Dominion Corporate Trustees Ltd& Anor v Capmark Bank Europe Plc

The claimants are the trustees of a Jersey-based property unit trust called the Maylands Unit Trust (the Trust). The Trust was formed, for tax reasons, as the vehicle for the sale and purchase of warehouse premises at Units 2, 25 and 50, Maylands Avenue, Hemel Hempstead (the property). The agreed price was £28.1m and the purchaser was Cantabria Investments Limited (Cantabria). The vendor contributed the property to the Trust in exchange for units which it sold to Cantabria (99%) and to a wholly-owned subsidiary of Cantabria (1%). Cantabria raised £21m by a term loan arranged by the defendant and paid the balance from its own resources.

The property was mortgaged to secure the term loan of £21m. The trustees are the registered proprietors and legal owners of the freehold interest in the property, as trustees of the Trust. The security was created by a deed of guarantee and debenture (the debenture) between the trustees and the defendant as security agent. The defendant (the bank) was then called GMAC Commercial Mortgage Bank Europe PLC. The lender was a company in the same group as the bank.

The term of the loan was to 20 April 2008, extendable at the option of Cantabria to 20 March 2009. At the time of the sale the property was let to Scottish & Newcastle plc which vacated the property in November 2007. There was a rental guarantee in place in place until April 2008. Until then, the rental income was more than sufficient to meet all outgoings in relation to the property and the administration of the Trust. The property was not however re-let, except on a short-term basis to Royal Mail as licensee between early November 2008 and early February 2009. A change in rating law which came into force on 1 April 2008 had the effect that the property would be subject to unoccupied property rates after it had been unoccupied for six months.

Liability for rates falls on the person entitled to possession, who in periods when the property was not occupied were the trustees as the freehold owners. The trustees have incurred a liability for unoccupied property rates in excess of £1m. On 15 May 2009 the rating authority obtained an order for recovery against the trustees for £532,608 in respect of the year ended 31 March 2009, and there was further liability from August 2009 until the property was sold in February 2010. There is in addition a claim by Royal Mail to reimburse it for rates totalling nearly £225,000 which it paid in respect of its period of occupation as licensee.

The term loan became repayable on 21 April 2009 and, following a failure to repay it, receivers of the property were appointed, who sold it for £14.63m in February 2010. There are therefore insufficient funds to repay the secured loan in full, even without taking account of the trustees’ liability for rates and any liability to the Royal Mail. This may be contrasted with the position at the date of purchase when the price of £28.1m negotiated at arms-length between the vendor and Cantabria left unencumbered equity of £7.1m in the property after creation of the mortgage in favour of the bank.

As trustees, the claimants are entitled to be indemnified out of the trust assets for all expenses reasonably and properly incurred by them and have a lien over the trust assets for that purpose, and it is not in dispute that the liabilities for rates and the liability (if any) to Royal Mail fall into that category. The issue is whether the trustees’ right of indemnity ranks in priority to or behind the bank’s security.

The trustees put this issue as falling squarely to be determined as a matter of construction of the debenture, whether by an interpretation of its express terms or by means of an implied term. They do not assert any general principle that charges granted by trustees over trust property are subject to the trustees’ lien for their own expenses and they accept that their rights cannot prevail over the bank’s registered rights as mortgagee unless the relevant contract, the debenture, so provides.

The Trust is established under Jersey law. Jersey-based property unit trusts are, or were until changes in tax legislation, used as a means of selling and owning property while securing certain tax advantages. As in this case, the vendor would establish a unit trust in Jersey and transfer the property to it in exchange for the issue of units. The vendor would then sell the units to the purchaser. A principal advantage was the avoidance of stamp duty land tax on the acquisition of property in the UK. Further advantages were that they could be structured so that income belonged directly to unit holders and that there could be capital gains tax benefits because of the off-shore ownership of the property.

In the present case, the vendor of the property was Hemel Hempstead Limited Partnership (the vendor). As already mentioned, the purchaser was Cantabria, itself incorporated in Guernsey. Cantabria was owned as to 50% of its ordinary shares and 15% of its preference shares by Glenn Maud, a property developer. The balance of the ordinary shares and preference shares was owned by Glenmac Limited (Glenmac). Glenmac was established as a joint venture between Mr Maud and a subsidiary of the bank, with each owning 50% of the share capital of Glenmac. It may be assumed that the sum of £7.1m required in addition to the term loan for the purchase was provided by these parties. I take these facts from the witness statements of Steven Cottee, on behalf of the bank. The trustees have exhibited documents which appear to be inconsistent as regards the ownership of Glenmac, suggesting that it was wholly-owned by a company in the same group as the bank. Mr Cottee’s evidence as to Glenmac’s ownership was in response to those documents.

The vendor and Cantabria agreed to structure the sale through a Jersey-based property unit trust. The vendor engaged the trustees to set up the unit trust. The trustees’ sole business is to provide trustee services from Jersey and they are part of a substantial group providing trust and company administration services. They act as trustees of over 60 separate trusts, most of which are property unit trusts. They receive fees for their services as trustees, which are mainly paid on to other group companies, and they have no other revenue or assets of their own beyond the assets representing their paid-up share capital.

The trustees were not responsible for the management of the property, which was the responsibility of a management company owned by Mr Maud under the terms of an asset management agreement made as part of the overall arrangements.

The Trust was established by a trust deed dated 17 March 2006, to which I refer below for some of its terms. On 21 March 2006 the property was transferred to the Trust in exchange for the issue of units. On the same day Cantabria and a wholly-owned subsidiary called Catalunya Investments Limited granted to the vendor a put option giving it the right to require Cantabria and Catalunya to purchase the units in the Trust for £28.1m. As intended, the vendor exercised the put option and the units were purchased by Cantabria and Catalunya in the proportions of 99% and 1% respectively.

The Trust Instrument dated 17 March 2006 constituting the Trust provides in cl.2.1:

“The Trust Fund shall be constituted out of the proceeds of issues of Units in accordance with this Trust Instrument. All cash and other property for the time being held by the Trustees pursuant to this Trust Instrument (other than Income and any amounts standing to the credit of the Distribution Account) shall be held as a single common fund (the “Trust Fund”) upon trust for the Holders in proportion to the number of Units held by them from time to time according to and subject to the provisions of this Trust Fund. The Trust Fund shall be applied and otherwise dealt with by the Trustees in accordance with the provisions of this Trust Instrument. …”

This defines the Trust Fund for the purposes of the Trust Instrument. Clause 2.6 provides that no provision of the Trust Instrument shall impose any liability on a unit-holder to make any further payments in respect of units after payment of the unit price, save for the recovery of revenue expenses under cls.16 or 17.

Clause 13.7 of the Trust Instrument empowers the Trustees to create charges in terms which permitted the grant of the debenture securing the term loan to Cantabria:

“For the purpose of securing any actual or contingent liabilities of the Trust or of a Holder in connection with its holding of Units, the Trustees shall be entitled to guarantee payments under such actual or contingent liabilities and to charge, encumber, mortgage and pledge or allow to subsist any lien in any manner over, all or any part of the Trust Fund. The Trustees shall promptly inform the Holders of any exercise by them of this power. ..”

Clause 15 deals with the payment of trust expenses. Clause 15.1 defines “Permitted Expenses” in terms wide enough to include the unoccupied property rates and the amounts which may be due to Royal Mail: see cls.15.1.14 and 15.1.17, in particular. Clause 15.2 provides that all Permitted Expenses shall be payable out of the Trust Fund. There is an exception for “Revenue Expenses” which are borne by the unit-holders but only to the extent of income payable to them in the quarter in which the expense was incurred or in subsequent quarters. As no sufficient income accrued out of which the unoccupied property rates and any amounts due to Royal Mail could be paid, it is academic whether they constituted Revenue Expenses, as defined.

The trustees are given a right of indemnity out of the Trust Fund and a lien over the Trust Fund for all liabilities and expenses, by cls.25.8 and 25.9:

“25.8

Subject to clauses 25.6 and 25.7 but without prejudice to the right of indemnity by law given to trustees, the Trustees and their respective permitted servants, agents, delegates and sub delegates (including the Property Asset Manager and the Investment Adviser) shall be entitled to be indemnified out of the Trust Fund:

25.8.1

in respect of all liabilities and expenses properly incurred in the execution or purported execution of the trusts hereof or of any powers, authorities or discretions vested in them or any of them pursuant to this Trust Instrument; and

25.8.2

against all actions, proceedings, costs, claims and demands in respect of any matter or thing done or omitted in any way relating to this Trust Instrument and including any claim or demand made of the Trustees by their respective delegates in relation to any action, proceeding, costs, claims, demand or expense incurred relating to this Trust Instrument.

25.9

The Trustees may retain and pay out of any monies comprising part of the Trust Fund all sums necessary to effect such indemnity and the Trustees shall have a lien on the Trust Fund for all monies payable to them or any of them under this clause or otherwise howsoever.”

The saving for cls.25.6 and 25.7, dealing with breach of duty, is not relevant.

Effect is given to the trustees’ right of indemnity and lien in the event of termination of the Trust by cl.31. Clause 31.1 requires the trustees within a year of giving notice of termination to “realise the Trust Fund then remaining, and repay any borrowings”. Clause 31.2 provides:

“The Trustees shall distribute among the Holders, in proportion to the number of Units held by them respectively, the net proceeds of the realisation of the Trust Fund, after payment of or the deduction of a retention, of such amount as the Trustees (after consulting with the Auditors) deem appropriate, in respect of all costs, charges, expenses and other liabilities of any nature connected with the Trust or its termination and which are payable out of the Trust Fund, whether actual, contingent or expected by the Trustees to arise in the future, (the “Trust Liabilities”, which expression includes any such costs, charges, expenses and other liabilities incurred or expected to arise after the retention pursuant to this clause shall have been made).”

The trustees’ fees are provided by cl.23.1, as £3,500 payable on execution of the Trust Instrument, £6,500 for services provided during the first month after execution of the Trust Instrument and thereafter variable fees payable each quarter at rates to be agreed.

Following the establishment of the Trust, a number of agreements to give effect to the underlying transaction were made on or about 21 March 2006.

The £21m term loan was made pursuant to a facility agreement dated 21 March 2006. It was to be made as a single advance, subject to various conditions precedent, including the provision of a structure chart showing the ownership of Cantabria up to the ultimate beneficial owners. The loan was repayable on 21 April 2008 or, at the borrower’s option, 20 March 2009. Clause 20.1.8 provided that Cantabria was to use its best endeavours to procure that the trustees entered into the debenture within one business day of drawdown.

The debenture, dated 22 March 2006, was executed by the trustees as chargors and by the bank as security agent. The definitions include the following. “Charged Assets” means:

“the assets and undertaking of the Chargor from time to time mortgaged, charged or assigned (or intended to be mortgaged, charged or assigned) by way of fixed and/or floating security as security for the payment or discharge of all or any part of the Secured Liabilities, and “Charged Asset” shall be construed accordingly;”

“Secured Liabilities” means:

“all present and future obligations and liabilities, whether actual or contingent and whether owed jointly or severally and whether as principal or as surety or in any other capacity whatsoever, of the Borrower and/or each Chargor and/or each other Security Provider to the Finance Parties (or any of them) under or in connection with the Finance Documents (including this Deed) ..”

“Security” was defined as in the Facility Agreement, namely:

“a mortgage, charge, security assignment, pledge, lien or other encumbrance security interest securing any obligation of any person or any other agreement or arrangement having a similar effect ..”

“Trust Fund” had the meaning given by cl.2.1 of the Trust Instrument.

Clause 2 created the fixed security, including in cl.2.1 a mortgage of the property in the following terms:

“Each Chargor, as continuing security for the payment, performance and discharge of the Secured Liabilities and in the manner specified in Clause 2.3:

2.1.1

charges in favour of the Security Agent (as agent and trustee for itself and each of the other Finance Parties) by way of first legal mortgage all the property now belonging to it and specified in Schedule 1 and all other estates and interests in any freehold, commonhold or leasehold property now or in the future belonging to it ..”

Clause 2.1.2 created a first fixed charge over a wide variety of assets, ending with:

“all other assets comprised in the Trust Fund not otherwise mortgaged or charged pursuant to the foregoing provisions of this Clause 2.1 or assigned (whether at law or in equity) pursuant to Clause 2.2.”

Clause 11 provides for the application of proceeds:

“11.1

Any monies received by the Security Agent, any Receiver or any administrator after this Deed has become enforceable shall be applied in the following order of priority (but without prejudice to the right of the Finance Parties to recover any shortfall from the Chargors):

11.1.1

in satisfaction of or provision for all costs and expenses incurred by the Security Agent, any Receiver or any administrator and of all remuneration due to any Receiver or administrator;

11.1.2

in or towards payment (in the order specified in Clause 28.5 (Partial Payments) of the Facility Agreement) of the Secured Liabilities or such part of them as is then due and payable; and

11.1.3

in payment of the surplus (if any) to the Chargors or other person entitled to it.”

By cl.17.3, the trustees covenant to “pay, perform or discharge all the Secured Liabilities on the due date therefore” and by cl.17.4.1, the trustees irrevocably and unconditionally, as principal obligor, guarantee the prompt payment, discharge and performance of the Secured Liabilities.

Clause 17.6, on which the trustees particularly rely provides:

“Notwithstanding any other provisions of this Deed:

17.6.1

each Chargor has executed this deed solely in its capacity as trustee of and with the intention of binding the assets of the Unit Trust held by the Chargors from time to time (the “Trust Assets”);

17.6.2

the aggregate of all liabilities of each Chargor under this Deed shall at all times and for all purposes extend only to the Trust Assets;

17.6.3

in no circumstances shall any liability attach to or be enforced or enforceable against the assets of the Chargors (held in their capacity as trustees of any other trust or in their personal capacity or in any other capacity whatsoever) other than the assets which comprise the Trust Assets; and

17.6.4

all representations, warranties, undertaking, obligations and covenants in this Deed are made, given, owed or agreed by or in relation to the Trust Assets and in the Chargors’ capacities as trustees of the Unit Trust and, for the avoidance of doubt, shall not be construed to be made, given, owed or agreed by or in relation to the Chargors in their capacities as trustees of any other trust or in their personal capacity or in any other capacity whatsoever (other than in their capacities as trustees of the Unit Trust).”

The trustees’ case that their right of indemnity and lien ranks ahead of the mortgage in favour of the lender rests on the construction of the debenture or, alternatively, on a term to be implied in the debenture.

They submit that these issues should be approached against the circumstances existing when the arrangements were put in place in March 2006. The debenture must be read as part of the wider set of documents putting in place those arrangements. The Trust was put in place for tax reasons, for the benefit of the vendor and Cantabria as purchaser. The trustees’ role was limited to holding the property as trustees. They were not expected to take an active commercial role in the underlying transaction or subsequent ownership of and dealing with the property. All this was readily deducible from the relevant documents putting the arrangements in place. This would have been so even if the bank had no role other than as arranger of the term loan, but in fact it or a company in the same group was an investor with a significant indirect equity interest in Cantabria and the lender was in the same group of companies as the bank. The Trust structure was established for the benefit of Mr Maud and the bank or companies in the same group as the bank as the ultimate beneficial owners of Cantabria and, indirectly, of the property. The trustees entered into the debenture at the request of Cantabria, not for its own benefit but ultimately for the benefit of those owners. The trustees did not stand to benefit from the loan or the security. It cannot have been intended or envisaged, it is submitted, that the trustees would be exposed to any significant commercial risk.

In circumstances where the facility agreement provides expressly for the assignment or syndication of the loan with its security, I was concerned whether all these factors, some of which involve knowledge of quite specific facts, could properly be brought into account in the construction of the debenture or in determining the existence of implied terms when they would or might not be known to assignees or participants in a syndication. The judgment of Carnwath LJ in KPMG LLP v Network Rail Infrastructure Ltd [2007] Bus LR 1336 at [38] – [43] and of Lord Hoffmann in Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38 at [40] indicate that in general such matters should be taken into account, although the circumstances and purpose of some instruments will make it impermissible: see Re Sigma Finance Corp [2009] UKSC 2 at [36] – [37] per Lord Collins SCJ. This is not one of those cases. The loan was relatively short-term and if there had been any assignment or syndication, which there was not, basic enquiries would have disclosed the interest of the bank’s group in Glenmac and hence in Cantabria.

It appears from evidence adduced by the trustees that initially it was intended that they should have only a brief involvement in the transaction, acting as the original trustees but retiring on completion of the sale of the units in Cantabria in favour of new trustees selected by Cantabria. Only at a late stage, a few days before completion, were they asked by Cantabria to remain as trustees. The trustees instructed their Jersey lawyers to advise on the terms of the draft debenture and other documents which had not previously concerned them. Although not an issue in the proceedings before me, this may explain why the trustees did not seek to negotiate for the inclusion of further provisions for their protection, but as Mr Ayliffe himself submitted it is difficult to see how the legal advice taken by the trustees could affect the proper construction of the debenture.

The trustees submit, uncontroversially, that cl.17.6 of the Debenture recognises that the trustees were contracting in a specific capacity, as trustees of the Trust, and is designed to provide protection to them in a personal capacity and to assets held by them for their own benefit or for the benefit of other trusts. In order to understand their capacity as trustees, it is necessary to look at the Trust Instrument, which defines their capacity and confers rights and obligations on them in such capacity. Those rights include their right of indemnity out of the trust assets and their lien over the trust assets. The parties here, including the lender, recognised that in the capacity of trustees in which they executed the debenture, they had a right of indemnity against the trust assets.

It is submitted that cl.17.6.1, in providing that the trustees (the Chargors) have executed the debenture “solely in its capacity as trustee of and with the intention of binding the assets of the Unit Trust held by the Chargors from time to time (the “Trust Assets”)”, is intended to ensure that the debenture would affect only those assets held by them which were available to be applied for the purposes of the Trust, i.e. for the benefit of the beneficiaries under the Trust. Those assets did not include assets required to satisfy the indemnity in favour of the trustees. They were not available to be applied for the purposes of the Trust and would therefore not be affected by the debenture. To the extent that assets were needed to satisfy the right of indemnity, they were not trust assets at all but belonged to the trustees.

The trustees draw attention to the new defined term “Trust Assets” introduced by cl.17.6.1 and used in the remaining paragraphs of cl.17.6, in contrast to the “Trust Fund”, as defined in the Trust Instrument and used elsewhere in the debenture. So, in cl.17.6.2, the trustees’ liability under the debenture is limited to the “Trust Assets”, so as to avoid any personal exposure of the trustees to liabilities either for costs and expenses of the trust or under the debenture. Likewise, cl.17.6.3 provides that no liability shall attach to or be enforceable against assets held by the trustees in their personal capacity. To the extent that they have rights of indemnity against the Trust Fund, they have an asset which belongs to them personally. Mr Ayliffe submitted that “If [the bank] were entitled to enforce the debenture without regard to such rights of indemnity, this would run directly counter to cl.17.6.3 by enabling [the bank] to enforce against an asset belonging to [the trustees] in their personal capacity.”

I am unable to construe cl.17.6 as the trustees submit, even taking full account of its context and the commercial considerations to which they draw attention. It is necessary to look both at the provisions whereby the property is mortgaged and at the terms, purpose and effect of cl.17.6.

The trustees, in their capacity as trustees of the Trusts, were the legal owners of the property. It was until its sale the principal, probably the only, asset comprised in the Trust Fund, as defined in cl.2.1 of the Trust Instrument. By cl.2.1.1 of the debenture, they charged the property by way of first legal mortgage. Subject to the trustees’ submissions on the effect of cl.17.6, it was the property, not the property subject to the trustees’ lien, which was mortgaged. There is no express reservation of their lien. Consistently, cl.11.1 directed the order of priority in the application of the proceeds of sale of the property by the lender or a receiver or administrator as follows: first, the costs and expenses of the lender, receiver or administrator, and the remuneration due to any receiver or administrator; secondly, payment of the Secured Liabilities; and thirdly, payment of the surplus (if any) to the trustees.

There is no reference to expenses incurred by the trustees, only that any surplus is to be paid to them. The trustees’ submissions would appear to lead them to the conclusion that their expenses would rank ahead even of the receiver’s expenses. Not only is no mention made of the trustees’ expenses but by cl.12 the trustees covenant to indemnify the lender and any receiver against all costs, expenses and liabilities incurred in the execution of their powers under the debenture and against all actions, proceedings, costs, claims or demands in respect of acts or omissions in relation to the charged assets.

If, notwithstanding these provisions, cl.17.6 was intended to ensure that the trustees’ right of indemnity and lien ranked ahead of the mortgage of the property, it might be expected to do so in clear and direct terms. Rather than doing that, it is on its natural reading a limitation on the liability of the trustees to the lender. It is no surprise that there should be such a limitation. By numerous provisions of the debenture, but in particular by cls.17.3 and 17.4 and cl.12, the trustees undertake personal liability to the bank and other parties. Clause 17.6 has the clear effect of limiting the trustees’ liability to the assets held by them as trustees of the Trust and preventing any recourse to any other assets held by them, whether in their personal capacity or as trustees of other trusts.

I do not consider that there is any significance in the use of the term “Trust Assets”, except as a means of identifying the assets comprised in the Trust Fund. Nor do I consider that the trust assets to the extent required to satisfy the trustees’ right of indemnity or lien are not trust assets at all, but the trustees’ personal assets. There are as it seems a number of objections to this notion. First, it is because they are trust assets that the trustees are given a right of indemnity out of them and a lien to secure that right. They do not cease to be trust assets to the extent of the trustees’ claim. Secondly, the amount of the claim will fluctuate, so the argument would seem to be for a beneficial interest of a fluctuating amount (and, at times when there is no claim, no beneficial interest at all) in an undivided whole. Thirdly, what was expressly mortgaged was “the property now belonging to it [each Chargor] and specified in Schedule 1” (clause 2.1.1), being “all that freehold property known as Units 2, 25 and 30 Maylands Avenue…” (Schedule 1), not some lesser interest in it.

The trustees rely on the opening words of cl.17.6 (“notwithstanding any other provisions of this Deed”) to show that provisions such as cls.2.1.1, 11.1 and 12 were to be read subject to the trustees’ right of indemnity and lien. That would be right only if the remainder of cl.17.6 had that effect. For the reasons given above, it does not in my judgment have that effect. Moreover, in considering the effect of cl.17.6 it is right to take account of those other provisions, as the debenture must of course be construed as a whole. Likewise, sections 105 and 107 of the Law of Property Act 1925 would apply only if the trustees’ rights were a prior encumbrance ranking ahead of the mortgage in favour of the bank.

The trustees submit that their construction is reinforced by the consideration that it limits the effect of the debenture to the assets available to the beneficiaries, Cantabria and Catalunya, whose liabilities are being secured. It is only the assets after satisfying the trustees’ rights of indemnity which can be available to them. I am not persuaded by this submission. The security provided by the trustees is a legal mortgage over the property. It is separate from the charge given by Cantabria over its units in the Trust, which cannot of course affect or take priority over the trustees’ lien and rights to indemnity. A charge over the property gives the bank a direct security over the underlying asset of the trust.

I conclude that the Trustees are seeking to put on cl.17.6 a construction which, however generously cl.17.6 is construed in their favour, it cannot bear.

Miss Agnello QC, appearing for the lender, fairly pointed out that a conventional means of dealing with priorities as regards secured property is to have a deed of priorities executed by the interested parties. As it happens, there is as one of the documents entered into on 21 March 2006, a deed of subordination whereby the term loan ranks ahead of all liabilities of Cantabria to Mr Maud, but there is no deed of priorities between the trustees and the lender.

The trustees’ alternative submission was that, if the terms of the debenture do not expressly provide on their true construction for their lien to rank in priority to the bank’s mortgage, there must be implied a term to that effect. In making this submission, the trustees relied on the same particular circumstances of the arrangements (the unit trust was established for the benefit of Cantabria as purchaser, the indirect beneficial of the bank’s group in Cantabria, the minimal role of the trustee, and so on) as were brought into play in the process of interpretation of the express terms.

As with the principles of construction, there are a number of important authorities in recent years, the latest of which is the decision of the Privy Council in A-G of Belize v Belize Telecom Ltd [2009] 1 WLR 1988. The discussion of general principles is at [16] – [27] of the judgment of the Board given by Lord Hoffmann. A term is implied to give effect to the meaning which the instrument would convey to a reasonable person having all the background knowledge reasonably available to the audience to whom the instrument is addressed. It is not an addition to the document but spells out what it means. It is essentially part of the process of construction. The various tests put forward in the authorities over a long period (business efficacy, it goes without saying, and so on) are not separate tests but ways of putting the same point: what does the instrument mean?

It follows that an implied term cannot contradict the express terms, properly construed, or at any rate, as put by Lord Hoffmann in AG of Belize v Belize Telecom Ltd at [27], the fact that the proposed implied term would contradict an express term is a good reason for saying that a reasonable man would not have understood that to be what the instrument meant. The implied term must be necessary in order to give effect to the presumed intentions of the parties; it is not enough for a court to consider that the implied term expresses what would have been reasonable for the parties to agree. In a passage from his speech in Trollope & Colls Ltd v North West Metropolitan Regional Hospital Board [1973] 1 WLR 601 at 609 cited by Lord Hoffmann, Lord Pearson said:

“An unexpressed term can be implied if and only if the court finds that the parties must have intended that term to form part of their contract; it is not enough for the court to find that such a term would have been adopted by the parties as reasonable men if it had been suggested to them.”

It is not difficult to accept the proposition that the circumstances in the present case are such that the parties might reasonably have agreed that the trustees’ lien should rank ahead of the mortgage. But in my judgment the circumstances are not such as to permit or require such a term to be implied.

There are a number of reasons for this. First, it would in my view contradict cl.11 of the debenture, which is directly in point as the sale of the property was effected by receivers. Clause 11 requires the receiver to apply the proceeds, after payment of his own expenses and remuneration and the security agent’s costs and expenses, in or towards payment of the secured loan. Only the balance, if any, is paid to the trustees. Secondly, if there were to be some protection for the trustees’ position, it is far from obvious that it would be by giving priority to their lien. A lender might well say that such protection should take the form of a right of indemnity against the beneficial owners of the property and whether such right was joint and several or several in proportion to their respective interests would be a matter for negotiation. Thirdly, the very fact that no provision is made for the trustees’ lien to take priority is a significant factor against its implication. As was said by Lord Hoffmann in AG of Belize v Belize Telecom Ltd at [17]:

“The question of implication arises when the instrument does not expressly provide for what is to happen when some event occurs. The most usual inference in such a case is that nothing is to happen. If the parties had intended something to happen, the instrument would have said so. Otherwise, the express provisions of the instrument are to continue to operate undisturbed. If the event has caused loss to one or other of the parties, the loss lies where it falls.”

Among the circumstances of the arrangements on which the trustees relied in support of an implied term for priority of their lien, they particularly stressed that the terms of the Trust Instrument had been the subject of negotiation and agreement by the bank. The Trust Instrument conferred the trustees’ rights of indemnity and lien, without the requirement contained in a number of the other clauses conferring rights or powers on the trustees for the bank’s prior consent. If anything, this seems to me to tell against an implied priority of the lien over the mortgage. It demonstrates that the question of the trustees’ expenses was considered, but nonetheless no provision for priority was included in the debenture.

I conclude overall that the trustees’ lien and rights of indemnity do not rank in priority to the mortgage of the property in favour of the bank and that the trustees are not therefore entitled to the declaration of priority sought in paragraph (1) of their claim for relief.