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Within the bridging market, it’s not uncommon for loans to be advanced on a syndicated basis.
Syndicated loans can be advanced as a single charge with a security trustee, with the funding partners involved agreeing terms of their relationship by discreet syndication agreement.
Such a model has the appeal of keeping the details of the funding participants discreet from the mortgage borrower and off the title, which is public record.
In a 2023 case where a security trustee settled a mortgage at less than contractual value, leaving a junior funder out of pocket, the duties owed between senior and junior syndicators have recently been examined in the High Court.
The claim arose from a £2.75m bridging loan that had been agreed to provide the borrower for the refinance of a property.
The totality of finance for the loan was provided by two funders. The senior funder provided £2.4m of the capital, with the junior providing the balance to make up the total loan advance.
The beneficial interest in the loan was assigned to the two funders in the proportion of capital advanced, with the nominal lender remaining the in place as security trustee.
The parties, which included the nominal trustee in whose name the loan facility was written, entered a separate security trust deed which governed their relationship and how the securities held for the loan, or monies arising from the facility, were to be dealt with.
In this agreement, the senior funder had effective control over debt administration with the power, exercisable on default by the borrower, to require the trustee to resign and assign the legal interest.The documents also provided, in respect of monies arising, that the senior lender interest be repaid in first priority.
The loan ran into default. The senior lender exercised its powers, and the loan was assigned. The assignee agreed a settlement with the mortgage borrower, at £3.5m, a figure which was just short of the amount to clear the senior interest but leaving nothing for the junior funder.
This may well have been sensible commercial settlement. However, the junior funder argued that the securities should have been enforced, and had they been, then a sale of the assets would have raised £5.7m, a disposal at that level would have been sufficient to settle both interests.
The junior sought to recover their losses.
They argued that they were owed fiduciary duties and/or equitable duties analogous to those of a mortgagee when exercising a power of sale. Simply put, steps had not been taken to obtain the best price reasonably obtainable, as any mortgagee would have to undertake to protect the next.
There was also negligence in accepting the borrower’s offer when a better outcome was available.
These claims failed and the High Court determined that the junior creditor was not a mortgagee as such and could not assume the rights of one and in any event, the assignee did not exercise a power of a sale.
The claimants were unable to identify any express duties as claimed, in the security trust deed, nor could these be implied on the facts. The mere existence of loss suffered was insufficient.
This case illustrates a host of issues, and takeaways for lenders and syndicators. The complexity around syndicated lending and the need for every syndicator to fully understand and agree the terms of the relationship. Each relationship is by its nature a commercial one.
So always apply the ‘what if’ principle, when agreeing fundamentally crucial terms such as priorities, control, administration.
The decision also provides useful guidance on the narrow scope and application of the mortgagee’s duty to obtain the best price reasonably obtainable for the secured asset, and the limited circumstances in which, and the range of parties to whom, that duty is owed.
Might the result have been different had there been a sale, and the junior funder could have relied on a sub-charge?
Jonathan Newman, Senior Partner