Out-Law News 3 min. read

Amendment to loan letter does not affect priority of security, Court of Appeal confirms

Amending a loan letter to reflect the current balance owed under an agreement does not rescind the original contract, and so does not destroy a particular creditor's security over the debt, the Court of Appeal has confirmed.

The court's judgment confirms that of the High Court in 2014, when it rejected property developer Urban Ventures' attempt to have its debt take priority over that of lender Dunbar Assets when a company went out of business.

Urban Ventures had argued that a 2009 loan letter replaced and rescinded the original 2006 loan letter, meaning that the original loans should be treated as having been repaid and then advanced again.

Commercial disputes expert Suzie Boyd of Pinsent Masons, the law firm behind Out-Law.com, said that the Court of Appeal's decision was a "commercially sensible" one, which recognised that "straightforward amendments to the standard terms of a facility to reflect a current balance rather than any additional borrowing were not a further advance which destroyed the priority of security".

"In determining the effect of a subsequent facility letter, the court looked to the purpose of the facility and the natural interpretation of the parties' intentions," she said. "In this instance, it was clear that the parties knew there was to be no new drawing under the facility and there was an absence of any new advance."

The case involved two insolvent property companies, The Black Ant Company Ltd (TBAC) and Billsop Properties Ltd (Billsop), which had been lent money by Dunbar Assets and Urban Ventures.

TBAC owned three properties, and Billsop one property. Dunbar made a loan to TBAC and Billsop with those properties as security at an earlier date than Urban Ventures did. This meant that when TBAC and Billsop became insolvent and the properties were sold by the administrators, Dunbar's debt had priority over that of Urban Ventures.

Dunbar's first legal charge over the TBAC properties dated back to September 2006. After the charge was executed, Urban Ventures agreed to lend two separate amounts to the company. Under the 2002 Land Registration Act, charges over registered land rank in order of their registration.

The loan by Dunbar to TBAC was extended by a series of letters. In March 2009, Dunbar issued a new facility letter in similar terms for the purpose of "continu[ing] to fund your existing borrowings". This letter stated that the offer was "in substitution and not in addition to all our previous facility letters to you which shall be deemed cancelled". However, the only difference between the September 2006 and March 2009 letters was the amount of accrued but unpaid interest. The March 2009 letter did not contain any additional lending.

In his judgment, Lord Justice Richards said that it was irrelevant whether the March 2009 letter varied the original facility letter or merely replaced it. The question was simply whether a "new or further advance" had been made by Dunbar to TBAC. Agreeing with the trial judge in a unanimous decision, he concluded that there was not.

"So far as relevant for present purposes, an advance is a payment of money on terms that it will be repaid, in other words a loan," he said.

"In this case, as is common ground, no monies were repaid by TBAC to Dunbar and no monies were paid by Dunbar to TBAC pursuant to the facility letter dated 26 March 2009. Nor did the parties agree that TBAC should be treated as repaying the existing loan, with Dunbar immediately re-lending that amount to TBAC. There is nothing in the facility letter dated 26 March 2009 to that effect. Continuing or leaving outstanding an existing loan is not the making of a new or further advance," he said.

Commercial disputes expert Suzie Boyd of Pinsent Masons said that as well being commercially sensible, the Court of Appeal's decision could also be of assistance to lending banks bringing negligence claims against advisers arising from facilities which were extended by the issue of new facility letters.

"When defending these claims, valuers may sometimes look to argue that where a loan has been redeemed by a lender when issuing a second loan, no loss arises to the bank under the first loan," she said.

"Whether this argument is viable will be a question of fact, and it was not an argument before the court in this judgment. However, in this case, even though the second facility letter expressly stated that the previous facility letter was cancelled, the court found that it was an extension of the first loan and not a second loan," she said.

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