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Anti-tacking and further advances - protecting a lender's security

Gateley Legal

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First come, first served

When it comes to who gets paid first with charges over land, the usual case is that the holder of the first charge registered at the Land Registry will be paid first out of the sales proceeds, regardless of when the charge was created.

This is why lender’s solicitors apply for a priority period before completion, to ensure no other charges are registered in the meantime.

As soon as a second charge is registered, and notice is served on the first chargeholder, the default position is that only the original debt secured by the first charge can be recovered out of the sales proceeds before any surplus funds go to the second chargeholder.

Please, sir, I want some more

If the first chargeholder then lends more to the borrower, these new funds will not benefit from the priority of the first charge (this loss of priority is known as anti-tacking) unless the charge is a legal mortgage and either:

  1. The first chargeholder was not given notice of the second charge;
  2. It was noted on the register at the Land Registry at the time the second charge was created that the first lender is under an obligation to make further advances or there is a maximum amount secured by the first charge that has not yet been exceeded; or
  3. An agreement is made between the chargeholders.

What is more?

One of the big questions surrounding this has always been what does and does not constitute a ‘further advance’. The case of Urban Ventures Ltd v Thomas and others[1] has now clarified what is meant by further advances. The first chargeholder Dunbar Assets plc (Dunbar) issued a new facility letter to the borrowers which was essentially on the same terms as the existing facility letter but rolled up the unpaid interest and fees.

When the borrowers went into administration, the second chargeholder argued that the rolled up interest and fees were a further advance and therefore should not benefit from the priority of Dunbar’s charge, due to the anti-tacking rules. They should instead fall behind the sums secured by the second charge in the priority hierarchy.

The court, however, held there was no further advance and all sums outstanding under the new facility had priority under the first charge. This was due to the fact no new money was actually given to the borrowers, and nothing had been paid under the existing facility.

The appeal judge explained his interpretation of further advances in simple terms:

“An advance is a payment of money on terms that it will be repaid…continuing or leaving outstanding an existing loan is not the making of a new or further advance.”

Get it agreed

Whilst this is helpful for lenders as facilities are often amended, restated or extended, each case would be looked at on its facts, should there ever be a dispute.

Negative pledge clauses are commonly used to prohibit the granting of further security and a restriction will usually be placed on the register when a charge is registered. This prevents anyone from registering a second charge without the consent of the first chargeholder.  When giving that consent, the easiest way to ensure that all money owed to the first chargeholder has priority of security is by an agreement with the other chargeholders, often by way of an intercreditor or priority deed which can also be registered at the Land Registry.

The ‘senior creditor’, often a bank or other commercial lender, will agree that their security and debt, no matter when the security was created or further funds are advanced, will rank ahead of the other ‘junior creditors’. The intercreditor deed can also prevent a junior creditor from enforcing its security without the prior consent of the senior creditor.

In summary

The best practice for a lender to preserve its security is to put such an agreement in place rather than relying on the limited statutory protection, and to ensure that proper restrictions are placed on the register to protect their charge and its priority.

[1] Urban Ventures Ltd v Thomas and others [2016] EWCA Civ 30

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