US Bank Trustees Ltd v Titan Europe 2007-1 (NHP) Ltd & Ors

This is the expedited trial of a Part 8 Claim issued by the Claimant (“the Note Trustee”) as the trustee of a series of notes (“the Notes”) issued by the First Defendant, Titan Europe 2007-1 (NHP) Limited (“the Issuer”). The Note Trustee seeks answers from the Court to various issues concerning the interpretation and effect of the financial documentation of which the Notes form a part. The Issuer is a special purpose company incorporated in the Republic of Ireland where the Notes are listed. However, the Notes and the other contractual documents are governed by English law.

The Notes were issued pursuant to a trust deed dated 24 May 2007 (“the Trust Deed”). They are floating rate commercial mortgage backed securities (CMBS) and are due for redemption in 2017. They comprise a number of different classes and are designated (in descending order of seniority) Classes A - E. There are also two small additional classes X and V with priority as to interest, but which are not relevant to the issues that I have to decide. The total amount subscribed for the Notes was about £638 million. The senior, and by far the largest class of Notes by principal amount, were the Class A Notes, with a face value of about £435 million. The other classes each ranged between about £42 million and £60 million in principal amount.

The Notes were part of a financing structure relating to a total loan of some £1,172 million that was made to a borrower called Libra No.3 Limited (“the Borrower”). I shall refer to this loan as “the Whole Loan”. The original lender in respect of the Whole Loan was a company in the Credit Suisse group. The Whole Loan was divided into seven tranches, each of which is referred to in the documents as a “Loan”. The most senior tranche had a principal amount of some £638 million, and was referred to in the documents as “the Libra Loan” or “the A Loan”. I shall refer to it in the same way. The remaining six tranches amounted to a total principal amount of £534 million, were subordinated, and were designated (in descending order of priority) as the B0-1 Loan, the B0-2 Loan, the B1 Loan, the B2 Loan, the B3 Loan and the B4 Loan. I shall refer to these tranches collectively as “the Subordinated B Loan”.

At the time of issue of the Notes in May 2007, the Libra Loan had been transferred to another special purpose vehicle in the Credit Suisse group called Libra 2007 (NHP) Limited. The Libra Loan was subsequently acquired from that company by the Issuer using the proceeds of the issue of the Notes. The Issuer thereupon became the lender in respect of the Libra Loan. At or around the same time, the tranches of the Subordinated B Loan were also sold to a variety of institutions, which each became a sole lender or joint lender to the Borrower in respect of the various tranches. The documents refer to the Issuer as the “Lender” in respect of the Libra Loan, to the institutional lenders as the “Lenders” in respect of the various tranches of the Subordinated B Loan, and to them collectively as the “Lenders”. I shall do likewise.

The Whole Loan was used by the Borrower to fund the acquisition of a portfolio of commercial properties (“the Property Portfolio”) by various companies in the Borrower’s group. The Property Portfolio comprises several hundred healthcare properties in the United Kingdom. The majority of those properties had originally been let to the Southern Cross Healthcare group, but were and are now operated by HC-One Limited, a subsidiary of the Borrower. Each of the companies owning properties in the Property Portfolio entered into a joint and several guarantee, and granted security over its assets to Credit Suisse as Security Agent for all of the Lenders for the repayment of the Whole Loan (the “Related Security”).

The rights of the Lenders in respect of the Whole Loan are regulated inter se by an intercreditor deed dated 22 May 2007 (“the A/B Intercreditor Deed”). One of the provisions of that deed envisaged the execution of a “Servicing Agreement”. It is the interpretation of that contract that lies at the heart of this case.

Under the Servicing Agreement, a “Servicer” was appointed to manage and administer the Whole Loan and its Related Security in accordance with prescribed standards. The Servicing Agreement also provided that in certain circumstances, including, in particular, in the event of covenant breaches under the Whole Loan, the Servicer would be replaced by a “Special Servicer” which would take over the responsibility for managing and administering the Whole Loan and for deciding whether to pursue enforcement measures in respect of that loan and the Related Security.

The Servicing Agreement further envisaged that there would at all times be a person designated as “the Controlling Party”, and that that person would have various rights to receive information, to be consulted, and to give its approval to certain actions in relation to the Servicing or Special Servicing of the Whole Loan and the Related Security.

Crucially, so far as this case is concerned, under clause 22.2 of the Servicing Agreement, the Controlling Party was given a right to require the termination of the appointment of the Special Servicer. Clause 22.2 provided as follows:

“The Controlling Party, with respect to the … Whole Loan, shall at any time be entitled … to give written notice to the Issuer or Note Trustee to require the Note Trustee (and, if the Controlling Party gives such notice, the Issuer and the Note Trustee shall so act) to terminate the appointment of the Special Servicer with respect to the … Whole Loan and at the expense of the Controlling Party and subject to the terms of this Agreement, to replace the Special Servicer with a successor Special Servicer, who shall be reasonably acceptable to the Controlling Party and subject to the terms of this Agreement, if the Controlling Party has not selected a replacement Special Servicer, the Note Trustee shall use reasonable endeavours to appoint a successor Special Servicer which has experience of servicing loans secured by mortgages over commercial property on similar terms to that required under this Agreement (provided that the Note Trustee shall not be required to incur costs in the course of such endeavours unless indemnified to its reasonable satisfaction).”

The termination of the appointment of the Special Servicer was subject to a number of preconditions that were set out in clause 22.5:

“Preconditions to Termination

No termination of the Servicer’s or the Special Servicer’s appointment under Clauses 22.1 (Servicer Events of Default), 22.2 (Termination by the Controlling Party) or 22.4 (Voluntary Termination) shall take effect unless:

(a)

a successor Servicer or Special Servicer, as applicable, is appointed, such appointment to be effective no later than the date of termination of the outgoing Servicer or Special Servicer;

(b)

the Servicer or Special Servicer or the Note Trustee shall have notified each of the Rating Agencies in writing of the identity of the successor Servicer or Special Servicer and the Rating Agencies shall have confirmed that the appointment of the successor Servicer or Special Servicer, as applicable, will not result in an Adverse Rating Event;

(c)

the successor Servicer or, as the case may be, Special Servicer accedes to this Agreement (or otherwise assumes by novation all the obligations of the existing Servicer or Special Servicer hereunder) and such successor Servicer or Special Servicer, as applicable, has experience in servicing mortgages of commercial property on similar terms to that required under this Agreement and is approved by the Issuer and the Note Trustee (such approval in each case not to be unreasonably withheld);

(d)

the fee payable, directly or indirectly, by the Issuer or the Subordinate Lenders to the successor Servicer or Special Servicer shall not without the prior written consent of the Issuer, the Note Trustee and the Controlling Party exceed the rate payable to the terminated Servicer or Special Servicer pursuant to Clause 15 (Payments to the Servicer and the Special Servicer);

(e)

the Advance Provider is replaced with suitable replacements subject to and in accordance with the terms of this Agreement.

If the Advance Provider is no longer an Affiliate of the Special Servicer, the Special Servicer undertakes to provide to the Advance Provider all information that may be requested by the Advance Provider in connection with the Libra Loan.”

The issues in this case relate to the identity of the Controlling Party entitled to serve a notice under clause 22.2 and to the meaning of a number of the preconditions set out in clause 22.5.

The current dispute has arisen against the background of a substantial fall in value of the underlying Property Portfolio. As I have indicated, the Notes were issued in May 2007. At that time the latest valuation of the Property Portfolio as at 31 January 2007 was £1,338 million. In September 2008 the Servicer commissioned a valuation report, which, when received on 7 November 2008, showed a substantial fall in the valuation of the Property Portfolio to £926 million. That was a breach of a loan-to-value covenant in the Whole Loan, and as a result of that breach not being remedied, on 25 November 2008 Capita Asset Services (UK) Limited (“Capita”) was appointed as the Special Servicer under the Servicing Agreement.

In the period since its appointment, Capita has commissioned a series of valuation reports. Those show a further decline in the value of the Property Portfolio, to the extent that a recent report as at 31 December 2013 ascribed a value of about £529 million to the Property Portfolio. That was less than 40% of its original valuation and implied a loan to value ratio of about 221%.

The position of the Borrower group has also been adversely affected by liabilities under a forward interest rate swap that the Borrower entered into as part of the original structure in May 2007. Capita reported that in mid-January 2014, the Borrower was “out of the money” to the tune of £124 million under the swap and in arrears of periodic payments due to the swap counterparty in the sum of about £73.8 million. I have been told that all payments due to the swap counterparty rank ahead of the Class B-E Notes, but the swap counterparty has confirmed that it will treat swap termination payments as ranking behind the Class A Notes. However, the outstanding arrears are payable by the Borrower before any payment to the Issuer, and hence these liabilities (presently more than £86m and likely to continue increasing) rank ahead of the Class A Notes.

On this basis there is a reasonable expectation that on a sale of the secured assets at or around their current valuation, the Class A Notes ought to be repaid in full, but the Class B Notes would suffer a significant loss, and the Class C, D and E Notes and the Lenders in respect of the Subordinated B Loan would suffer a total loss. In the vernacular of the financial markets, the Class C-E Notes and the Subordinated B Loan are (to an increasing degree) “underwater”.

Against this difficult background, by a series of announcements commencing in September last year, Capita announced that it was exploring an “exit strategy” in relation to the Property Portfolio. To that end it appointed Deutsche Bank to act as an adviser; an information memorandum was prepared and distributed to potentially interested parties in respect of a possible sale of the companies or properties in the Borrower’s group; initial proposals were invited; and a data room was opened for interested parties to conduct due diligence. I am told that this sales process is continuing and that a number of interested parties are working towards finalisation of their proposals. Capita (as Special Servicer) and the Security Agent have also entered into various variation and standstill agreements with the Borrower that have currently been extended to mid-April.

The Second Defendant (“Anchorage”) is the holder of Class E Notes. In early December last year, its representatives met representatives of Capita and voiced concerns, among other things, as to the level of disclosure to the market concerning the underlying business of the Borrower group and the proposals for sale that had been announced. Anchorage expressed the view that a sale now would not give sufficient time for any benefits of capital investment that had been made in 2012 and 2013 fully to feed through into the business performance of the Borrower group. In short, Anchorage objected to what it viewed as a premature sale of the Borrower group which, on the current valuations, would be for the sole benefit of the Class A and possibly the Class B Noteholders, but would not result in any return to the more junior Noteholders, including itself.

When Capita indicated an intention to press ahead with the sale process, on 31 December 2013 Anchorage notified the Note Trustee that it (Anchorage) was the Controlling Party under the Servicing Agreement and instructed the Note Trustee to serve a notice terminating the appointment of Capita as Special Servicer. That instruction was notified to the public by the Issuer on 8 January 2014.

The instruction from Anchorage met with opposition from the parties involved in the proposed sale process, who contended that Anchorage’s action was unjustified and designed to disrupt that process. In particular, a significant group of the Class A Noteholders contended that a number of the pre-conditions to an effective termination of the appointment of the Special Servicer had not been satisfied and will not ever be satisfied, and that in consequence Anchorage cannot insist that the Note Trustee serve any termination notice (whether conditionally or otherwise).

It was to resolve those issues, and to seek the Court’s directions and guidance as to how it should approach the exercise of any discretion that it might have in dealing with an instruction from the Controlling Party, that the Note Trustee issued its Part 8 Claim on 6 February 2014. The defendants to the Part 8 Claim are (i) the Issuer; (ii) Anchorage; (iii) a Class A Noteholder which has obtained an order from Barling J. to the effect that (for commercial reasons) it is not to be identified by name; and (iv) the Fourth Defendant, which is the “Backup Advance Provider” which has provided financial support to the Issuer under the financing documents. The Backup Advance Provider has an interest in the issues raised in relation to clause 22.5(e) of the Servicing Agreement concerning the replacement of the Advance Provider.

After the Claim Form was issued, the Class A Noteholder raised for the first time an additional argument that Anchorage is not in fact the Controlling Party under the Servicing Agreement at all, and hence that it was not entitled to serve any notice requiring the Note Trustee to terminate the appointment of the Special Servicer. The Class A Noteholder contends that in the current circumstances the Controlling Party is the Issuer itself.

The issue of the identity of the Controlling Party entitled to require the service of a termination notice is logically prior to the questions raised by the Note Trustee. I shall therefore address that issue first and shall then deal with the Note Trustee’s questions. The issues are numbered by reference to an agreed document that was produced after the hearing.

Although this is a Part 8 Claim, voluminous evidence was filed by the parties. I was assisted by those parts of the evidence which, in a neutral way, exhibited the relevant transaction documents, placed them in their contemporaneous context, and identified and outlined the background to the issues that the court was being asked to consider. I was, moreover, told that there were no factual disputes that necessitated cross-examination, and indeed was referred to almost none of the evidence at the hearing, since counsel largely focussed their submissions on the transaction documents themselves.

Of less assistance, however, were those parts of the evidence that sought variously to argue the case, to provide commercial justification for the actions of the witness’ own party; to cast imputations upon the commercial motives of the opposing party; or to refer me to other CMBS transactions as an alleged aid to construction. The Chancellor has recently commented upon the need for the parties and their advisers to exercise restraint and to have regard to the proper scope of witness statements in a case such as the present: Napier Park European Credit Opportunities Fund v. Harbourmaster [2014] EWHC 1083 (Ch) at para 33. I would also observe that in a Part 8 Claim such as this, there is much to be said for the approach which has recently been adopted by Briggs J. (as he then was) and David Richards J. in various cases arising out of the administration of Lehman Brothers International (Europe) and MF Global of obtaining directions from the court that the parties produce an agreed statement of facts and file “Position Papers” stating their contentions prior to exchange of skeleton arguments, rather than seeking to argue the case in the witness statements.

I was referred by the parties to a number of the well-known authorities on interpretation of commercial documents, including in particular the speeches of Lord Hoffmann in Investors Compensation Scheme v West Bromwich Building Society [1998] 1 WLR 896 and Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101; the various judgments in Re Sigma Finance [2010] 1 All ER 571 (SC); and Lord Clarke’s judgment in Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900. I would summarise the basic principles as follows:

I turn to the documents that are relevant to the question of the identity of the Controlling Party.

The first relevant document in chronological order is the A/B Intercreditor Deed dated 22 May 2007, which was designed to regulate priorities as between the Lenders, both in respect of the Libra Loan and the Subordinated B Loan.

Libra 2007 (NHP) Limited was a party to the A/B Intercreditor Deed in various capacities. These included its then capacity as “A Lender” in respect of the £638 million Libra Loan, which was expressly referred to in the document as “the A Loan”: see the list of parties, the definition of “A Loan” in clause 1.1, and Schedule 6. Libra 2007 (NHP) Limited was also a party to the A/B Intercreditor Deed in its then capacity as Lender in respect of the B0-1, B0-2 and B2 tranches of the Subordinated B Loan. The remaining parties were the institutional Lenders in respect of the B1, B3 and B4 tranches of the Subordinated B Loan, and Credit Suisse as the Security Agent for all the Lenders in respect of the Libra Loan and the Subordinated B Loan.

As well as providing for the subordination and priority of payments as between the Lenders in respect of the different tranches of the Whole Loan, the A/B Intercreditor Agreement also provided for the servicing of the Whole Loan. Clause 13.1 stated,

“The Lenders and the Security Agent hereby agree that the A Lender and the Security Agent shall at all times cause the Whole Loan and this Deed to be serviced, as their agent, on their behalf pursuant to a Servicing Agreement pursuant to which a Servicer and, if applicable, a Special Servicer will be appointed. The B Lenders will not be a party to such Servicing Agreement, but will be a beneficiary thereof, and hereby authorise the Security Agent to execute on their respective behalves, the Servicing Agreement. While the Servicing Agreement may contain more extensive and detailed provisions than set forth in Schedule 4 (Servicing Principles), in the event of any conflict the provisions set forth in Schedule 4 (Servicing Principles) to this Deed shall override, unless otherwise consented to by the Lenders….”

Schedule 4 provided that the Servicing Agreement would incorporate provisions substantially in the form there set out, subject to any amendments requested by the rating agencies initially rating the Notes. Clause 1 set out the "Servicing Standard" governing the performance of their functions by the Servicer and Special Servicer, and Clause 2 defined a number of "Servicing Transfer Events", following which the Whole Loan was to be serviced by the Special Servicer as a Specially Serviced Loan. Such Servicing Transfer Events included payment defaults under the Whole Loan.

Clauses 3 and 4 then set out the definition of “Controlling Party” and the requirements for the Servicer or Special Servicer to consult with, provide information to, and to obtain the approval of the Controlling Party to certain specified actions. Under clause 3, the identity of the Controlling Party was dependent upon whether one or more “Control Valuation Events” had occurred. The general scheme of clause 3 was to provide for the "Representative" of the Lender(s) for the most junior tranche of the Subordinated B Loan (the B4 Loan) to be the Controlling Party for so long as there had not been a Control Valuation Event in respect of that tranche. A Control Valuation Event was the result of a calculation performed by reference to the principal amount outstanding of the tranche, a valuation of the underlying Property Portfolio and any realised losses. The effect was that as each tranche of the Subordinated B Loan moved further underwater, there would be successive Control Valuation Events, following each of which the Representative for the Lender(s) in respect of the next most senior tranche of the Subordinated B Loan would become the Controlling Party.

Pausing there, it is common ground between the parties that Control Valuation Events for each of the tranches of the Subordinated B Loan up to and including the B0-1 Loan have occurred and are continuing, so that the relevant clause of Schedule 4 in the present circumstances is clause 3(g) which provided:

“3.

For the purposes of this Schedule: the “Controlling Party” is:

…..

(g)

for as long as a B4 Loan Control Valuation Event, a B3 Loan Control Valuation Event, a B2 Loan Control Valuation Event, a B1 Loan Control Valuation Event, a B0-2 Loan Control Valuation Event and a Control Valuation Event for the B0-1 Loan…but no other Control Valuation Event, is continuing, the Representative for the A Loan.”

Clause 3 then set out the definition of “Representative” for a Loan as follows,

“the "Representative" for a Loan means either the Lender for that Loan, or if more than one Lender owns a Loan, then those Lenders’ duly appointed Loan Representative for that Loan or (if there is no Loan Representative), Lenders whose commitments and participations with respect to that Loan represent more than 50 per cent. of that Loan.”

For completeness I would add that the concept of “Loan Representative” was explained further at clause 18 of (the body of) the A/B Intercreditor Deed. Clause 18.1 provided that where there was more than one Lender participating in any Loan, the majority of the relevant Lenders by value were to elect a Loan Representative, and upon the giving of notice of such election to the Security Agent, the various consents, notices, directions and other acts of the relevant Lenders might be made by the Loan Representative acting on their behalf.

On 23 May 2007 - the day after the execution of the A/B Intercreditor Deed, and the day before the execution of the Servicing Agreement – the Issuer published the Offering Circular for the Notes. The Offering Circular was a Prospectus for the purposes of Directive 2003/71/EC and the Issuer expressly accepted responsibility for the information contained in it, stating, in conventional form that,

“To the best of the knowledge and belief of the Issuer, the information contained in this Offering Circular … is in accordance with the facts and does not omit anything likely to affect the import of such information.”

That acceptance of responsibility was, however, followed by what was described as an “Offeree Acknowledgment” in the following terms,

“Each person receiving this Offering Circular, by acceptance hereof, hereby acknowledges that:

The obligations of the parties to the transactions contemplated herein are set forth in and will be governed by certain documents described herein, and all of the statements and information contained herein are qualified in their entirety by reference to such documents. This Offering Circular contains summaries, which the Issuer believes to be accurate, of certain of these documents, but for a complete description of the rights and obligations summarised herein, reference is hereby made to the actual documents, copies of which may (on giving reasonable notice) be obtained from the Note Trustee.”

In the Offering Circular, in both the summary of the main features of the transaction and the detailed description of the transaction under the heading “Servicing”, there was a description of the Controlling Party which generally followed the wording of clause 3 of Schedule 4 to the A/B Intercreditor Deed. There was, however, one critical difference. The equivalent to clause 3(g) of Schedule 4 to the A/B Intercreditor Deed stated as follows:

“The “Controlling Party” means:

….

(g)

for as long as a B4 Loan Control Valuation Event, a B3 Loan Control Valuation Event, a B2 Loan Control Valuation Event, a B1 Loan Control Valuation Event, a B0-2 Loan Control Valuation Event and a Control Valuation Event for the B0-1 Loan…but no other Control Valuation Event, are continuing, the Controlling Class Representative.”

(my emphasis)

As can be seen, the critical difference was that the Offering Circular contained the words “the Controlling Class Representative” in place of the words “the Representative of the A Loan” as had appeared in the A/B Intercreditor Deed.

The concept of a Controlling Class or a Controlling Class Representative was not one that had featured in the substantive provisions of the A/B Intercreditor Deed. The Offering Circular did, however, contain a definition of “Controlling Class” and “Controlling Class Representative” as follows:

“The holders of the most junior class of Notes outstanding at any time … who meet the Controlling Class Test as defined in Condition 20 (Controlling Class) [of the Notes] will be the “Controlling Class”.

The Conditions [of the Notes] and the Servicing Agreement permit the Controlling Class to appoint a representative (the “Controlling Class Representative”) to represent its interests. The appointment of a Controlling Class Representative will be deemed effective upon written notice being given to each of the Issuer, the Note Trustee, the Servicer and the Special Servicer.”

Those descriptions of the Controlling Class and the Controlling Class Representative in the Offering Circular were duly reflected in Condition 20 of the Notes. Condition 20 of the Notes also contained the Controlling Class Test. Condition 20 provided that a class of Notes would meet the Controlling Class Test if the ratio of the principal amount outstanding for that Class to the principal amount outstanding for all Notes at the relevant time was not less than 25% of that same ratio as at the Closing Date of 24 May 2007. This meant that the Controlling Class Test would be determined by reference to the principal amount of the outstanding Notes and would not take any account of the underlying value of the Property Portfolio or the financial interests (or lack of interest) of the Noteholders in it.

The reference to the Controlling Class Representative becoming the Controlling Party on the happening of a Control Valuation Event for the B0-1 Loan and the possibility that the Controlling Party might be the representative of a junior class of Noteholders was followed through into other parts of the Offering Circular. So, for example, in the Risk Factors section under the heading “Conflicts of Interest” the following paragraphs appeared:

“Conflicts between the Interests of the Holders of the Notes and the Controlling Class Representative: As described herein, under certain circumstances, the Controlling Class will be entitled to appoint a Controlling Class Representative (which may be the Controlling Class (or any member of the Controlling Class)) with respect to the … Whole Loan. Prior to the Servicer or Special Servicer making certain modifications with respect to the … Whole Loan, the Servicer or Special Servicer, as the case may be, will be required to obtain the approval of the Controlling Class Representative if it is the Controlling Party.

….

Rights of the Controlling Party: The Controlling Party will have the right to remove and replace the Special Servicer upon the occurrence of a Servicing Transfer Event and in some instances approve certain actions with respect to the … Whole Loan in the event that the … Whole Loan becomes a Specially Serviced Loan including, among other things, any enforcement of the … Whole Loan, the appointment of a receiver, modifications, waivers and amendments of any monetary terms of the … Whole Loan, the release of any security, the release of the Borrower’s obligations under the relevant Credit Agreement and actions taken on the Properties with respect to environmental matters. The Special Servicer will not be required to follow any such direction that would cause it to violate the Servicing Standard. There can be no assurance that any directions provided by the Controlling Party will ultimately maximise the recovery on the … Whole Loan. Because the Controlling Party will represent a junior class of Notes or a Subordinate Lender, the Controlling Party will have interests that may conflict with those of the other Noteholders in respect of a Specially Serviced Loan.”

(my emphases)

As will be appreciated, that latter risk warning was prophetic: in the current circumstances, the most junior Class E Noteholders are the “Controlling Class”, notwithstanding that they, and indeed, a number of classes of Notes senior to them, are economically underwater given the fall in value of the Property Portfolio. Moreover, the commercial interests of the Class E Noteholders who are opposed to the proposed sale of the underlying Borrower group appear to be in conflict with the commercial interests of the Class A Noteholders who are in favour of it.

The Servicing Agreement was executed on 24 May 2007, the day after the Offering Circular. The original parties to the Servicing Agreement were the Issuer, the Note Trustee, the Security Agent for the Lenders in respect of the Whole Loan, two Servicers (one of which was the Special Servicer), the Advance Provider and the Backup Advance Provider.

Under the Servicing Agreement the Servicer and Special Servicer were appointed to service and administer the Whole Loan and the Related Security on behalf of the Issuer, the Lenders in respect of the Subordinated B Loan, the Note Trustee and the Security Agent. As is standard in CMBS transactions of this kind, the Servicer and Special Servicer (as applicable) were entitled under clause 2.3 to exercise all the rights and powers and discretions of the Issuer, the Lenders in respect of the Subordinated B Loan and the Security Agent in relation to the Whole Loan and Related Security.

Clause 2.2(a) set out the Servicing Standard in materially the same terms as in clause 1 of Schedule 4 to the A/B Intercreditor Deed. It provided, amongst other things, that the Servicer and Special Servicer should act:

Part II of the Servicing Agreement addressed further the powers and duties of the Servicer and Special Servicer with regard to the operation and administration of the underlying Whole Loan. This Part dealt with payments and collections (clause 3), insurance (clause 4) and modifications, waivers, amendments and consents (clause 5). Part III of the Servicing Agreement dealt with Special Servicing and enforcement and sale of the Whole Loan. Among other things it gave the Controlling Class Representative an exclusive right to purchase the Libra Loan after the Whole Loan had become a Specially Serviced Loan: see clause 7.3(e).

Part IV of the Servicing Agreement was the most relevant for present purposes. It was entitled “Rights of the Controlling Class and Subordinate Lenders” and contained a number of different provisions.

Clause 8.1 entitled the majority holders of the Controlling Class to appoint a Controlling Class Representative in circumstances where the Whole Loan had become a Specially Serviced Loan. It provided,

“The majority holders of the Controlling Class may appoint and remove a Controlling Class Representative to represent the interests of the Controlling Class in relation to the … Whole Loan for as long as it is a Specially Serviced Loan. Such appointment shall become effective upon notice being provided in writing to the Note Trustee, the Servicer and the Special Servicer (attaching a copy of the instrument appointing the Controlling Class Representative).”

The definition of Controlling Class for the purpose of the Servicing Agreement was to be found in a “Master Definitions Schedule” that was annexed, and was in materially the same form as Condition 20 of the Notes.

Clause 8.2 dealt with the Cure Rights of Subordinate Lenders and PIK Facility Lenders with respect to the Whole Loan. No-one suggested that it had any relevance to the issues that I have to decide.

Clause 8.3(a) identified the "Controlling Party" in terms that were similar, though not identical to, clause 3 of Schedule 4 of the A/B Intercreditor Deed, but did not follow the language of the Offering Circular. The crucial clause was clause 8.3(a)(vii) which provided as follows:

“The “Controlling Party” means:

….

(vii)

for as long as a B4 Loan Control Valuation Event, a B3 Loan Control Valuation Event, a B2 Loan Control Valuation Event, a B1 Loan Control Valuation Event, a B0-2 Loan Control Valuation Event and a Control Valuation Event for the B0-1 Loan…but no other Control Valuation Event, are continuing, the Representative for the A Loan.”

(my emphasis)

Clause 8.3(a) also contained the following definition of “Representative” for a Loan:

“the "Representative" for a Loan means either the Loan Representative for that Loan (if one is appointed) or (if there is no Loan Representative), Lenders whose commitments and participations with respect to that Loan represent more than 50 per cent of that Loan. For the avoidance of doubt, the Controlling Party will have no ability to take direct action in respect of the timing or manner of enforcement of any Related Security with respect to the Libra Loan.”

The Master Definitions Schedule defined a “Loan Representative” as,

“in relation to any Loan, any party identified to the Security Agent as representative of the Lenders participating in that Loan”.

The Master Definitions Schedule also expressly defined “Lenders” as the Issuer, together with the Lenders in respect of the Subordinated B Loan. Neither the Servicing Agreement nor the Master Definitions Schedule contained a definition of “the A Loan” but it is not disputed that this was a reference to the Libra Loan.

Clauses 8.4 to 8.8 of the Servicing Agreement provided for consultation, consent and provision of information rights of the Controlling Party. These followed the equivalent provisions of Schedule 4 to the A/B Intercreditor Deed. In summary, clause 8.4 obliged the Servicer/Special Servicer to consult with the Controlling Party before taking any significant action in relation to the Whole Loan or its Related Security, and to obtain the written approval of the Controlling Party before taking various specified actions such as agreeing to a modification of the terms of the Whole Loan or the release or substitution of any security. Those rights were all subject to a proviso that nothing should oblige the Servicer or Special Servicer to service the Whole Loan other than in accordance with the Servicing Standards.

Clause 8.9 contained a clause limiting the parties to whom the Controlling Class Representative might owe duties to those members of the class of Noteholders of which it was the representative. The clause also exonerated it from any liability “to the Issuer, the Security Agent or the Note Trustee for any action taken…in good faith pursuant to this Agreement, or for errors in judgment”. There was then a separate, but similarly worded, exoneration clause in clause 8.10 in favour of the Controlling Party.

Any analysis of the identity of the Controlling Party entitled to serve notice requiring the termination of the appointment of the Special Servicer must start with the obvious proposition that this is a question of interpretation of the Servicing Agreement, rather than any other document.

I preface my analysis by observing that the Servicing Agreement clearly distinguishes between three concepts: the “Controlling Party”, the “Controlling Class Representative”, and a “Loan Representative”, each of which has distinct characteristics. So, for example, there will be a Controlling Party at all times: but a Controlling Class Representative can only be appointed to represent the interests of the Controlling Class for as long as the Whole Loan is a Specially Serviced Loan. Moreover clauses 8.9 and 8.10 deal separately with the exoneration of the Controlling Class Representative and the Controlling Party.

Likewise, under clause 8.1, the appointment of a Controlling Class Representative is carried out by the majority holders of the Controlling Class of Notes and becomes effective only on notification in writing (together with a copy of the instrument of appointment) being provided to the Note Trustee, the Servicer and the Special Servicer. In contrast, under the Master Definitions Schedule, a Loan Representative is defined as a representative of the Lenders participating in a Loan, and the definition of “Lenders” expressly identifies the Issuer together with the Lenders in respect of the Subordinated B Loan. There is no reference to any Noteholders. Further, the appointment of a Loan Representative requires notification to the Security Agent rather than to the Note Trustee, the Servicer and the Special Servicer.

The first, and most obvious point that I would make was illustrated when, in the course of his submissions, Mr. Trower suggested that if it had really been intended that the Issuer would have been Controlling Party in the circumstances prescribed in clause 8.3(a)(vii), then the clause would simply have identified the Issuer in terms, rather than adopt what he suggested was a circuitous definitional route to the same result. To the contrary, I think that such an argument highlights one of the more powerful points against Anchorage. The simple fact is that the parties to the Servicing Agreement had readily available to them two potential formulations by which to identify the Controlling Party in the event of a continuing Control Valuation Event for the B0-1 Loan. One of those came from the A/B Intercreditor Deed, and the other came from the Offering Circular. The formulation in the Offering Circular referred in terms to the Controlling Class Representative being the Controlling Party; and I observe that the parties to the Servicing Agreement had, only two sub-clauses earlier, in clause 8.1, identified and defined the role of the Controlling Class Representative for the purposes of the Servicing Agreement. In these circumstances, if the parties had intended the Controlling Class Representative to be the Controlling Party for the purposes of clause 8.3(a)(vii) of the Servicing Agreement, the easiest course, by far, would have been for them simply to have mirrored the wording of the Offering Circular and referred to the Controlling Class Representative in those terms; but they did not.

Instead, given the words which the Servicing Agreement actually used, I think that it is apparent that “the Representative for the A Loan” in clause 8.3(a)(vii) must have been intended as a reference to the Issuer. On the ordinary meaning of the words, one would expect that a party who was identified “as representative” of the Lenders participating in that Loan within the definition of “Loan Representative” in the Master Definitions Schedule would be one of the Lenders themselves, rather than some third party who was not a Lender. It is also clear that the reference to the “A Loan” is a reference to the Libra Loan, and the Issuer is the only Lender in respect of that Loan. By the same token, on the ordinary meaning of the words, I do not think that a Noteholder falls naturally within the concept of a Loan Representative, because no-one suggested that a Noteholder could claim to be a “Lender”. A Noteholder would also not naturally fall within the words “Lenders whose commitments and participations with respect to that Loan represent more than 50 per cent of that Loan” under the second limb of the definition of “Representative” of a Loan in clause 8.3(a).

Mr. Trower took issue with this approach, submitting that as a matter of linguistics it was inapposite to refer to the Issuer as the “representative of the Lenders” in the definition of “Loan Representative”, or as “Lenders” representing more than 50% of the Loan in the second limb of the definition of “Representative”, because (he said) it was known that the A Loan would always only ever have one Lender, which could not “represent” itself. I do not agree. As I have indicated, I do not think that it is a misuse of language to describe a sole Lender as representing itself, and I would add that the parties to the A/B Intercreditor Deed plainly did not think that there was anything inappropriate in describing a sole Lender as a “Representative”: see the first limb of the definition of “Representative” in clause 3 of Schedule 4. Further, as a matter of drafting, the singular/plural point is answered by clause 2.9 of the Master Definitions Schedule, which provides that in the interpretation of any “Transaction Document” (which includes the Servicing Agreement) “words importing the singular number include the plural and vice versa” (save where the context otherwise requires).

Mr. Trower also submitted that the wording of clause 22.2 suggested that the Controlling Party had to be someone other than the Issuer itself, because the clause provided for the Controlling Party to serve notice on the Issuer in the alternative to the Note Trustee. I accept that the drafting in this respect might be thought somewhat clumsy; but I do not think that this points conclusively or even with any great weight to a conclusion that the Issuer cannot be the Controlling Party. That is because the clause is in no way unworkable if the Issuer is the Controlling Party. Clause 22.2 was drafted to apply to a variety of Control Valuation Events, in most of which the Controlling Party would be a representative of the Lenders in respect of a tranche of the Subordinated B Loan, and hence perfectly well able to give notice to the Issuer. If, in the most extreme B0-1 Loan Control Valuation Event under clause 8.3(a)(vii), the Issuer were to be the Controlling Party, clause 22.2 would simply require it to select the alternative of giving notice to the Note Trustee. The same observation can be made in respect of a number of other clauses in the Servicing Agreement to which Mr. Trower drew my attention, none of which would be rendered unworkable if the Issuer was the Controlling Party.

Turning from the wording of the Servicing Agreement itself to the background to that agreement, attention is immediately drawn to the A/B Intercreditor Deed. As I have indicated, that document included, in clause 13.1, a contractual undertaking to put in place a servicing agreement containing certain provisions as described in Schedule 4. Moreover, the A/B Intercreditor Deed also expressly provided that,

“While the Servicing Agreement may contain more extensive and detailed provisions than set forth in Schedule 4 (Servicing Principles), in the event of any conflict the provisions set forth in Schedule 4 (Servicing Principles) to this Deed shall override, unless otherwise consented to by the Lenders….”

When reference is made to the provisions of Schedule 4 of the A/B Intercreditor Deed, and in particular to the definition of the “Representative for a Loan” in clause 3 as set out in paragraph 33 above, it is clear that the Controlling Party in the circumstances described in clause 3(g) of Schedule 4 would be the Issuer. That is because the "Representative" for a Loan was expressly defined to include the Lender for that Loan; the A Loan was defined as meaning the Libra Loan; and the Libra Loan was only to have one Lender, namely the Issuer. Indeed, Mr. Trower did not contend that the A/B Intercreditor Agreement could realistically be read in any other way. In my view, this unambiguous meaning of the contract that was the precursor to the Servicing Agreement provides very strong support for the conclusion that in the event of a B0-1 Loan Control Valuation Event, the Controlling Party under the Servicing Agreement was intended to be the Issuer.

The problem raised by this conclusion, is, of course, that this would be flatly inconsistent with what was said in the Offering Circular. The terms of the Offering Circular set out in paragraphs 37 and 40 above made it clear that the Issuer believed that in the event of a B0-1 Loan Control Valuation Event, the Controlling Party would be the Controlling Class Representative. For Anchorage, Mr. Trower naturally placed great reliance upon these statements in the Offering Circular. He submitted that the Servicing Agreement was a document that recognised both the interests of the Lenders and the Noteholders, and he sought to downplay the terms of the A/B Intercreditor Agreement as a document that dealt only with the position of the Lenders inter se.

Although I accept that the Offering Circular is undoubtedly an important part of the relevant matrix against which the Servicing Agreement must be construed, the obvious problem which Mr. Trower faced was that the A/B Intercreditor Agreement was a contractual document which, as between the parties to it, required the Servicing Agreement to take a particular form; whereas the Offering Circular was not a contractual document, and any force that it might otherwise have had as an aid to construction of the Servicing Agreement is minimised by the express qualification which it contained as referred to in paragraph 36 above. That qualification included, in particular, the statement that,

“The obligations of the parties to the transactions contemplated herein are set forth in and will be governed by certain documents described herein, and all of the statements and information contained herein are qualified in their entirety by reference to such documents.”

Doubtless recognising such difficulties, Mr. Trower’s primary argument on construction was an ingenious one. He submitted that it was possible to read the Servicing Agreement and the Master Definitions Schedule in such a way that the Offering Circular could be treated as the identification by the Issuer of the Controlling Class Representative as the party who would be the “Loan Representative” for the A Loan for the purposes of clause 8.3(a)(vii) of the Servicing Agreement.

Though attractively made, I do not accept that submission, which seems to me to stretch the sense of the contractual documents beyond breaking point and to require the court to adopt an artificial view of what actually happened. The definition of “Representative” in clause 8.3(a) of the Servicing Agreement plainly envisages that a “Loan Representative” will be “appointed”, and in order to fit within the definition of a “Loan Representative” in the Master Definitions Schedule there must have been a “party identified to the Security Agent as representative of the Lenders participating in that Loan”. For a number of reasons I do not think that the relevant provisions of the Offering Circular can sensibly be viewed as intended to constitute such an appointment, or indeed that they identified anyone to the Security Agent.

First, given that the Offering Circular was issued prior to the execution of the Servicing Agreement, it is difficult to see how it could have been intended to have any effect in respect of a contract that had, at that point in time, not yet come into existence. Moreover, the terms of the Servicing Agreement seem (as would be conventional) to be forward-looking: if any contractual significance were intended to be attached to something that had already been done prior to its execution, one would have expected that to have been reflected in the terms of the Servicing Agreement itself, or at very least referred to in some way, such as by a recital. Neither was the case.

Secondly, although the Offering Circular contained the same definition of “Loan Representative” as the Master Definitions Schedule, it did not suggest that the references to the Controlling Class Representative in the relevant places were intended in any sense by the Issuer as an appointment to satisfy that definition. Instead, as Mr. Hill QC, who appeared for the Class A Noteholder pointed out, the Offering Circular made it clear that it was intended merely as a description of the provisions of the relevant contractual documents and was qualified in its entirety by them.

Thirdly, the Offering Circular did not, in any real sense, identify any person or entity at all. At best the reference to the Controlling Class Representative was a general description of an unknown person or entity, the actual identity of which would only become apparent if and when the Whole Loan had become a Specially Serviced Loan, and dependent upon who held the majority of Notes in whichever was the Controlling Class of Notes at the relevant time. I do not think that such a contingent and uncertain description was what was contemplated by the definition of Loan Representative.

Fourthly, there is no real basis upon which it could be said that any such identification had been made to the Security Agent. Whilst it is perfectly reasonable to assume that the Security Agent must have at some point seen the document, the Offering Circular was not addressed to or directed at the Security Agent: it was addressed to investors who were potential Noteholders. Moreover, there was certainly no suggestion of any acknowledgement by the Security Agent that any (contingent) appointment of a Loan Representative had taken place.

As an alternative argument, Mr. Trower submitted that if I was not persuaded by the contention that the Offering Circular served a contractual purpose by appointing a Representative for the A Loan under the Servicing Agreement, I should conclude that an obvious mistake had been made in the drafting of the Servicing Agreement. He submitted that an analysis of the consequences and background showed that it would be commercially absurd if the Controlling Party were to be the Issuer itself, and that the parties must have meant to give some meaningful role to the Controlling Class Representative by making it the Controlling Party in the present circumstances.

In support of his contentions, Mr. Trower made a number of observations concerning the commercial purpose and effect of the transaction. In particular, he submitted that the parties could not have intended that the Controlling Party would be an entity such as the Issuer, which was a special purpose vehicle with no independent economic interest of its own in the transaction. He supported that submission by pointing out that the parties had plainly intended that the management and administration of the Whole Loan and the Related Security should be carried out by someone other than the Issuer – i.e. the Servicer or Special Servicer – so that it would be “slightly bizarre” to conclude that the parties intended that the Issuer should ever take on such responsibility.

Mr. Trower contrasted that result with the very limited role which he said that the Controlling Class Representative would have under the Servicing Agreement if Mr. Hill was correct in his submissions. Why, Mr. Trower asked, would the parties go to the length of providing for the appointment of a Controlling Class Representative if it were not intended that it should have some significant role under the Servicing Agreement? He suggested that if the Controlling Class Representative was not intended to be the Controlling Party in the circumstances set out in clause 8.3(a)(vii) then its role under the Servicing Agreement would be limited to exercising the right to purchase the Libra Loan under clause 7.3(e).

Mr. Hill’s response was to deny that there was any mistake (obvious or otherwise) in the drafting of the Servicing Agreement. He observed that if there were such a mistake it would also have had to have extended to the A/B Intercreditor Deed. He submitted that this was an impossible contention, not least because the parties to the A/B Intercreditor Deed had entered into an agreement that, as between them, made perfect commercial sense.

On the role of the Issuer, Mr. Hill drew attention to the Deed of Charge and Assignment dated 24 May 2007. By clause 3.1 (headed “Related Security and Jersey Security Interests”) of that Deed the Issuer provided the Note Trustee with the benefit of security over its rights in the Libra Loan and the Related Security to secure payment of the amounts due in respect of the Notes. In addition, under clause 3.2 (headed “Contractual Rights”), the Issuer executed a security assignment to the Note Trustee of all its rights and interests both present and future, under the transaction documents including, in particular, the Servicing Agreement. Clause 3.9 of the Deed of Charge and Assignment then provided,

“Without prejudice to the rights of the Note Trustee after the security created under this Deed has become enforceable, the Issuer hereby authorises the Note Trustee, prior to the security created by this Deed becoming enforceable, to exercise, or refrain from exercising, all rights, powers, authorities, discretions and remedies under or in respect of the agreements referred to in Clause 3.1 (Related Security and Jersey Security Interests) and Clause 3.1(b) (Contractual Rights) in such manner as in its absolute discretion it shall think fit.”

It is clear, and Mr. Trower did not dispute, that the reference to clause 3.1(b) in clause 3.9 of the Deed of Charge and Assignment is an obvious typographical error, and it should be read as a reference to clause 3.2.

Mr. Hill submitted that this meant that there was nothing commercially absurd or obscure about the Issuer becoming the Controlling Party for the purpose of the Servicing Agreement, because the benefit of the rights given to the Issuer as Controlling Party would be capable of exercise by the Note Trustee, which would in turn be entitled to consider how to do so in the interests of the Noteholders in accordance with its general obligations under the Trust Deed. He then pointed out that clause 12.19 of that Trust Deed required the Note Trustee to have regard to the interests of Noteholders equally provided that in the event of any conflict, effect should be given to the interests of the Noteholders in accordance with their order of seniority.

Mr. Hill further observed that this arrangement was far more commercially sensible than that contended for by Mr. Trower. Mr. Hill submitted that in the extreme situation which has been reached in which the more junior Notes are significantly underwater and the only real economic interest in the Libra Loan and Related Security rests with the Class A (and possibly Class B) Noteholders, an arrangement under which the rights of the Controlling Party vested in the Issuer, but had been assigned by way of security to the Note Trustee, made sense. He said that this would have the result that the Note Trustee could consider whether to exercise any rights in respect of the Special Servicer in the interests of all Noteholders and could resolve any conflicts in that respect in accordance with the provisions of the Trust Deed. He said that this made far more sense than Mr. Trower’s alternative under which, no matter how far underwater they are, control and influence over the Special Servicer would rest with a majority of the junior Class E Noteholders who have no obligation to act other than in what they regard as their own interests.

Finally, Mr. Hill pointed out that although the Offering Circular plainly envisaged that the Controlling Class Representative would be entitled to exercise “all of the rights, powers and discretions given to it pursuant to the Servicing Agreement” the Offering Circular did not specify what those rights might be. He then drew attention to the rights given to the Controlling Class Representative under clause 7.3(e), and also pointed out that there were further rights to receive information and give consents which were given to the Controlling Class Representative under clauses 9.3(b) and 9.9(c) of the Servicing Agreement which, whilst perhaps not of great significance in themselves, meant that it could not be said that the appointment of the Controlling Class Representative had no commercial content if it were not also to be the Controlling Party.

For completeness I should also record that Mr. de Mestre, who appeared for the Note Trustee, formally maintained a position of neutrality on this issue. He did, however, indicate that the Note Trustee would be “surprised” to find that it had substantive rights and obligations if the Issuer were to be the Controlling Party. I also detected more than a little reluctance on the part of the Note Trustee to find itself in such a position. But whilst there would appear to be a need for the Issuer and the Note Trustee to consider how such matters might work out between them in practice, I did not understand Mr. de Mestre to contend that Mr. Hill’s analysis by reference to the terms of the Deed of Charge and Assignment would be impossible or commercially unworkable.

In my judgment, although the points raised by Mr. Trower have force, I think that Mr. Hill’s points make at least equal commercial sense. I therefore cannot conclude that the result that is required by the ordinary meaning of the words of the Servicing Agreement is one that is commercially absurd. Nor can I otherwise be sure that a mistake has been made in the drafting of the Servicing Agreement rather than the Offering Circular, so that the parties to the Servicing Agreement must have had the intention contended for by Mr. Trower.

In particular, Mr. Trower was unable to direct me to any statement in the Offering Circular or otherwise explain to me the commercial logic of why the transaction should have provided for the role of Controlling Party to move up the tranches of the Subordinated B Loan as those tranches fell successively underwater, but to have provided that when the point was reached that value broke in the Libra Loan, the Controlling Party would be and remain the representative of the most junior Notes, irrespective of any further falls in value of the Property Portfolio and irrespective of which class of Notes might be most directly be affected by decisions taken by the Special Servicer, and which class of Notes might be underwater.

In the absence of a clear explanation of the commercial rationale for such a result, it seems to me that it is equally, if not more, commercially rational for the parties to the Servicing Agreement to have intended that if the position had been reached that all of the Subordinated B Loan was underwater, the Controlling Party should be the party which had made the Libra Loan to the Borrower, in the same way that the Controlling Party would previously have been the relevant Lender (or one of the Lenders) which had made the relevant tranche of the Subordinated B Loan to the Borrower.

Moreover, I cannot see how it could be said to be commercially absurd for the parties to the Servicing Agreement to have agreed that if value broke in the Libra Loan, the Controlling Party should not simply be the majority holder of one of the class of Notes, entitled to act in its own interests, but should instead be a party that was obliged to have regard to the interests of all the underlying Noteholders. That party would be the Issuer (which would have to have regard to the interests of all of its creditors) or, by security assignment, the Note Trustee (the duties of which to Noteholders were set out in the Trust Deed).

I am acutely conscious that the Offering Circular clearly indicates that the Issuer thought that the Controlling Party would be the representative of a junior class of Noteholders or a Subordinated B Lender rather than itself. I am also mindful that given the importance of a prospectus to investors, there is much force in a submission that the court ought to strive to ensure, whenever possible, that underlying contractual documents are interpreted consistently with it. I further recognise that the argument which has been somewhat belatedly made on behalf of the Class A Noteholder places great reliance upon contractual documents to which it was not a party, rather than the terms of the Offering Circular, which I assume was the primary basis upon which it acquired its Notes. But at the end of the day my task is to construe the contractual documents in accordance with the recognised principles of interpretation that I have set out above. If the result is that the Offering Circular did not accord with the contractual documents, then this may simply have the result that Noteholders might have claims in respect of the Offering Circular.

In the result, I conclude that in the present situation, the Servicing Agreement provides that the Controlling Party is to be the Issuer, and not the Controlling Class Representative of the Class E Notes.

Although the conclusion that I have reached means that the remaining questions raised by the Note Trustee will be of no practical consequence since Anchorage was not entitled to serve a notice under clause 22.2 of the Servicing Agreement, the remaining points were the subject of argument, and so I will express my views on them to the extent to which I consider it is appropriate for me to do so.

Under clause 22.5(b) of the Servicing Agreement,

“No termination of the Servicer’s or the Special Servicer’s appointment under Clauses 22.1 (Servicer Events of Default), 22.2 (Termination by the Controlling Party) or 22.4 (Voluntary Termination) shall take effect unless:

….

(b)

the Servicer or Special Servicer or the Note Trustee shall have notified each of the Rating Agencies in writing of the identity of the successor Servicer or Special Servicer and the Rating Agencies shall have confirmed that the appointment of the successor Servicer or Special Servicer, as applicable, will not result in an Adverse Rating Event.”

Under the Master Definitions Schedule, “Rating Agencies” are defined as,

“Moody’s, S&P and Fitch or any other rating agency which is appointed to provide a credit rating for any securities issued in connection with any Securitisation.

Moody's rate the Class A Notes, S&P rate all the Notes, and Fitch rates the Class B-E Notes.

An “Adverse Rating Event” is defined as,

“an event that would cause a downgrade, qualification or withdrawal of the then current ratings of any class of Notes, as confirmed in writing by S&P or Fitch”.

As to these requirements, it is obvious, and common ground, that any confirmation from a particular Rating Agency is only required to relate to its own rating, and not to the rating of any of the other agencies.

An issue has arisen in relation to this precondition because although the three Rating Agencies have been duly notified of the identity of the proposed replacement Special Servicer, and S&P has provided a suitable confirmation in writing, no confirmation has been obtained from either Fitch or Moody’s that the appointment of a successor Special Servicer will not result in the downgrade, qualification or withdrawal of its current rating of the relevant classes of Notes.

As I understand it, the reason for this so far as Fitch is concerned, is that Fitch indicated in an announcement on 10 December 2012 that it would not, as a matter of policy, provide any confirmations in relation to CMBS transactions. Fitch stated,

"...the agency does not provide [Rating Agency Confirmations] for servicer replacements in EMEA CMBS, noting concerns about the potential for conflicts of interest. A lack of insight into the reasons for a requested change in special servicing and the nature of the controlling class investor's commercial relations with other interested parties make the task of prejudging the consequences for ratings unreliable, in Fitch's view."

The position in relation to Moody’s is less clear. The suggestion in the evidence filed on behalf of the Class A Noteholder is to the effect that the absence of a reference to confirmation in writing from Moody’s in the definition of “Adverse Rating Event” is explained by the fact that it is well-known in the market that Moody’s does not generally provide written rating confirmations in relation to CMBS transactions. I infer, though the evidence is not entirely clear, that this was known to be the position when the Servicing Agreement was entered into in 2007. I was, however, given to understand that this did not mean that Moody’s was generally unwilling to give such confirmations: just that such confirmations would not be given in writing.

On the specific facts of this case, the Note Trustee’s evidence was that Moody’s had indicated verbally to the Note Trustee that the proposed change of Special Servicer might result in a downgrade or review of Moody’s ratings for the Class A Notes. At the start of his submissions, Mr. de Mestre sought to clarify that evidence by stating that Moody’s had said that they would not issue the required rating confirmation that the Class A Notes would not be downgraded. In the light of these statements, Mr. Trower proceeded to address his argument on the footing that Moody’s had indicated that the change of Special Servicer might have an adverse impact on the rating of the Class A Notes.

Mr. Hill’s basic argument was very simple. He said that clause 22.5(b) required each of the Rating Agencies to provide confirmation that they would not downgrade any of the respective Notes for which they provided a rating; that in the case of S&P and Fitch, that confirmation had to be in writing, and that in the case of Moody’s it need not be in writing. Mr. Hill said that since neither Moody’s nor Fitch had provided the necessary confirmation, the condition in clause 22.5(b) simply could not be satisfied.

Mr. Trower countered that in relation to Fitch he could rely upon clauses 26.7(d) and 26.7(e) of the Servicing Agreement which provided,

“(d)

If this Agreement requires Rating Agency Confirmation to be obtained in relation to a particular matter, the Servicer (or, in the case of matters pertaining to a Specially Serviced Loan, the Special Servicer) shall, as soon as is practicable following a request therefor, provide each Rating Agency with all information as is reasonably necessary and available to it to enable such Rating Agency to determine whether, and on what basis, confirmation should be given.

(e)

…if any provision of this Agreement requires the Servicer or Special Servicer to obtain a written confirmation from the Rating Agencies in respect of a particular matter but a Rating Agency declines to issue such a confirmation, then the relevant provision shall be read and construed as though written confirmation from the Rating Agency declining to issue the confirmation was not required and the Servicer or the Special Servicer, as applicable, may nonetheless proceed with the matter in question, provided it determines in its sole discretion that it would be consistent with the Servicing Standard to do so.”

Mr. Trower did not suggest that clause 26.7(e) could apply to a situation in which a Rating Agency declined to give the requisite rating confirmation on substantive grounds, e.g. because it believed that it would or might downgrade the relevant Notes. However, he submitted that clause 26.7(e) was plainly intended to cover a situation such as had arisen with Fitch, where the Rating Agency in question simply declined to give any confirmations as a matter of policy. Mr. Trower also submitted that one could reach a similar result as a matter of interpretation of clause 22.5(b) because as a matter of commercial common sense it would be wrong to attribute to the parties the intention that if one of the Rating Agencies simply stopped issuing rating confirmations as a matter of policy, clause 22.5 could never thereafter be satisfied, with the result that there could never be a termination of the Servicer or Special Servicer’s appointment under any of clauses 22.1, 22.2 or 22.4.

Mr. Hill’s response (which was supported by the Note Trustee) was that clause 26.7(e) was inapplicable on its terms, because clause 22.5 did not actually require the Servicer or Special Servicer to obtain a written confirmation from the Rating Agencies in respect of a particular matter. Still less, he said, did clause 22.5 envisage a situation in which the Special Servicer was intending to proceed with a specific matter. Rather he said, clause 22.5 simply provided that clause 22.2, which dealt with the termination of the Special Servicer’s appointment, would not be capable of being effective unless such confirmation had been obtained. Mr. Hill said that one could not adopt a more purposive interpretation of clause 22.5(b), and that if this result was inconvenient, then the answer was for the parties to promote a consensual variation of the Servicing Agreement.

Whilst I can see the force in Mr. Hill’s argument as to the inapplicability of clause 26.7(e), I think that Mr. Trower is correct in his approach to construction of clause 22.5(b). To my mind clause 26.7(e) gives a very clear indication in an analogous situation as to what the parties would intend to happen as a matter of common sense if a Rating Agency were simply to stop issuing rating confirmations altogether. In the same way as the parties plainly intended that in such a case the Special Servicer should not be prevented from acting altogether because one of the Rating Agencies stopped issuing rating confirmations, I cannot see how it would make any commercial sense for the parties to have agreed that, for example, just because Fitch no longer gave rating confirmations as a matter of policy, the Servicer or Special Servicer could not even validly terminate its own appointment under clause 22.4 (Voluntary Termination), no matter that both of the other Rating Agencies might be willing to give such confirmations and had done so.

The position in relation to Moody’s is more complex. Mr. Trower’s submission was that the words “as confirmed in writing by S&P or Fitch” in the definition of “Adverse Rating Event” served to limit the requirement in the body of clause 22.5(b) as to which of the Rating Agencies needed to have given the relevant confirmation. He said that no confirmation was required from Moody’s because the concept of an Adverse Rating Event was only an event that would cause a downgrade as confirmed in writing by S&P and Fitch.

In support of that submission, Mr. Trower also referred to a number of other clauses in the Servicing Agreement that limited the number of Rating Agencies from which confirmation might be required. So, for example, he referred to clause 5.7. That concerned the situation in which the consent of the Special Servicer was required to the replacement of a Property Manager, and provided that such consent should not be given by the Special Servicer,

“unless … the Special Servicer … has received prior written confirmation from each of S&P and Fitch (following notification to all Rating Agencies) that such action will not result in an Adverse Rating Event.”

I do not accept Mr. Trower’s argument. It seems to me that the body of clause 22.5(b) is quite clear that each of the Rating Agencies needs to have been notified of the identity of the proposed successor Special Servicer, and (subject to the point already made about a Rating Agency that will not issue any such confirmations as a matter of policy), the requirement is that each such Rating Agency should give the required confirmation that there will not be an Adverse Rating Event.

The other clauses of the Servicing Agreement to which Mr. Trower referred me, such as clause 5.7, certainly show that in some cases confirmation that there would not be an Adverse Rating Event was not to be required from Moody’s: but if anything that proves the point against him. Where the intention was that no confirmation was required from Moody’s, the clause simply excluded Moody’s and referred only to confirmation being received from S&P and Fitch. In contrast, there is no such exclusion from clause 22.5(b): the inference being that even though Moody’s might only be prepared to give the rating confirmation verbally, it was nevertheless still required.

In that regard, it seems to me that the words at the end of the definition of Adverse Rating Event are simply recognition of the fact that S&P and Fitch would be expected to give their confirmations in writing. But I think it is placing too much weight on the few words at the end of the general definition of Adverse Rating Event to qualify the otherwise unrestricted words of clause 22.5(b). That point can be illustrated if the wording of clause 22.5(b) is expanded out using the definitions of Rating Agencies and Adverse Ratings Event as follows:

“No termination of the Servicer’s or the Special Servicer’s appointment under Clauses 22.1 (Servicer Events of Default), 22.2 (Termination by the Controlling Party) or 22.4 (Voluntary Termination) shall take effect unless:

…

(b)

the Servicer or Special Servicer or the Note Trustee shall have notified each of [Moody’s, S&P and Fitch or any other rating agency which is appointed to provide a credit rating for any securities issued in connection with any Securitisation] in writing of the identity of the successor Servicer or Special Servicer and [Moody’s, S&P and Fitch or any other rating agency which is appointed to provide a credit rating for any securities issued in connection with any Securitisation] shall have confirmed that the appointment of the successor Servicer or Special Servicer, as applicable, will not result in [an event that would cause a downgrade, qualification or withdrawal of the then current ratings of any class of Notes, as confirmed in writing by S&P or Fitch].”

For completeness I should add that I do not derive any assistance from clause 29.2(a)(v) of the Servicing Agreement. That provided that a transfer of the obligations of the Backup Advance Provider would only be effective if,

“…the Rating Agencies deliver written confirmation that the then current ratings of the Notes will not be downgraded, withdrawn or qualified as a result of such transfer.”

Whilst that clause is clear in requiring written confirmation from all the Rating Agencies, I think that it is reading too much into the difference in drafting to suggest that the parties did not use the definition of Adverse Rating Event in that clause because they appreciated that the use of that definition carried with it an inference that no confirmation was required from Moody’s.

Finally, I should state that I do not find it surprising or uncommercial that a rating confirmation from Moody’s should be required for the termination of the appointment of the Special Servicer. That event would be of major importance to the operation of the financing structure. I see every reason why the parties might have agreed that positive confirmation should be required from each of the Rating Agencies prepared to give such confirmation that there would be no downgrade or other negative consequence, even though in the case of Moody’s that confirmation might only be given verbally. The counter-factual would to my mind be more surprising: why should the parties be taken to have agreed that the Special Servicer could be replaced in circumstances in which, say, Moody’s had firmly indicated that it would downgrade the Class A Notes, just because Moody’s was only prepared to say so verbally?

The next issue relates to clause 22.5(c) of the Servicing Agreement. That clause provided in material part,

“No termination of the Servicer’s or the Special Servicer’s appointment under Clauses 22.1 (Servicer Events of Default), 22.2 (Termination by the Controlling Party) or 22.4 (Voluntary Termination) shall take effect unless:

…

(c)

… [the] successor Servicer or Special Servicer, as applicable, has experience in servicing mortgages of commercial property on similar terms to that required under this Agreement and is approved by the Issuer and the Note Trustee (such approval in each case not to be unreasonably withheld).”

The specific issue is whether the exercise of the Note Trustee’s discretion to grant or withhold approval of the successor Special Servicer is limited to a consideration of the proposed successor’s experience in servicing mortgages of commercial property, or whether it can take into account wider considerations, such as, for example, the Note Trustee’s views as to the commercial interests of Noteholders or certain classes of Noteholders.

Mr. Trower, supported in this respect by Mr. de Mestre, submitted that clause 22.5(c) does not provide the Note Trustee with a general discretion to approve or refuse approval to the proposed successor Special Servicer. Consequently, they submitted that clause 22.5(c) does not “engage” the Note Trustee’s discretion under clause 12.19 of the Trust Deed or otherwise oblige the Note Trustee to weigh up any strategy proposed by the replacement Special Servicer or, say, to decide whether to give precedence to the interests of the Class A Noteholders over the interests of the Class E Noteholder. Mr. Trower and Mr. de Mestre submitted that clause 22.5(c) only requires the Note Trustee to be satisfied that the proposed successor Special Servicer has the relevant experience to be able to carry out the task of acting as Special Servicer.

Mr Hill’s argument focussed on the language of clause 22.5(c), which he said plainly distinguished between two different concepts separated by the word “and”, namely (i) the requirement that the proposed successor Special Servicer should have relevant experience, and (ii) the requirement that the proposed successor be approved by the Note Trustee. He said that without the second of these requirements being independent of the first, the Noteholders would have no protection from the appointment of a Special Servicer which had relevant previous experience but which was, for other reasons such as being subject to current financial or regulatory difficulties, completely unsuitable.

Mr. Hill also countered Mr. Trower’s and Mr. de Mestre’s argument that it would be unrealistic to assume that the Note Trustee had any wider discretionary role to play in the approval of the successor Special Servicer by pointing to clause 28.2 of the Servicing Agreement. That clause deals with the preconditions to the termination by the Backup Advance Provider of the appointment of the Advance Provider following the insolvency of the Advance Provider or any failure by the Advance Provider to make an advance to the Issuer as required by the Servicing Agreement. That clause provided that the termination would not take effect unless (among other things),

“(d)

the successor Advance Provider is approved by the Issuer and the Note Trustee (such approval in each case not to be unreasonably withheld).”

Mr. Hill submitted that in clause 28.2(d) the same words as appeared in clause 22.5(c) were used alone, without reference to any considerations of experience, and in circumstances that could only signify that the Note Trustee and Issuer were required to exercise a general discretion to approve the successor Advance Provider. He also pointed out that in the context of clause 28.2(d), this would inevitably require the Issuer and Note Trustee to consider, for example, the financial standing of the proposed successor Advance Provider, whose role it was to make loans to the Issuer when required to do so to meet funding shortfalls.

I agree with Mr. Hill that the plain language of clause 22.5(c) contains two separate and distinct requirements, each of which must be satisfied before the termination of the appointment of the Special Servicer can take effect. The first relates to the experience of the successor Special Servicer, and the second requires the approval of the Issuer and Note Trustee to that successor (which approval cannot be unreasonably withheld).

I also do not think that the Issuer and Note Trustee’s role in granting or withholding approval is limited to an assessment of the experience of the proposed successor. If the Issuer and Note Trustee are required to exercise a general discretion in relation to the approval of the Advance Provider (as they plainly are by clause 28.2(d)), I see no reason whatsoever why the same words should not mean that they are required to exercise a similar discretion in relation to the equally (if not more) important issue of replacement of the Special Servicer when those words are used in clause 22.5(c). That also makes good commercial sense in the context of the transaction. Given the importance of the role of Special Servicer, there is every reason why the parties should have intended that there should be a proper check on the suitability of the Special Servicer for the task: past experience is one, but only one, of the obvious factors that might be relevant in that regard.

So, for example, I consider that the parties intended that it should be permissible for the Issuer or Note Trustee to decide to withhold approval on the grounds that, though experienced, the proposed successor Special Servicer was, for example, incompetent, insolvent or in serious financial or regulatory difficulties, subject to the proviso that such judgment should not be unreasonable.

Beyond those examples, which were canvassed in argument and which I think flow naturally from the similar considerations under clause 28.2(d), I do not think that it would be sensible or appropriate for me to attempt to elaborate, on a hypothetical basis, any other factors that the Issuer or Note Trustee might take into account in the exercise of their discretion, or to attempt to prescribe how clause 12.19 of the Trust Deed might operate in such a situation. Questions of the proper exercise of a discretion are always highly fact-sensitive, and I am simply not in any position to form any view upon whether, and if so how, the Note Trustee might take into account factors such as whether a proposed successor might adopt a strategy which favoured one group of Noteholders over another.

This issue concerns the proper construction and effect of Clause 22.5(e) of the Servicing Agreement which provides,

“No termination of the Servicer’s or the Special Servicer’s appointment under Clauses 22.1 (Servicer Events of Default), 22.2 (Termination by the Controlling Party) or 22.4 (Voluntary Termination) shall take effect unless:

…

(e)

the Advance Provider is replaced with suitable replacements subject to and in accordance with the terms of this Agreement.”

The issue is whether this clause requires the replacement of the Advance Provider as a condition of the termination of the Special Servicer; or whether clause 22.5(e) merely means that if the Advance Provider is to be replaced at the same time as the Servicer or Special Servicer, the termination of the Servicer or Special Servicer is not to have effect unless the replacement Advance Provider is suitable. The Note Trustee also raised a subsidiary question: if the replacement of the Advance Provider is a necessary pre-condition to termination of the appointment of the Special Servicer, then can that requirement be waived without the consent of the Backup Advance Provider?

The obligations of the Advance Provider and the Backup Advance Provider were set out in clause 9 of the Servicing Agreement. In essence, the Advance Provider is a party that may be obliged, subject to certain conditions, to make loans to meet shortfalls in the funds available to the Issuer to satisfy its obligations to Noteholders. If the Advance Provider fails to provide sums due from it, then the Backup Advance Provider is liable to provide those sums. The Servicer or Special Servicer are the parties entitled to demand such an advance from the Advance Provider, and it is the Servicer or Special Servicer which are required to provide an advice to the effect that the loan will be recoverable: without such advice being given, the Advance Provider will have no obligation to make the loan.

The drafting of the Servicing Agreement should be considered against the background that when that agreement was entered into, the Advance Provider was part of the same group of companies as the Servicer and Special Servicer. One of the complicating factors in this case is that since then that group of companies has been split. The administration business (including the Special Servicer) has been acquired by a third party, but the lending business (including the Advance Provider) has remained with the original group. The commercial link between the Special Servicer and the Advance Provider has therefore been severed.

As events have turned out, advances have become due from the Advance Provider which has failed to make them, and as a result, the Backup Advance Provider has had to make such advances amounting to over £14 million. The consequence is that the Backup Advance Provider is entitled, pursuant to clause 28.1 of the Servicing Agreement, to terminate the appointment of the Advance Provider.

For the Backup Advance Provider, Mr. Smith QC contended that as a matter of ordinary language the meaning of clause 22.5(e) is clear: it is a precondition that any termination of the Special Servicer’s appointment under clause 22.2 shall not take effect unless the Advance Provider is replaced with suitable replacements subject to and in accordance with the terms of the Servicing Agreement. He contended that in the present case, this means that any termination of Capita as Special Servicer would only take effect if the current Advance Provider was also replaced by a suitable replacement.

Mr. Smith said that this interpretation also made commercial sense, because the Advance Provider is in a position of commercial vulnerability vis-à-vis the Servicer or Special Servicer by reason of the role of the Servicer or Special Servicer in requiring advances to be made, and the Advance Provider therefore has a clear interest in the Servicer or the Special Servicer being a known and trusted entity on whose determinations and judgments it can rely. So, he argued, where it is proposed to terminate the appointment of the existing Servicer or Special Servicer, then it makes commercial sense for the Advance Provider in effect to be able to require its own replacement as Advance Provider so as to avoid being exposed, without its consent, to a new Servicer or Special Servicer of whom the Advance Provider may have no knowledge and with whom it might well have no existing relationship.

For Anchorage, Mr. Trower emphasised that clause 22.5(e) envisaged that the Advance Provider would be replaced with suitable replacements “subject to and in accordance with the terms of this Agreement.” He said that there was no general right under the Servicing Agreement to replace the Advance Provider, but that this could only be done either if the Advance Provider itself wished to transfer or assign its rights and obligations to a new Advance Provider under clause 27.1, or if it was in default under clause 28.1 and the Backup Advance Provider decided to terminate its appointment.

Given these limitations on the right of replacement of the Advance Provider, Mr. Trower argued that it would make no commercial sense if the termination of the appointment of the Special Servicer were to be dependent either upon the Advance Provider also deciding to transfer its rights and obligations to a new Advance Provider (which would itself require the consent of the Backup Advance Provider and the Servicer), or itself being in default. He said that it would be commercially absurd if the Advance Provider could effectively block the replacement of the Special Servicer by refusing to go unless, by coincidence, the Advance Provider also happened to be in default at the same time and the Backup Advance Provider was willing to terminate its appointment.

I accept the argument of Mr. Smith that the wording of clause 22.5(e) is clear, and that the appointment of the Special Servicer cannot be effectively terminated unless the Advance Provider is also replaced. That linkage is, I suspect, the result of the parties to the Servicing Agreement assuming that Special Servicer and the Advance Provider would be associated companies. In that regard I also accept Mr. Smith’s point that the linkage was intended to provide the Advance Provider with the commercial leverage to ensure that if the Controlling Party wanted to remove the Special Servicer, it would have to make suitable arrangements to enable the Advance Provider to have the option to leave at the same time.

The alternative interpretation for which Mr. Trower contends simply does not accord with the language of clause 22.5(e). It turns what is expressed to be a pre-condition to an effective termination of the appointment of the Special Servicer into a requirement as to suitability of a replacement Advance Provider that need only be fulfilled if, by coincidence, the Advance Provider decides to go, or the Backup Advance Provider decides to remove it, at the same time. Mr. Trower’s argument does not explain why the parties thought it necessary to include any reference to the replacement of the Advance Provider in clause 22.5, because all the requirements for the replacement of the Advance Provider are already covered by clauses 27 and 28. On Mr. Trower’s argument, there would have been no reason for the parties to refer to the Advance Provider in the context of removal of the Special Servicer at all.

I recognise that this interpretation might, at least in theory, open up the possibility to which Mr. Trower alluded, namely that a Special Servicer which did not wish to be removed might enlist the assistance of an (associated) Advance Provider in an effort to block attempts to terminate its own appointment. But I suspect that a scenario of a Special Servicer wishing to cling to its appointment where the Controlling Party wished to terminate its appointment and was willing to arrange for a suitable replacement Advance Provider would not have been uppermost in the minds of the contracting parties to the Servicing Agreement. I do not regard it as a scenario that would have been seen as so likely to be problematic that I can conclude that the parties cannot have intended to make the removal of the Special Servicer conditional upon the replacement of the Advance Provider.

The basic position therefore, is that clause 22.5(e) of the Servicing Agreement means that the appointment of the Special Servicer can only be effectively terminated if, at the same time, the Advance Provider is replaced with a suitable alternative. Because this requirement is essentially inserted for the benefit of the Advance Provider, I can see that there are grounds for suggesting that the condition could be waived by the Advance Provider if it was willing to remain in office with the new Special Servicer. I also see the force in Mr. Smith’s submission that since that new arrangement could affect the Backup Advance Provider, which is liable to pay if the Advance Provider does not, such waiver could not take place without the consent of his client as well.

However, I did not hear any contrary argument on this point since the Advance Provider was not a party and Mr. Trower told me that he was not instructed to argue that any requirement that the Advance Provider had to be replaced with a suitable replacement at the same time as the Special Servicer could be waived by the Advance Provider alone without the consent of the Backup Advance Provider. I therefore do not consider that it is appropriate for me to express any firm conclusion on this point.

These issues essentially boil down to the following questions: assuming that the Issuer has received a notice from the Controlling Party under clause 22.2:

There was no real debate on the first of these questions. It was Mr. Trower’s submission that the Note Trustee could serve a conditional notice of termination upon the Special Servicer, and Mr. Hill did not dispute that this was at least conceptually possible. There was, however, no agreement over the second of these questions. The positions of the parties were polarised. Mr. Trower contended that the Controlling Party could require the Note Trustee to serve a conditional termination notice on the Special Servicer at any time, except only where the pre-conditions in clause 22.5 were incapable of being met. Mr. Hill submitted that the Note Trustee could not be obliged to serve a termination notice unless and until the pre-conditions in clause 22.5 had actually been met, though he accepted that the Note Trustee could serve a conditional notice if it wished where the satisfaction of the pre-conditions was imminent.

The structure of clauses 22.2 and 22.5 is that clause 22.2 entitles the Controlling Party to give written notice to the Note Trustee to require the Note Trustee to terminate the appointment of the Special Servicer; and clause 22.2 further provides that if such notice is given, the Note Trustee “shall so act … to terminate the appointment of the Special Servicer”. It should be noted, however, that nowhere does clause 22.2 expressly require the Note Trustee to serve a termination notice upon the Special Servicer; still less does it prescribe when that should be done.

Clause 22.5 then states that, “No termination of the Servicer’s or Special Servicer’s appointment…shall take effect unless” the specified preconditions are satisfied. It is apparent that achieving satisfaction of the preconditions in clause 22.5 may be complicated, and is not something that is likely to be achieved immediately, or without further substantive steps being taken on the part of the Note Trustee after receipt of the Controlling Party’s notice. It will, for example, fall to the Note Trustee to notify the Rating Agencies and obtain the necessary rating confirmations under clause 22.5(b), which may take some correspondence with the Rating Agencies, and which the Note Trustee is unlikely to wish to do until after receipt of a notice from the Controlling Party.

I also think that it is relevant to consider the role of the Special Servicer. That entity is central to the operation of the financing structure, and the contracting parties would have understood that the removal of the Special Servicer would be a major step which might well cause significant disruption and have adverse consequences for the Lenders and the Noteholders unless handled carefully. It could, moreover, be foreseen that the service of a conditional termination notice might cause additional uncertainty and disruption to the operations of the Special Servicer in the interim period until it were known whether the preconditions to termination were satisfied. Those risks and uncertainties would only increase if there were a longer lead time between service of a conditional notice and satisfaction of the preconditions.

Carried to its logical conclusion, Mr. Trower’s argument was that provided that there was a possibility of the preconditions being satisfied, the Controlling Party could require the Note Trustee to serve a conditional notice of termination at any time, no matter how remote that possibility might be, or how long it might take for the preconditions to be satisfied. That is not a commercially attractive argument, and I cannot understand why the parties should have intended that the Note Trustee should be obliged to act in such a way, thereby incurring the risks to which I have alluded above.

Against that background, it seems to me that if the Controlling Party gives a notice to the Note Trustee, neither the express language nor the commercial sense of clause 22.2 requires the Note Trustee immediately to serve a conditional termination notice upon the Special Servicer. Instead, in my view what clause 22.2 requires the Note Trustee to do on receipt of a notice from the Controlling Party, is to do those acts and take those steps which will be necessary in an attempt to satisfy the preconditions to an effective termination as set out in clause 22.5. Beyond that I do not think that clause 22.2 is intended to be prescriptive of how the Note Trustee should act, and indeed I think it would be impossible for the parties to have intended it to be so, given the complex commercial nature of some of the matters required to be addressed to satisfy the preconditions in clause 22.5. What can, of course, be said, is that if, in the course of taking those steps, it becomes apparent that satisfaction of the preconditions will not be achieved, then, as Mr. Trower accepted, the Note Trustee will thereafter not be obliged to serve any termination notice upon the Special Servicer. Alternatively, if and when the preconditions are satisfied, then as Mr. Hill accepted, the Note Trustee will be obliged to serve an unconditional notice terminating the appointment of the Special Servicer.

I appreciate that this analysis leaves open the question of whether, and if so, when the Note Trustee might serve a conditional termination notice upon the Special Servicer. I can well see that there might be circumstances in which, when satisfaction of the preconditions was reasonably certain to be achieved, it might be thought desirable by the Note Trustee to give advance notice to the Special Servicer on a conditional basis. But for similar reasons that caused me to decline to engage in an attempt to elaborate, upon a hypothetical basis, all of the factors that the Issuer or Note Trustee might take into account in the exercise of their discretion to approve a successor Special Servicer, I do not consider that it would be appropriate for me to embark upon a similar exercise in relation to this issue either.

I would ask the parties to endeavour to agree a draft order reflecting this judgment. I will hear argument on any unresolved points on the draft order, any consequential matters and any question of costs on a date to be fixed. I should also express my gratitude to all counsel for their comprehensive and helpful written and oral submissions.