JAK Property Jersey Limited v Together Commercial Finance Limited

In construing a deed of priority, the court must undertake a unitary, objective assessment of the language, relevant background and commercial consequences. Commercial common sense may assist where rival constructions exist, but cannot override clear language or retrospectively improve a bad bargain.

A provision stating that a junior lender’s debt will be paid when its loan ends does not necessarily alter the priority of the parties’ security. Its purpose may be only to prevent subordination of the underlying debt, while leaving the agreed priority of the charges intact. Rectification for common mistake requires a continuing common intention, an outward expression of accord, continuation of that intention at execution, and a document which by mistake fails to record it.

JAK and Together both lent to Mulbury Homes and took charges over the same property. Under a deed of postponement, the Together charge was expressed to rank ahead of the JAK charge.

Clause 13 provided that, if the term of JAK’s loan ended before Together’s, sums due under the JAK charge would be paid to JAK in accordance with its loan agreement, notwithstanding Together’s priority. JAK contended that this reversed the priority of the charges. Together contended that it merely confirmed that the underlying debt was not subordinated.

The principal issue was the proper construction of clause 13. Alternatively, Together sought rectification for common mistake.

1. Construction. Clause 13 was sufficiently unclear to require consideration of the wider contractual and commercial context. It could support either a reversal of security priority or a provision preventing subordination of the underlying debts.
2. The objective commercial purpose of the arrangements was to enable development finance to be provided on the basis of unencumbered first-ranking security for Together. JAK’s construction would permit a race to terminate the respective loan agreements and would substantially undermine that purpose. The Development Services Agreement, particularly clause 19.4, reinforced this conclusion and was reasonably available background.
3. The wording of clause 13 referred to payment of sums due and payable, rather than enforcement of the JAK charge. Other provisions, including clauses 8, 10 and 12, also supported Together’s interpretation. Any presumption against surplusage required caution and had little force in the circumstances.
4. The proper interpretation was that Together’s charge retained priority over JAK’s charge in relation to the sale proceeds. Clause 13 merely clarified that JAK’s underlying debt was not itself subordinated and did not prevent JAK from recovering that debt, subject to the priority governing enforcement of its charge.
5. Rectification. Alternatively, Together established that the parties had a common continuing intention that Together’s charge should have unqualified priority; that intention had been outwardly expressed, including through the parties’ correspondence; it continued at execution; and clause 13 failed by mistake to record it. The proposed wording in paragraph 63 accurately reflected the parties’ true agreement.
6. The declaration sought by JAK was refused. Together had first call on the retained proceeds of sale.