Any lender with a first mortgage can add advances onto its debt, in priority to other registered interests, where;
• There is an agreement in place between chargees, or
• He has no notice of subsequent interest (and his charge so permits), or
• There is a contractual obligation in the mortgage to make further advances.
This is known as the doctrine of “tacking”.
But what happens when a lender has renewed the loan facility without seeking the agreement of a subsequent charge holder. It is quite common in renewals for interest to be rolled up, capitalised, and for renewal fees to be applied to the account.
Is the priority of the renewed facility, and the charges within, vulnerable to subsequent charge holders?
Well, the Court of Appeal has this month provided some useful guidance to clarify the position.
In the matter of Urban Ventures -v-Thomas, the Court gave careful consideration to the meaning of “further advances” in the context of anti-tacking provisions and in particular, circumstances where the original loan facility has been renewed.
The Court held that a renewal will not amount to a new replacement advance, (i.e. losing priority) even where accrued but unpaid interest and fees have been added and included in the new principal sum under the new facility, in cases where;
1. No money had passed to the borrower on renewal.
2. There was no understanding between lender and borrower that the principal had been repaid and another loan re-lent.
3. The capitalised interest represented interest not yet paid, which interest fell to be secured by the first legal charge.
Clearly it is preferable to have all registered chargees enter into a Deed of Priority or Inter-Creditor Agreement to prevent disputes between registered charge holders over amounts and priority. In so doing, enforcement is more easily regulated. But it does remain open to dispute that fees charged on subsequent renewals (which do not arise under the terms of the original facility letter), might be considered outside the context of these provisions, (therefore unable to be tacked onto the original mortgage debt in priority to second or subsequent security).
So where an original facility agreement does allow for renewals of facility, take care to set out the level of renewal fees, and other terms for renewal, to avoid potential dispute by subsequent charge holders over priority.