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Mortgagee’s priority for further advances

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Summary: The renewal of a mortgage loan beyond its original repayment date, on substantially the same terms, and without any new money being advanced, is not a “further advance”. Consequently, a second mortgagee will continue to rank behind the renewed loan.

Re The Black Ant Company Ltd (in administration); Urban Ventures Ltd v Thomas [2016] EWCA Civ 30 (29 January 2016)

 

Background

On 26 October 2006, Black Ant Company Ltd ('Black Ant') granted an “all monies” legal charge to Dunbar Bank plc ('Dunbar') over a development site at 172-176 Balham High Road SW12. By a facility letter dated 28 September 2006, Dunbar had agreed to lend Black Ant £2.47m to refinance its previous borrowings on the site. The facility was repayable on demand, and in any event no later than 30.06.2007. The facility was renewed by a series of 8 letters: (1) 28.06.2007, (2) 01.02.2008, (3) 16.09.08, (4) 29.12.2008, (5) 26.03.2009, (6) 30.06.2009, (7) 30.09.2009 and (8) 22.12.2009. Renewal 5 incorporated Dunbar’s latest standard terms, and recorded the Facility amount as £2.59m (representing the original advance plus accrued interest and costs). Paragraph 14(ii) read: “This offer is in substitution of and not in addition to all our previous Facility letters to you which shall be deemed cancelled”. Renewals 6, 7 and 8 were in the same form as renewal 5, apart from the loan amount being increased to cover rolled-up interest and renewal fees. Otherwise, no new money was advanced by Dunbar to Black Ant after the original advance on 26 October 2006.

 

On 21 December 2006, Black Ant had granted a second charge to Urban Ventures Ltd ('Urban'). Urban claimed priority over Dunbar, arguing that the renewal letters operated as “further advances” made by Dunbar after it had received notice of Urban’s second charge.

 

Decision

The court affirmed the decision of the High Court, and held that the renewal letters did not constitute “further advances”. Dunbar therefore retained its first ranking priority ahead of Urban. Rolled-up interest and renewal fees were also held not to be a “further advances”.

 

The decision itself is to be welcomed. The main reasons were (a) there were no accounting entries of any repayments and re-advances, (b) the obvious purpose of the renewal letters was merely to introduce Dunbar’s up to date standard terms, and (c) even if the renewal letters had taken effect as the rescission of one contract and its replacement by another, they still related to the same original advance. There had been no new advances at all.

 

BLP comment

It is not uncommon for loans to be extended or rolled over beyond the original repayment date, and to continue to be secured by the original security. If Urban’s claim had succeeded, a reassessment of lending practices might have been required. Query whether the position would be the same if a variation involved the introduction of a different lender (for example, a new lender under the “novation” method of transfer under LMA documentation).

This was not a new point. Back in 1981, the Privy Council had held that that the words “further advance” in a guarantee meant “the furnishing of an additional principal sum”. They did not include “a transaction under which money being already available to a debtor, he becomes entitled to retain it for a period beyond that for which it would have been available to him”.

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