In this legal update we explore the implications for first ranking lenders of restating original facility agreements.
In the recent case of Black Ant Company Ltd (in administration) , the High Court held that the holder of a first ranking charge did not lose priority when restating its original facility agreements and rolling up amounts of unpaid interest and fees due under them.
The court considered the meaning of the term 'further advances' to determine whether the first ranking charge holder had lost priority due to the 'anti-tacking' provisions contained in the Land Registration Act 2002 (the "Act") which limit a lender's ability to secure further advances with existing security.
Priority of further advances
A first ranking lender will want its security to secure all amounts advanced to the borrower whether at the time the security was originally entered into or at a later date when further advances are made. The priority of advances made at the time the security was originally entered into is straightforward but the securing of those further advances (known as 'tacking') is restricted by law in order to protect the position of subsequent chargeholders.
Where a subsequent charge has been registered, the 'anti-tacking' provisions contained in sections 49 - 50 of the Act effectively limit the lender's priority in relation to further advances to those that it was obliged to make at the time of charge (or that are within a limit agreed by lender and borrower) and only then if that obligation or agreement was recorded on the register. Outside of these restrictions, priority for further advances is only given with the agreement of the subsequent chargeholders.
Black Ant Company Ltd (in administration)  EWHC 1161 (Ch)
In this case, Lender 1 and Lender 2 held a first and second legal charge respectively over properties owned by a company in administration. After Lender 2's charge had been registered, Lender 1 entered into new facility letters with the company in order to extend the term of the facilities, roll up interest and fees that were due under the original facilities and put the facilities on Lender 1's new standard form. No additional money was lent and the loan was not repaid. The lenders agreed that Lender 1 had no obligation to make further advances.
Lender 2 argued two points. Firstly, that the language in the new facility letters implied the original advance had been repaid and that therefore the new loan was a further advance. Secondly, that by allowing interest and fees to remain unpaid and be rolled up, Lender 1 had made a further advance. It asserted that as a result, Lender 1's new loan ranked behind its own and that Lender 1 was not entitled to tack on the interest and fees to its security.
The High Court held that 'further advances' had its ordinary meaning of 'an advance of further or additional funds', which led the court to dismiss Lender 2's argument. In relation to Lender 2's first argument, the court held that the purpose of the new facility letters was to update the terms of Lender 1's existing advance and no 'further advances' had been made. In relation to the second argument, the court held that the rolled up interest and fees could not constitute a further advance, as they were simply contractual amounts due under the original advance and were secured by Lender 1's charge.
Reassurance for lenders
This decision is reassuring for first ranking lenders who are simply restating their facilities to extend the term, roll up unpaid interest and fees in respect of the original advance or put the facilities on its new standard terms, as it confirms that they should not lose their priority position.
The case highlights the importance of intercreditor agreements to address the treatment and priority of future advances and the extent to which underlying facility documentation can be varied without affecting each lender's security.