Cross-security arrangement upheld

Allied Irish Bank Mortgage Bank v O’Toole & Another [2018] IECA 6

Overview

Two brothers (the “Borrowers”) tried unsuccessfully to rely on the doctrine of consolidation to defeat a cross-security arrangement with AIB Mortgage Bank (the “Bank”).

Doctrine of Consolidation

The doctrine of consolidation provides that if the same mortgagor provides a mortgage over two distinct properties to a lender and seeks to redeem only one of the mortgages, the lender can require the mortgagor to redeem both mortgages. If the doctrine did not exist, the lender could potentially be left with inadequate security for the remaining mortgage.  

The doctrine is subject to a number of important requirements which include:

  • the mortgages must have been created by the same mortgagor;
  • the date of redemption of both mortgages must have passed;
  • the securities must be in existence at the time when consolidation is claimed.

Facts

The Bank advanced a loan (the “First Loan”) to the Borrowers in the sum of €240,000 to finance the purchase of two properties in County Carlow.

The Bank subsequently advanced another loan ( the “Second Loan”) to the Borrowers and a third brother in the sum of €80,000 which was secured on other properties.  

The First Loan was performing but the Second Loan was not and after unsuccessful negotiations,  the Bank demanded repayment of the Second Loan. The Bank then also served a demand on the Borrowers in respect of the First Loan because of the default in relation to the Second Loan.

The Borrowers contracted to sell certain properties secured by the First Loan. In the course of the sale, the Borrower’s solicitor requested a redemption statement detailing the amounts due by the Borrowers to discharge the mortgage over the properties in sale. The Bank issued a redemption letter but detailed only the amounts connected with the First Loan and erroneously omitted any reference to the amounts owing under the Second Loan. The Borrowers remitted the proceeds of the sale to the Bank who deducted the amounts due under the First Loan only and returned the surplus to the Borrowers. It was only after the surplus funds had been returned to the Borrowers did the Bank realise the error in the redemption letter. The Bank then sought orders from the Court restraining the Borrowers from disposing of the remaining secured properties pending the full repayment of the Second Loan.

The Bank Manager later gave evidence to the effect that the redemption letters should have referred to the cross-security obligation on the Borrowers and should have referenced the full sums required to discharge the entirety of the liabilities owing by the Borrowers on foot of both loans.

High Court Judgement, 2016

The Borrowers contended that the equitable doctrine of consolidation applied and unless the Bank was in a position to comply with the requirements of the doctrine, it was not entitled to consolidate the two loans. The Borrowers argued that as their brother was a party to the Second Loan the mortgagor in both loans was not the same. The Bank in response sought to rely on the terms of the loan agreements and security documents which had been executed by the Borrowers.

The High Court held that the Borrowers could not force the Bank to comply with the doctrine and upheld the validity of the Bank’s cross-security. The loan agreements and security documents signed by the Borrowers provided that the security was in connection with all present and future liabilities.

Court of Appeal, 2018

The Borrowers again argued that the mortgage was subject to the doctrine notwithstanding the express terms of the loan agreements and security documents. They further argued that the Banks’s claim on the surplus funds from the sale proceeds should be rendered invalid due to the Bank’s  failure to comply with the doctrine.

The Court of Appeal considered the definition of “secured monies” in the security documents which were defined as “…all monies and liabilities which the mortgagor covenants to pay to the Bank or discharge under the covenants hereinafter contained.”

The Court found that the language in the loan agreements and security documents made it sufficiently clear that the Second Loan was cross secured by the First Loan and had been secured under a clear “all sums due” provisions.

The Court noted that the doctrine of consolidation should not be confused with cross-securitisation. The Court noted that the doctrine of consolidation was not applicable in this instance as it was not open to the Borrowers to compel the Bank to involve the doctrine.The definition of “secured monies” in the loan agreements and security documents was such that the Borrowers entered into a cross-securitisation arrangement whereby the properties secured by the First Loan remained as security for all monies due under the Second Loan. 

Importance

This case significantly narrows the doctrine which may only be invoked strictly by the Lender. It cannot be used by a borrower to prevent enforcement of loan agreements which they have entered into with a lender.

The doctrine of consolidation is not the same as cross-securitisation; the doctrine applies where the same borrower has more than one mortgage while cross-securitisation occurs where there are two or more loans which are securing each other.

The courts will give effect to cross-security provisions under contract and a bank will not be prevented from relying on a mortgage as security for all sums due, despite issuing erroneous redemption statements.

For further information please contact Claire McCormack (Partner) or your usual AMOSS contact.

Cross-security arrangement upheld