CBRE Loan Servicing Ltd v Gemini (Eclipse 2006–3) Plc and Others
| Jurisdiction | England & Wales |
| Judge | Mr Justice Henderson |
| Judgment Date | 07 October 2015 |
| Neutral Citation | [2015] EWHC 2769 (Ch) |
| Date | 07 October 2015 |
| Docket Number | Case No: HC-2014-001763 |
| Court | Chancery Division |
[2015] EWHC 2769 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Rolls Building
Royal Courts of Justice
Fetter Lane, London EC4A 1NL
Mr Justice Henderson
Case No: HC-2014-001763
John Brisby QC and Sharif Shivji (instructed by Paul Hastings (Europe) LLP) for the Claimant
Richard Lissack QC and Farhaz Khan (instructed by Taylor Wessing LLP) for the 9th Defendant
Richard Sheldon QC and Sue Prevezer QC (instructed by Quinn Emanuel Urquhart & Sullivan LLP) for the 10 th Defendant
Hearing dates: 22 and 23 April 2015
Introduction
This case raises a short question of construction of a contractual provision contained in a complex securitisation structure which was set up in 2006.
In outline, the securitisation related to a bank loan of £918,862,500 ("the Loan") advanced in August 2006 to a number of Guernsey-registered limited partnerships, who used the funds to refinance a portfolio of commercial properties in England, Wales and Scotland. The intention was that the income derived from the properties would service the commitments of the borrowers under the Loan. The securitisation was effected by a company called Gemini (Eclipse 2006–3) Plc ("the Issuer"), which in November 2006 purchased the Loan and its related security from the original lender (Barclays Bank Plc), and funded the purchase by issuing £918,862,000 of secured floating-rate notes which fell due in July 2019 ("the Notes"). The Loan itself was repayable three years earlier, on 17 July 2016, and was subject to acceleration in the usual way upon the happening of various specified events of default.
The Notes were constituted by a Trust Deed dated 14 November 2006 entered into between the Issuer and BNY Mellon Corporate Trustee Services Limited ("the Trustee") as trustee. The Notes were divided into five classes, A to E, ranking in that order of priority. The detailed terms and conditions governing the Notes were set out in a prospectus. The rate of interest payable on the class A Notes was lower than the rate applicable to the other classes, reflecting their greater security. Similarly, the ratings assigned to the Notes by the main rating agencies reflected their relative rankings (ranging from triple A for the class A Notes to triple B for the class E Notes).
Until the financial crisis, the securitised structure ran smoothly. The rental income from the UK properties was used to pay the interest due under the Loan, which was in turn used to pay the interest due under the Notes (after meeting various other obligations which had priority under the securitisation arrangements). From October 2009, however, the interest due under the Loan was no longer paid in full by the borrowers on the due dates, and the value of the properties declined from £1,143,335,000 in August 2006 to £437,500,000 in March 2012. This substantial fall in value, and the failure to pay the interest on the Loan in full, constituted events of default in relation to the Loan, with the result that on 6 August 2012 the Loan was accelerated so that the full amount became due.
The acceleration was effected by the claimant in the present proceedings, CBRE Loan Servicing Limited ("CBRE"), in its role as the "Master Servicer" and the "Special Servicer" of the Loan under the documentation governing the securitisation structure. The original Master Servicer and Special Servicer had been a company in the Barclays group, but CBRE replaced it pursuant to Deeds of Assignment and Assumption executed in April and May 2009.
Following the acceleration of the Loan, administrators were appointed in Guernsey and England over the general partners of the borrowers, and receivers were appointed over the properties in England and Wales. In addition, CBRE entered into a supplemental hedging agreement with Barclays, whereby Barclays agreed not to terminate certain interest rate hedging transactions scheduled to expire in 2026, in circumstances where such termination would have resulted in a significant sum being owed by the borrowers to Barclays, provided that a programme for disposal of the properties was followed so as to enable a gradual termination of the hedging transactions over an agreed period.
The present position is that the administrators and receivers collect the rental income from the properties which remain unsold. As at January 2014, this amounted to approximately £8.4 million per quarter. After deduction of costs and expenses, the rental income is then paid over to CBRE (acting as the delegate of the Security Trustee) and applied by CBRE in payment of the periodic payments due under the hedging transactions, which rank in priority to the principal and interest on the Loan. The remainder of the rental income is then paid over to the Issuer. As at January 2014, the amount of rental income received by CBRE was about £7 million per quarter, and the periodic payments due under the hedging transactions were about £5.5 million per quarter, leaving around £1.5 million to be paid over to the Issuer.
In accordance with the disposal programme agreed with Barclays, some of the properties have been sold. By 21 March 2014, when CBRE filed its main evidence in support of the present proceedings, five properties had been sold since enforcement action had begun in relation to the Loan, and 30 properties remained unsold as continuing security for the Loan. The proceeds of sale were paid to Barclays as the counterparty to the hedging transactions, which were then partially unwound. Once the stage is reached when no further amounts are due under the hedging transactions, the proceeds of sale, and any surrender premiums paid by tenants of the properties, as well as the rental income, will be paid to the Issuer.
The question which now arises for determination, shortly stated, is how the relevant receipts should be characterised by CBRE in its role as Master Servicer. Should they be characterised as "principal", or as "interest", within the meaning of those terms (neither of which is defined) in the relevant documentation? The parties have been unable to reach agreement on this question. Hence the present proceedings, which were commenced by a claim form under Part 8 of the CPR issued on 21 March 2014.
Although the Loan has been accelerated, it is important to appreciate that the Notes have not. Accordingly, interest on the Notes remains payable in full on the specified interest payment dates, which are 25 January, April, July and October in each calendar year.
The Issue
The immediate context in which the issue arises is the Cash Management Agreement dated 14 November 2006, the parties to which were the Issuer, Barclays, the claimant's predecessor as Master Servicer and Special Servicer, the Bank of New York (as Cash Manager) and the Trustee. The main purpose of this agreement, as its title suggests, was to provide for the appointment of the Cash Manager and set out the functions which it was to perform. Clause 6.1 provided that the Cash Manager would maintain various ledgers, including "a ledger in respect of revenue amounts received by and paid by the Issuer" (defined as the "Revenue Ledger") and "a ledger in respect of principal amounts received by and paid by the Issuer" (defined as the "Principal Ledger"). Clauses 10 and 11 provided for transfers to, and distributions from, the Transaction Account opened by the Issuer and operated by the Cash Manager. Clause 13 was headed "Reports", and clause 13.1 was headed "Statements to Noteholders; Other Information". Clause 13.1(j) and (k) then said:
"(j) The Master Servicer will on or before each Calculation Date identify funds paid under the Credit Agreement [ i.e. the agreement governing the Loan] and any Related Security, as principal, interest and other amounts on the relevant ledger in accordance with the respective interests of the Issuer and the Seller (if any) in the Loan.
(k) The Master Servicer will advise the Cash Manager of the determinations made pursuant to Clause 13.1(j) on or before each Calculation Date and the Cash Manager will allocate funds accordingly. Any such amounts to be paid to the Issuer will be paid to the Transaction Account and credited by the Cash Manager to the relevant ledger."
The Cash Management Agreement gives no guidance on how funds are to be identified as principal, interest or other amounts under clause 13.1(j), and the terms "principal" and "interest" (as I have said) are undefined. Accordingly, paragraph 12 of the claim form asks the court to rule how the funds that the claimant has received, and expects to receive, consisting of rent from the properties, surrender premiums received from tenants of the properties, and the proceeds of sale of properties, are to be classified under clause 13.1(j).
Depending on how the receipts are classified, they will fall to be applied in accordance with either the Pre-Acceleration Principal Priority of Payments or the Pre-Acceleration Revenue Priority of Payments referred to in clause 11.3 of the Cash Management Agreement. If the receipts are characterised as "principal", they constitute Available Issuer Principal and fall to be applied in accordance with the waterfall provisions in Condition 6.3 of the Notes. Under these provisions the principal on the class A Notes is repayable before the principal on the other classes of Notes (which are in turn to be repaid sequentially). It is therefore in the economic interests of the class A Noteholders that the receipts are to be characterised as "principal". If, on the other hand, the receipts are characterised as "interest", they constitute Available Issuer Income and fall to be applied in accordance with the waterfall provisions in Schedule 1 of the Cash Management Agreement, under...
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