A recent court ruling provided food for thought to those who partake in syndicate or top up lending and a problem that could occur from these types of arrangements.

The case in question was ‘Horn and others v Commercial Acceptances’, where the claimant provided top up finance to Commercial Acceptances’ (CA) first tier finance.

It is often so that a person wants to borrow a high at a high rate of loan to value (LTV) but the primary lender doesn’t want to give as high an LTV. If this is the case, an option for the lender could be to go out and look for sources of finance to top up the maximum amount they are willing to lend.

In the instance relating to above case, Commercial Acceptances would only loan to 75 percent but the borrower wanted to borrow to 85 percent, so they go out to somebody they have an arrangement with and ask if they will supply the extra 10 percent.

That way they can service the borrower’s need without breaching their own underwriting criteria. The top up lender will take the track record of the lender into consideration and, if it is a favourable one, they will come to an arrangement.

If, in the case of the deal not going to plan, the top up lender agrees to be a second charge of sorts they get to charge a higher interest for the privilege of doing that.

This particular case didn’t go as planned due to the property market crash, the property was realised, repossessed and sold – then they divide up the money.

According to the agreement, Commercial Acceptances received their full share but the amount received from the property sale did not have enough left over, once the first tier lenders had been repaid, to fully refund the top up stake.

It transpired that the first tier finance wasn’t CA in total; it was partly CA and partly another lender who they had brought in to syndicate on the same terms. So CA take the 75 percent, they take their money, then pay the syndicator and then pay the top up lender.

The top up lender disputes this because a) they were never told that another party was being brought in to syndicate, b) the agreement stated that CA could only take their own money, when they were actually taking somebody else’s money back, and c) the syndicator is getting just as good a return but is taking less risk.

The court agreed with the second of the previous points and said CA were only entitled to take their own share first, not the syndicator’s. It also said that, because they were in a fiduciary relationship, CA should have disclosed the presence of a syndicator to the top up lender and asked if it was a problem.

The court ruled in this way because, if CA had told the top up lender, they may have agreed and said it was fine. However, Horn and others may have decided not to take the deal as they were relying on the experience and business expertise of CA, who did not consider the deal good enough to put all their money up front.

This comes as a warning to lenders who invite a syndicator to put forward finance as part of a first tier mortgage and choose not to disclose it to any other parties that may be involved.

Jonathan Newman, Partner at Brighstone Law LLP, had this to say regarding the case: “Whilst the credit crunch continues to exercise lenders’ creativity in putting facilities together, lenders and participators must take special care on their inter partes arrangements, and the idea of ‘what happens if...?’”