Canary Wharf Finance II Plc v Deutsche Trustee Company Ltd & Ors

In construing commercial contracts, the court must identify what a reasonable person with the relevant background knowledge would have understood the parties to mean. Commercial common sense may assist where the language permits competing constructions, but cannot displace clear and unambiguous wording. Construction is an iterative process, testing rival meanings against the contract as a whole and their commercial consequences. A prepayment which a borrower may elect to make in order to obtain the release of security is voluntary, even if the payment is made from sale proceeds and is practically necessary to complete the transaction. Redemption funded by that prepayment is therefore optional and may attract the contractual premium applicable to optional redemption.

The claimant issuer sought declarations concerning the redemption of fixed-rate mortgage-backed notes following the sale of a mortgaged property. Under clause 17.20(a)(ii) of the Intercompany Loan Agreement, the borrower could obtain release of the property by making a specified prepayment, subject to maintaining the required loan-to-value position.

The issue was whether that prepayment was a mandatory prepayment within condition 5(b)(iv) of the Notes Conditions, so that redemption occurred at principal value, or a voluntary prepayment producing an optional redemption under condition 5(c), which required payment of a Treasury Stock-based premium.

1. Construction principles. The court applied the principles summarised in Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900. The relevant exercise is to ascertain objectively what a reasonable person with the available background knowledge would have understood the language to mean. Where two constructions are possible, commercial common sense may favour one, but clear language must be applied. The exercise is iterative, testing rival meanings against the agreement and their commercial consequences.
2. The court also applied the caution in Arnold v Britton [2015] 2 WLR 1593 that commercial common sense and surrounding circumstances must not undervalue the language used. The iterative approach was considered consistently with In re Sigma Finance Corpn [2010] 1 All ER 571.
3. Nature of the prepayment. Clause 17.20(a)(ii) did not oblige the borrower to prepay. Its wording gave the borrower an option to make a sufficient prepayment to obtain release of the mortgaged property. The contrast with provisions using imperative language, and the availability of alternative security under clause 17.20(a)(iii), confirmed that the payment was voluntary.
4. The fact that the payment might be funded from sale proceeds did not make it mandatory. The contractual obligation to use sale proceeds arose from the conveyancing arrangements after the borrower had elected to make the prepayment, rather than from the Intercompany Loan Agreement itself.
5. The redemption was therefore an optional redemption under condition 5(c), not a mandatory redemption under condition 5(b)(iv). The commercial purpose of the securitisation supported that conclusion: permitting redemption at par whenever the property portfolio was sold would deprive long-dated fixed-rate noteholders of the value of their investment.
6. The claimant’s case was rejected. The defendants were entitled to declarations that the redemption required payment of the contractual premium and that £168,746,800, together with accrued interest, was payable to the Class A1 noteholders.