Dominion Corporate Trustees Ltd& Anor v Capmark Bank Europe Plc

A trustee’s equitable right of indemnity and lien over trust assets does not rank ahead of a mortgage merely because the mortgage was granted in the trustee’s capacity as trustee. Priority depends on the proper construction of the security instrument. A general limitation of trustee liability does not reserve the trustee’s lien or alter an express order of application of enforcement proceeds. An implied term giving priority cannot be added where it contradicts the instrument’s express provisions or is unnecessary to give effect to the parties’ presumed intention. The fact that such protection might have been commercially reasonable is insufficient.

The claimants were trustees of a Jersey property unit trust holding commercial premises. They had granted the defendant a debenture securing a term loan, including a first legal mortgage over the property. Following default, receivers sold the property for insufficient proceeds to discharge the secured loan in full.

The trustees claimed an indemnity from the trust assets for unoccupied property rates and a possible liability to Royal Mail. They sought a declaration that their equitable lien and right of indemnity ranked ahead of the bank’s mortgage. The issues were whether the debenture gave that priority expressly, particularly through clause 17.6, and whether a term to that effect should be implied.

1. Claim dismissed. The trustees’ lien and rights of indemnity did not rank in priority to the bank’s mortgage.
2. The debenture was construed as a whole. Clause 2.1.1 charged the property itself by first legal mortgage, without reserving the trustees’ lien. Clause 11 prescribed the order in which enforcement proceeds were to be applied: enforcement costs first, secured liabilities second, and only the surplus to the trustees. Clause 17.6 limited the trustees’ personal liability and recourse to the trust assets; it did not alter the priority of the mortgage or reserve the trustees’ lien.
3. The use of the expression “Trust Assets” did not make the property, or part of it required to satisfy the trustees’ indemnity, cease to be trust property. The property charged was the freehold property itself, rather than a lesser interest subject to the trustees’ lien.
4. Sections 105 and 107 of the Law of Property Act 1925 could assist the trustees only if their rights already constituted a prior encumbrance. They did not establish that priority.
5. The proposed implied term failed. Applying A-G of Belize v Belize Telecom Ltd [2009] 1 WLR 1988, implication is part of construction and requires necessity to give effect to the instrument’s presumed meaning. It is insufficient that the term would have been reasonable. The proposed term contradicted clause 11, and the absence of any express priority provision was significant. The parties might have negotiated different protection for the trustees, such as an indemnity from the beneficial owners.
6. The circumstances relied on by the trustees, including their limited commercial role and the bank group’s interest in the transaction, did not justify a contrary construction or implication.