The meaning of 'further advance' in the context of land registration legislation

 In Re Black Ant Company (in administration) the High Court considered the meaning of 'further advance' within the meaning of the rules on tacking and further advances contained in the Land Registration Act 2002.

Original news

Re Black Ant Company Ltd (in administration and another case [2014] EWHC 1161 (Ch), [2014] All ER (D) 122 (Apr)

The proceedings concerned a dispute between two companies that had charges over the same property. An issue arose as to which of the charges had priority. The applicant company applied for a declaration that its charge would take priority. The Chancery Division dismissed the application and gave consideration to the meaning of a 'further advance' within the Land Registration Act 2002, s 49 (3) (LRA 2002).

What is tacking?

Under the normal rules on priority if:

  1. a debtor grants security to a lender (A) to secure all monies lent to it by A from time to time, and A, on the basis of that security, lends some but not all of the loan, and
  2. the debtor later grants security to another lender (B) to secure all monies lent to it by B from time to time, then
  3. if, with knowledge of B's security, A continues to advance money to the debtor, B will take priority over A in relation to all those amounts lent by A after it was aware of B's security

(Hopkinson v Rolt [1861-73] All ER Rep Ext 2380)

In this situation, 'notice' means actual notice.

The rationale behind this outcome is that A is not obliged to make further advances to the debtor if it is not satisfied with second-ranking security in respect of those advances. This principle can be criticised on the basis that B could also choose not to advance money to the debtor if it is not happy about the existence of the first security. Nevertheless, it is clear that priority is only given to the first security insofar as it secures money which is actually owed to A at the time A received notice of the later security. In such circumstances, A would be well advised to negotiate a contractual priority arrangement with B to govern the order of priorities between them.

'Tacking further advances' refers to the process by which a secured creditor may attempt to get around the outcome above by adding a further advance to an initial advance without creating new security for the further advance.

How do the rules on tacking further advances apply to security over land?

There are statutory rules on tacking further advances to security over land. The relevant statutory provisions are, in respect of registered land, the LRA 2002.

These provisions enable a secured creditor to tack further advances to existing security, even where it has notice of competing security at the time it makes a further advance. The rules provide that, if the first secured creditor is under an obligation to lend further money, any security which it has over land will rank ahead of a later security interest even if the first secured creditor had notice of the competing security when it lent additional money, provided:

  1. the further advance is made at a time when the prior secured creditor had received no notice from the subsequent secured creditor of the creation of the subsequent charge (LRA 2002, s 49(1))
  2. the further advance was made pursuant to an obligation to make further advances and that obligation was entered in the register in accordance with the LRR 2003 at the time of the creation of the subsequent charge (LRA 2002, s 49(3) and Land Registration Rules 2003 SI 2003/1417, r 108)
  3. the prior secured creditor and the debtor have agreed a maximum amount which the charge secures and that agreement was entered in the register in accordance with the LRR 2003 at the time of the creation of the subsequent charge (LRA 2002, s 49(4) and LRR 2003 SI 2003/1417, r 109), or
  4. the prior secured creditor has entered into a priority arrangement with the subsequent secured creditor (LRA 2002, s 49(6))

How did the High Court interpret the meaning of 'further advance'?

In Re Black Ant Company (in administration) the High Court considered the meaning of 'further advance' within the meaning of the rules on tacking and further advances contained in the LRA 2002.

The facts in the case

In this case, two secured creditors (Dunbar and Urban) had security over properties owned by companies in administration (the debtors). Dunbar held a first legal charge. Urban held a second legal charge. Both Dunbar and Urban had advanced loan facilities to the debtors.

After Urban's charge had been registered at the Land Registry, Dunbar asked the debtors to sign a new facility letter replacing the original facility letter. No new money was lent and there were no accounting entries of any kind showing a notional repayment of the original advances or the making of any further advances. The debtors failed to repay the amounts owing under the facility letter (including interest and fees which Dunbar added to the debtors' accounts).

The issue was which of Dunbar and Urban had first claim to the proceeds of sale of the charged properties.

Dunbar had registered an obligation to make further advances in accordance withLRR 2003, r 108. However, all parties acknowledged that no such obligation existed in the documentation so the registration was of no effect.

The High Court was asked to look at the meaning of 'further advance' within LRA 2002, s 49(3) and determine:

  1. whether the effect of the new facility letter was to deem the original advances repaid and further advances made so that the effect of Dunbar substituting the new facility letter for the old one was to deprive it of its priority, and
  2. whether Dunbar debiting unpaid interest and fees to the debtors' accounts (ie 'rolling up' the interest) represented 'further advances' in respect of which Dunbar could not claim priority since the protection offered by LRA 2002, s 49(3) only applies if the further advance was made under an actual obligation to make it and Dunbar had no obligation under the facility letter or the terms of the security documents to let them remain unpaid

The decision

The High Court dismissed Urban's application.

What did the court say about the meaning of 'further advance'?

The High Court noted that there was no directly relevant authority on the meaning of 'further advance' so it was necessary to start with the language of the statutory provisions and their purpose.

The judge said that the ordinary meaning of 'further advance' is 'an advance of further or additional funds'. As regards the purpose of the statutory provisions, the judge considered that it was 'to ensure that priority is not obtained for an advance which a second mortgagee who had received truthful replies to normal enquiries would not know that the first chargee had made or was under an obligation to make'.

The High Court held that the facility letters must be interpreted on usual principles (ie by reference to the ordinary meaning of the words used taking into account their purpose and the relevant background). On that basis, the court held that:

  1. the facility letter did not state that it was to give rise to a deemed repayment and further advance (as might have been expected if that had been the intention)
  2. such a deemed repayment and further advance would serve no useful commercial purpose whatsoever—in fact its sole effect would be to destroy Dunbar's priority which was unlikely to have been Dunbar's intention
  3. the obvious purpose of the new form of facility letter was to subject the existing advance to Dunbar's up-to-date terms, and
  4. the fact that the account showed no credit and debit entries, reflecting a repayment and a new advance, suggested that no such repayment and new advance took place

On the basis of a clause in the new facility letter which provided that 'this offer is in substitution of and not in addition to all our previous acility letters to you which shall be deemed cancelled', Urban argued that:

  1. the original contract had been rescinded in favour of a new contract on the terms of the new facility letter (relying on Morris v Baron [1918] AC 1), and
  2. if there was a new contract, it necessarily followed that the original advance should be deemed to be repaid, and a new advance made

The High Court rejected this argument and distinguished Morris v Baron, stating that it was clear that the parties in Re Black Ant Company (in administration) were slightly altering the terms of the contract so that they complied with Dunbar's up-to-date standard terms, rather than creating a new contract.

The court also considered that rolling up unpaid interest and fees could not sensibly be regarded as the making of a further advance. The judge noted that:

'The unpaid interest and fees are just amounts secured by the terms of the charge, which are contractually due in respect of the original advance and by the express terms of the facility letter they form part of the indebtedness'.

What are the lessons from this case?

This case provides useful insight into the meaning of 'further advance'.

It should also provide some comfort to secured creditors with first-ranking security that they will not ordinarily lose their priority position if they take steps to vary the terms of an existing transaction to update standard terms and include rolled up interest and fees in respect of original advances (a 'common enough situation' in the court's view) .

Further reading?

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Enforcement - security over land (Subscriber access only)

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Kate Gaskell, solicitor in the Lexis®PSL Banking & Finance team.

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