Casenote: Canary Wharf v Deutsche Trustee Company Ltd [2016] EWHC 100 (Comm)

The issuer of a commercial mortgage-backed securitisation was obliged to pay a premium of £169 million to redeem bonds early in accordance with a ‘Spens’ clause. The judge first applied the natural and ordinary meaning of words used in the contract and then tested this against “commercial common sense”.   

A valuable property forming part of the portfolio of a commercial mortgage-backed securitisation was sold and the proceeds applied by the issuer to redeem bonds. The issue arose as to whether the prepayment was 'mandatory', in which case the bonds were redeemed at par, or 'optional', in which case a significant premium of some £169m was payable (a 'Spens' payment). The securitisation used a whole-business structure: a special purpose borrower made a loan to companies in the originator group secured by mortgages over commercial property. The borrower financed the loan by an intercompany loan agreement (the "ICLA") with the issuer, another special purpose vehicle, which in turn financed itself by issuing bonds.  

Phillips J held that the repayment was optional and so a premium was payable. He cited Rainy Sky v Kookmin [2011] UKSC 50 and also the warning in Arnold v Britton [2015] UKSC 36 not to lose sight of the primary importance of the language used in the relevant provisions.

Phillips J then considered the rival interpretations of the relevant terms of the bonds and held that the language was 'clear and unambiguous' in pointing to the repayment as being optional, so that a premium was payable. In particular, there was no express requirement to make the repayment – it was something that the issuer could do voluntarily, if it wished to remove property from the securitisation.

The issuer argued, among other things, that it would make no sense for the issuer not to be under an obligation to use proceeds from sale of a property to repay the noteholders – otherwise money could simply sit in the securitisation with the issuer, contrary to the purpose of a securitisation. Phillips J rejected this argument briefly as third in the list of issuer arguments – even though the issuer had described it as their strongest point. He held that there was an implied term in the ICLA requiring the issuer to use the proceeds to make a voluntary repayment.
Phillips J then dealt with commercial common sense – strictly obiter and for the sake of completeness. He held that the relevant distinction was between repayments arising from matters outside the issuer's control and those within its control. A premium was required for the latter. Sale of part of the securitised portfolio was within the issuer's control and so required a premium.  The bonds paid a fixed coupon of 6.455% and had a legal maturity of 2033.  The rationale for the Spens clause was to ensure that holders were not prejudiced if the issuer chose to redeem some or all of the notes early and was designed to place them in a position they would have been if the notes had remained in place, by reference to the extra interest the bonds would have earned compared to a risk-free investment return.

The broad question arising from this case is: has Arnold v Britton [2015] UKSC 36 made a difference to contractual interpretation or does the judge merely cite it and then do what he would have done anyway? In fact, Phillips J carefully separated the textual analysis from considerations of commercial common sense and decided the case on the former, suggesting a new wariness of over-reliance on commercial common sense.

As to the particular result, one point of weakness is the implication of a term in the ICLA, with limited justification or discussion, imposing a requirement on the issuer to use sale proceeds to repay the issuer. Use of proceeds is one of the key elements of a securitisation, dealt with exhaustively in the priority of payments and elsewhere. So there should be little scope to imply terms of this nature and any implication should follow a thorough analysis.