Summary

Where the terms relating to the issue of mortgage-backed debentures gave the borrower an option to release a secured property in return for a prepayment of the debenture out of the sale proceeds, that prepayment was not a "mandatory repayment". As a matter of language and on the basis of commercial sense, it was a voluntary prepayment which properly gave rise to a Spens payment.

Facts

The claimant, which had issued mortgage-backed debentures, began Part 8 proceedings for declarations which involved construing the terms and conditions of the debentures, particularly a clause known as a "Spens clause".

The claimant was a company within the Canary Wharf group. It had issued the debentures to another of the group's companies (the borrower) under an inter-company loan agreement. The borrower then lent the sums to other group companies (the charging subsidiaries). The terms of the debentures were set out in a trust deed. The borrower's liabilities under the loan agreement were secured by charges over the group's properties which had been granted by the charging subsidiaries to the claimant and then sub-charged to the trustee. The group sold one of the properties in the securitised portfolio. Clause 17.20(a)(ii) enabled the release of a secured property upon the making of a specified prepayment. It was common ground that the sale took place pursuant to that provision. The borrower paid a proportion of the sale price to the claimant by way of prepayment. The claimant used the money to redeem some of the debentures early. The issue was whether it had effected the redemption under condition 5(b)(iv), which applied when the proceeds were a "mandatory repayment" arising from the release of mortgaged property, or under condition 5(c), which concerned optional redemption. The distinction between the two was significant because the former condition involved the payment of accrued interest, whereas the latter condition provided for the payment of an additional sum, which was described in some parts of the agreement as a "premium" and sometimes referred to as a "Spens payment". The claimant sought a declaration that payment had been under condition 5(b)(iv). The defendant debenture holders maintained that payment had been under condition 5(c).

Held

(1) Construction: A difficulty with the claimant's case was that cl.17.20(a)(ii) did not impose any obligation on the borrower to make a prepayment, it merely provided an option. The clause was stated to apply "if ... the borrower makes a prepayment of the loans in an amount sufficient ... ". It contained no imperative wording, unlike provisions intended to have mandatory effect, which used the word "shall". The fact that the borrower was obliged to make the prepayment out of the proceeds of sale simultaneously with the release of the security did not mean that it fell within the definition of "mandatory prepayment". There was no force in an argument that condition 5(b)(iv) and cl.17.20(a)(ii) were interrelated in subject matter and language, as they were not. A prepayment under cl.17.20(a)(ii) was a voluntary prepayment. The claimant had engaged in an optional redemption pursuant to cl.5(c) and a premium was payable (see paras 20-22, 24, 29, 31, 43 of judgment).

(2) Commercial sense of the provisions: The commercial purpose and effect of the securitisation was to provide the Canary Wharf group with long-termfinance while providing the debenture holders with the specified fixed rate of return over the same period. It would make a nonsense of that structure, and undermine the value and benefit of the debentures, if the claimant could redeem them at par at any time. It was not surprising that a premium became payable if redemption occurred via a voluntary payment (paras 34-36, 41-42).