The court interpreted contractual documents in a commercial mortgage-backed securitisation structure and rejected a claim by class X note holders that they had suffered historical underpayment of class X interest.
The court was required to determine the rights attached to loan notes held by the claimant and issued by the first defendant under a commercial mortgage-backed security scheme.

The investment scheme involved acquiring loans secured on income-generating commercial property. The purchase of the loans was funded by the issue of notes to investors. Under the terms of the investment scheme, holders of regular notes were entitled to interest at a rate based on the Euro Interbank Offered Rate (EURIBOR). Class X notes paid the holder “the excess (if any) of the Expected Available Interest Collections … over the amounts due and payable by the Issuer “. The loans held by the issuer included a loan at a fixed rate (the Nordostpark loan) by senior and junior lenders. The issuer entered into an interest rate swap agreement and inter-creditor agreement on the Nordostpark loan. The borrower defaulted on the Nordostpark loan, and the swap agreement expired and was not renewed. The EURIBOR rate subsequently dropped below the fixed rate of the Nordostpark loan. The claimants had initially received interest payments of over 400,000 euros on the notes. However, by October 2015 the issuer calculated that the interest due was zero.

In respect of two sample quarterly interest payment dates, the court was required to determine:

(1) the meaning of “senior rate” and “junior rate” in the inter-creditor agreement;

(2) whether the interest payable to the senior lender on the Nordostpark loan should have included default interest payable by the Nordostpark borrower at 1% pa;

(3) whether the capitalisation of unpaid interest on another loan (the Adductor loan) reduced the Expected Available Interest Collections for calculating the class X interest;

(4) whether historic unpaid class X interest triggered an obligation under condition 5(i) of the notes to pay interest at the class X rate on the underpaid amount.

HELD: (1) Meaning of “senior rate” and “junior rate” – The inter-creditor agreement provided a two-limb definition of senior rate and junior rate. The issue related to the second limb of the definition which referred to the EURIBOR rate. The claimant contended that words should be implied into the second limb of the definition to read “EURIBOR or (where no Hedging Arrangement remains in place) the Fixed Rate or (following an Event of Default where no Hedging Arrangement remains in place), the higher of EURIBOR and the Fixed Rate”. The court would only add words to the express terms of an agreement if it was necessary to do so because the agreement was incomplete or commercially incoherent without them. Even then, the court had to be certain that the absence of the missing words was inadvertent, and that if the omission had been drawn to the attention of the parties at the time of contracting they would have agreed what additional provision should be made, Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] 1 A.C. 1101 and Marks & Spencer Plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2015] UKSC 72, [2015] 3 W.L.R. 1843 considered. There was no obvious basis on which to conclude that the contracting parties to the inter-creditor agreement had failed to foresee a situation in which the Nordostpark borrower might still be obliged to pay a fixed rate of interest on the mortgage loan, but in which the swap agreement would not be in place. It was impossible to conclude that, if asked at the time of contract, the parties would have adopted the additional wording suggested by the claimant. That uncertainty was fatal to the contention that the alleged mistake could be corrected by construction or that additional wording could be implied, Chartbrook,Philips Electronique Grand Public SA v British Sky Broadcasting Ltd [1995] E.M.L.R. 472 and Arnold v Britton [2015] UKSC 36, [2015] A.C. 1619 followed (see paras 39, 56, 60, 68-70, 75 of judgment).

(2) Default interest – The answer to the second question was “no”. Default interest payable by the Nordostpark borrower would fall to be applied in the order set out in the inter-creditor agreement. It would not fall within the calculation of interest to the senior lender until any unpaid interest and the principle had been paid to the issuer and the junior lenders (paras 87-91).

(3) Capitalisation of unpaid interest – The issuer was correct to reduce the Expected Available Interest Collections to take account of the capitalisation of interest. The ability to capitalise unpaid interest after one year was built into the Adductor mortgage loan agreement, and the noteholders should therefore have envisaged that the servicer could use such power if appropriate. If it had been intended that such capitalisation should not reduce the amount of the Expected Available Interest Collections, or that the computation of such amount should disregard any capitalisation of interest, that could have been spelt out in the documents (para.105).

(4) Interest on historic unpaid class X interest – There had been no historical underpayment of class X interest. But if there had been, the claimants could not have relied on condition 5(i); it did not provide generally for a contractual rate of interest to be applied to any subsequently discovered underpayments of class X interest. It provided a specific mechanism to address a cashflow shortage. That did not leave class X noteholders without a remedy as the note trustee could bring proceedings for breach of contract to claim interest pursuant to statute to compensate noteholders for being kept out of monies that should have been paid. Even if the claimants could have relied on condition 5(i) for class X interest on unpaid amounts, that term would amount to a penalty and would be void (paras 117-120, 140-142).

Judgment for defendants

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