Mortgages and further advances

Mortgage finance comes in many shapes and sizes. The straightforward model of a single lump-sum loan secured by a charge is by no means universal. Things can become more complicated when securing loan monies paid in tranches or where an original loan is subsequently topped up with a further advance. The 'all monies' charge, where the borrower agrees to charge the property with 'all monies due from time to time' to the lender, is a common device for securing such additional borrowing.

However, problems can arise where the borrower has entered into later charges with other lenders. Such problems might only come to the fore where there is insufficient equity in the mortgaged property to repay all of the outstanding loans.This can give rise to questions of priority. For example, the first lender (A) lends £1m and the second lender (B) lends £1m. Both A's and B's loans are secured against a property, whose value is £2.5m. Later, A lends a further £1.5m to the property owner. The borrower defaults and both lenders seek to enforce their security. If A recoups all outstanding indebtedness to it from the sale proceeds, there will be nothing in the pot for B.

The process of adding further loans to existing security is known, historically, as 'tacking'. For obvious reasons of equity and fairness, the law has developed restrictions as to when a mortgagee can 'tack' further advances to its security. Those rules are now contained in section 49 of the Land Registration Act 2002 (LRA 2002) and section 94 of the Law of Property Act 1925 (for unregistered land).

Under section 49, there are four circumstances in which the proprietor of a registered charge may make a further advance on the security of an existing charge, which will rank in priority to a subsequent charge: if the further advance is made at a time when the mortgagee has not received notice of the subsequent charge; if it is made pursuant to an obligation which is recorded on the register when the subsequent charge is created (in accordance with rule 107 of the Land Registration Rules 2003); if the parties have agreed a maximum amount for the security which is entered in the register when the subsequent charge is created; and by agreement with the subsequent chargee.

The meaning of further advances was considered, for the first time, it seems, in the recent case of Re Black Ant Co Ltd (In Administration) [2016] EWCA Civ 30. A entered into a facility letter with the borrower company. It subsequently required the borrower to enter into new facility letters in respect of the same outstanding loan. During the intervening period, a further loan by B had been secured by a second charge. None of the circumstances in section 49 applied, so that if the new facility letters involved A making further advances, those further advances would rank behind B's charge. If they didn't, B's charge would rank behind A's, which would mean that there was insufficient equity from the relevant properties to repay B.

It was argued that the new facility letter brought about a repayment of the original loan and a new advance, even though there was no actual repayment or actual further advance of loan monies. At first instance, the deputy judge concluded that even if the new facility letter had created a new contract between the lender and borrower, the fact that the parties restate, or even vary, the terms on which the advance is made does not necessarily lead to a further advance for the purposes of the priority of the charge.

The Court of Appeal agreed. Similarly, it was held that unpaid interest under the original facility letter, which was added to the account and capitalised in the later facility letter, did not amount to a further advance. The interest was an amount secured by the original charge, which was contractually due under the original charge. It was not an advance or payment of further or additional funds when the later facility letter was entered into.

Although of historic origin, the rules on tacking further advances remain important. In high-value commercial lending, where further advances are required, the lender will usually require deeds of priority or intercreditor agreements, which deal with priority issues by agreement. Absent such agreement, a lender can take advantage of the priority rules in section 49 by recording an obligation to make further advances on the register or by stipulating a maximum amount of the security and recording it on the register.

That said, there are other less obvious scenarios where the tacking rules might apply. One such situation is where a loan is drawn down in instalments. It is arguable that each subsequent instalment is a 'further advance', such that a second charge entered before all instalments are drawn down might take priority. This view is not inconsistent with the decision in Re Black Ant Company.

The dearth of modern-day authority on the application of the rules for the tacking of further advances should not disguise the potential pitfalls for lenders. If section 49 is not followed, a lender could well find itself caught out.

Adam Rosenthal, pictured, and Greville Healey are barristers practising from Falcon Chambers @FalconChambers1 www.falcon-chambers.com