be restricted to only loans relating to that development, and
  • matters that post-date the execution of the legal charge should not be taken into account
Was the email a collateral warranty or did it give rise to an estoppel?

The judge set out the legal principles regarding collateral warranties, emphasising in particular that the parties must intend the statement to have contractual effect. The judge held that the evidence did not support the conclusion that this is what the parties intended. The judge commented that intention is unlikely to be shown where, as was the case here, the statement is followed by further negotiations and a written contract not containing any term corresponding to the statement.

The judge commented that an estoppel by convention may arise where parties to a transaction act on an assumed state of facts or law, the assumption being either shared by them both or made by one and acquiesced in by the other. Based on this, the requirements for an estoppel by convention were not met as there was no clear shared assumption that the legal charge would only apply to the initial facility.

Did the comfort letter carve out the further facility from the scope of the legal charge?

The judge once again applied ordinary principles of construction to the comfort letter, asking what, given the language used in the comfort letter, the reasonable reader with the background knowledge available to the parties at the time the comfort letter was executed would have understood it to mean. Applying these principles, the judge ruled that the comfort letter did not carve out the further facility from the scope of the legal charge. The comfort letter only referred to the guarantee as being limited, not the legal charge. In addition, the side letters confirming that the security documents were in full force and effect included the legal charge. Finally, Ashwood's board minutes referred only to limiting the guarantee, not the legal charge.

Were the claimants entitled to rectification of the comfort letter?

The judge stated that the party seeking rectification must show that:

  • the parties had a common continuing intention in respect of a particular matter in the instrument to be rectified
  • there was an outward expression of accord
  • the intention continued at the time of the execution of the instrument, and
  • by mistake the instrument did not reflect that common intention

The rectification claim failed as it could not be shown that there was a common continuing intention that the further facility be carved out of the legal charge.

The judge also commented that, in light of the fact that the comfort letter was a unilateral document, it would be essential that it was the intention of the bank that the comfort letter cover the legal charge as well as the guarantee. The judge felt that it could not amount to the intention of the bank without the requisite authority from a more senior officer and this was not sought or received.

Was the appointment of receivers in fact an appointment by the bank as agent for NAMA and therefore invalid?

The loans were transferred to NAMA prior to the bank making a formal demand against the McFeelys for repayment on 4 November 2011. On the same day the bank appointed receivers to the property pursuant to the Law of Property Act 1925, ss 101, s 109 and the terms of the legal charge.

It was submitted by the claimants that in appointing the receivers, the bank was acting as agent for NAMA and not on its own behalf. As a result the appointment of receivers was invalid, since it was an act of NAMA, and NAMA were not a party to the legal charge pursuant to which the receivers were appointed.

The court held that, under the terms of the Irish National Asset Management Act 2009, the bank held the property at the direction of NAMA (who had the economic interest in the property). The legal interest in the property remained with the bank (there was no formal assignment to NAMA) and accordingly no agency arose. The demand for repayment and appointment of the receivers was an act of the bank in accordance with the terms of the legal charge.

Why is this case useful for practitioners?

This case is a useful reminder of how a court will approach the construction of contracts, looking in particular at the slightly different approach where a document is registered (as will typically be the case with security documents). It also demonstrates the importance of ensuring that borrower clients understand the implications of an 'all monies' security document, especially when given in connection with a particular project when they may assume the charge applies only to lending relating to the project.

Although in this instance the email from the solicitor did not amount to a collateral contract or give rise to estoppel by convention, the case demonstrates the care that needs to be taken when corresponding with the other side, especially when making statements of fact.

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

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