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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.
Re Black Ant Company Ltd (in administration and another case  EWHC 1161 (Ch),  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).
Under the normal rules on priority if:
(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.
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:
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.
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:
The High Court dismissed Urban's application.
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:
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:
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'.
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) .
If you are a LexisPSL Subscriber, click the link below for further information on security:
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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