A recent Court of Appeal decision has provided some helpful discourse on a lender’s right to rely on cross security provisions in its loan and security documentation. This is to be welcomed by all lenders with the decision in question evidencing the Courts’ willingness to read contracts in light of the normal rules of interpretation when ascertaining the validity of cross security provisions. Although each case should be examined on its own unique set of circumstances, the Court of Appeal’s judgment represents an unequivocal restatement of cross security arrangements.
In AIB Mortgage Bank v O’Toole & Anor1, two brothers (the “Appellants”) entered into a loan agreement (the “First Loan”) with AIB Mortgage Bank (the “Lender”) and provided security (by way of mortgages/charges) in favour of the Lender to secure their obligations thereunder. Subsequently, a second loan was advanced by the Lender to the Appellants, and a third brother, on foot of a separate loan agreement (the “Second Loan”). No default of the First Loan had occurred. The Second Loan, however, was in default and was called in pursuant to a formal letter of demand.
Following on from the demand of the Second Loan, the Lender issued a formal demand of the Appellants in respect of the First Loan. The “event of default” entitling the Lender to make the demand was the alleged default on the part of the Appellants in repayment of the monies owing under the Second Loan. In other words, the Second Loan cross-defaulted the First Loan.
Prior to the letter of demand issuing for the First Loan, one of the brothers (“JOT”) had entered into a contract for the sale of one of the properties that secured the First Loan (the “Property”). Upon the closing of that sale, JOT remitted to the Lender the net proceeds of sale as redemption of the security over the Property alone and called on the Lender to discharge the relevant security. In this regard, redemption letters had previously issued to the Appellants representing that, upon receipt of the outstanding balances specified in the redemption letters, the charge registered against each secured property would be released. The redemption letters did not refer to the Lender’s rights of cross securitisation.
Subsequently, the surplus proceeds of sale in connection with the sale of the Property were released to JOT. It was at this point that the Lender realised its error and injunctions were sought preventing disposition of the remaining secured properties. The Lender claimed that the redemption letters were issued erroneously in that they should have referred to the cross obligations of the Appellants and to the full sum required to discharge the entirety of the monies due and owing by the Appellants to the Lender pursuant to the First Loan and the Second Loan.
The Appellants, both in the High Court and on appeal, in the Court of Appeal, attempted to rely on the equitable doctrine of consolidation and argued that, unless the Lender was in a position to comply with the strict requirements of that doctrine (which, it argued, the Lender was not), it could not consolidate both loans. The doctrine arises where two or more mortgages are made by the same mortgagor on different properties and are held by the same mortgagee or assignee (in the context of two or more loans). Where there has been a default by the borrower on one loan, the doctrine allows the lender to realise the entire secured assets against the full amount owing as opposed to limiting the recovery of the lender to the secured assets securing the non-performing loan only. Accordingly, in the context of redemption, where the mortgagor seeks to redeem only one of the mortgages, the lender can require the mortgagor to redeem both mortgages.
It was held in the High Court, and subsequently re-affirmed by the Court of Appeal, that the equitable doctrine of consolidation was not engaged and that it was never the intention of the Lender to invoke it. A more detailed analysis of the rationale behind the non-application of the doctrine to this case is beyond the scope of this note.
It therefore fell to examine the express terms of the loan agreements and related security. The Court scrutinised the definition of “secured monies” and also the covenant to pay provisions, and found that the Appellants had covenanted to pay all monies owing or incurred to the Lender on any account and in any manner whatsoever. The mortgages/charges further provided that the secured monies became immediately due and owing where the mortgagor failed to pay on the due date any money payable by him from time to time to the Lender. These provisions, when read in conjunction with the terms of the loan agreements and the general terms and conditions of the loans, provided resounding evidence that a valid cross security arrangement existed. In essence, the Second Loan was cross secured by the “all sums due” provisions contained in each mortgage/charge and all of the properties comprised within the First Loan remained as security in respect of the outstanding sums due on foot of the Second Loan.
Both High Court and Court of Appeal judgments paid particular attention to the express contractual terms of the security documents, an approach all lenders will draw comfort from. Whilst these Courts had to devote a significant amount of analysis to whether the equitable doctrine of consolidation applied to the particular facts of the case, ultimately deciding that it had not been engaged, the judgments nonetheless clearly endorse the validity of cross security provisions in loan and security documents where such provisions are clear and unambiguous.
1 2018 IECA 6