Hayfin Opal Luxco 3 SARL & Anor v Windermere VII Cmbs Plc & Ors

In construing tradeable financial instruments, the contractual language has paramount importance. Commercial consequences may be evaluated, but hindsight and retrospective commercial common sense cannot justify departing from clear wording.

A court may add words by construction, or imply a term, only where the agreement is incomplete or commercially incoherent without them, the omission was inadvertent, and the proposed provision is sufficiently certain. A contractual mechanism for calculating interest must be applied according to its terms, including the priority given to payments under a post-default waterfall.

Where interest has been capitalised under the underlying loan agreement, it may reduce assumed available interest collections if the contractual calculation is cumulative. A provision dealing with cash-flow shortfalls does not ordinarily govern later-discovered miscalculations.

The claim concerned seven issues arising from the calculation of payments due on a Class X note in the Windermere VII commercial mortgage-backed securitisation. The claimants, as holders of the Class X note, challenged calculations made for the January and October 2015 payment dates.

The principal questions concerned the construction of the Senior Rate and Junior Rate provisions in an intercreditor agreement, the treatment of default interest and servicing fees under a post-default waterfall, the effect of capitalised interest under an underlying French-law mortgage loan, and whether any underpayment generated further interest or an event of default.

1. Construction and correction. The court applied the ordinary principles of contractual construction, with particular weight placed on the language of tradeable financial instruments and on evaluating rival interpretations in their commercial setting. The definitions of Senior Rate and Junior Rate were carefully constructed provisions central to the bargain. There was no sufficiently clear mistake, and it was not clear that the parties would have adopted the additional wording proposed by Hayfin. The court therefore declined to correct or imply those words.
2. January 2015 calculations. The assumed payment of default interest under the definition of Expected Available Interest Collections did not mean that the sums would be available to the Issuer. Under the post-default waterfall, default interest was subordinated to prior-ranking interest and principal payments. Sums applied to principal rather than interest did not qualify as Expected Available Interest Collections. Servicing fees and related costs payable first under the waterfall likewise reduced the amounts transferable to the Issuer and therefore reduced the relevant calculation.
3. Capitalised interest. On the cumulative basis assumed by the parties, the Issuer correctly reduced Expected Available Interest Collections to reflect interest capitalised under clause 22.3 of the Adductor Mortgage Loan Agreement and Article 1154 of the French Civil Code. The contractual power to capitalise interest formed part of the arrangements and its natural effect was to reduce unpaid interest while permitting compound interest thereafter.
4. Shortfalls and events of default. Condition 5(i) provided a mechanism for deferring amounts determined to be due where available collections were insufficient. It did not provide a general contractual rate of interest for subsequently discovered miscalculations. Conditions 5(c) and 5(d) meant that the amounts due and payable were those determined by the Cash Manager. A later-discovered miscalculation therefore did not create a Note Event of Default under Condition 10(a)(i).
5. The court expressed provisional views that applying the Class X Interest Rate to an underpayment would likely engage the penalty doctrine and might be exorbitant, but that issue was not finally determined. The claimants failed on the substantive issues, and the court directed counsel to agree declarations giving effect to its conclusions.