New facility letters: who has priority?

When trying to enforce security over property, it is important for a lender to consider the order in which the proceeds of sale will be distributed – a matter decided by the priority of any charges that exist. The general rule is that whichever legal charge is entered onto the charges register has priority, but this isn’t always the case.

Scenarios where priority may be different 

• Where the holder of a first legal charge (which secures further advances) has not been notified of the existence of a second legal charge, any further advances made by the first chargeholder will take priority over the second legal charge. 
• Where the holder of a first legal charge is obliged to make further advances or is subject to an agreed maximum, and this is noted at the Land Registry, any additional advances under that charge (up to the maximum amount) will take priority. 
• A deed of priority is entered into between chargeholders, setting out their respective priority. This should be registered at the Land Registry.

Black Ant Co Ltd (in administration) (2014) High Court

The case of Black Ant dealt with a scenario where, with the borrower in administration, there was a dispute between two lenders over whose charge over the borrower’s property had priority.

The first chargeholder (Lender 1) had entered into a new facility letter with the borrower, which replaced the original facility letter, extended the term of the facility, and rolled up unpaid fees and interest into the outstanding loan. No payment of the existing loan was made, and nor was any further advance made.

The second chargeholder (Lender 2) argued that the new facility letter was in fact a repayment of the existing loan and advance of a new loan. As a result, Lender 2 asserted that the further loan ranked after the loan secured by Lender 2’s charge, and that they should be repaid first.

The court however dismissed this. It concluded that the reasonable reader of the new facility letter with knowledge of the facts would not find that further advances had been made. This was the case even though the new facility letter contained the words “this offer is in substitution of and not in addition to all our previous facility letters to you which shall be deemed cancelled”.

As this matter has so far only been before the High Court, there is potential for it to be appealed – so watch this space!