It is common practice for lenders to use an existing legal charge to secure a further advance. This practice is known as 'tacking'. The ability of lenders to 'tack' further advances on to an existing charge is vital to ensure that the lender retains priority over any subsequent legal charges. If 'tacking' were permitted without any control, it would severely prejudice the interest of second or subsequent charge holders.
In this article we look at a recent Court of Appeal decision, which examined whether 'tacking' had taken place as well as setting out some potential pitfalls for lenders.
In the case of Urban Ventures Ltd v Thomas & or, the Court of Appeal decided that the replacement of one lending facility with another did not amount to a new advance.
The case concerned two companies, Urban Ventures Limited (Urban) and Dunbar Assets plc (Dunbar), which had lent money to The Black Ant Company Limited (TBAC). Legal charges were secured over its freehold properties in respect of these loans. TBAC became insolvent and the issue was which company's charge took priority. This was important as it would determine which of the charge holders had first claim to the sale proceeds of the properties.
Section 48 of the Land Registration Act 2002 (the 2002 Act) provides that charges over registered land rank in the order of their registration. Dunbar was the first legal chargeholder, so, it would follow that its charge would rank in priority to Urban's charges. Section 48 is subject to the restrictions on tacking set out in section 49 of the 2002 Act. It was agreed that none of the situations set out in section 49(1) to 49(5) of the 2002 Act applied. The only other circumstance in which tacking is permitted is where a subsequent chargee has agreed (section 49(6).
If Dunbar's charge had priority, Urban would not recover the money that it had advanced. Urban argued that the issue of a series of new facility letters, which replaced and extended the term of the original first charge lending facility, amounted to tacking. As the tacking was not permitted under section 49, Dunbar could not claim priority for those further advances.
At first instance, the commercial court held that the new facility letters did not constitute a 'further advance' within Section 49 to give priority to a second charge over the properties.
The Court of Appeal agreed, stating that at the time of each new facility letter, no money was repaid by TBAC to Dunbar and no money was paid by Dunbar to TBAC. If a deemed repayment and new advance had been intended, this would have been stated.
The judge was not satisfied that the intention of the parties was to create a new contract. Even if there had been a new contract, it would not follow that there was a new advance. It would simply mean that there was a new contract relating to an existing loan.
Urban also tried to argue that the new facility letters referred to an amount that included unpaid interest, constituted a further advance. This argument was rejected by the court.
The Court of Appeal acknowledged that fees were payable on each renewal, and these were negotiated as part of the terms for each renewal. They were not payable under the original facility letter.
Unfortunately, the court declined to consider this point, as it would not have a bearing on the outcome of the case. Therefore, it is possible that fees payable on the renewal of a facility could constitute a further advance.
Where there is a second charge in place, a lender should ensure that it does not lose its priority in relation to any further money advanced to the borrower. Lenders will need to check that:
Contributor: Alexandra Holsgrove Jones
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at February 2016. Specific advice should be sought for specific cases. For more information see our terms & conditions.