Reversal of fortune: court consideration of ambiguous priority arrangements

Briefing

The recent case of JAK Property Jersey Limited vs Together Commercial Finance Limited [2025] EWHC 2442 (Ch) concerned a dispute between two secured lenders as to the effect of a provision in a deed of postponement regulating their respective security interests in a development property. As the value realised on the sale was insufficient to discharge the liabilities owing to both lenders, the outcome of the case was high stakes for all involved. It is therefore instructive to principals involved in negotiating intercreditor/priority arrangements, and the lawyers tasked with documenting the commercial position reached, in avoiding a similar dispute.

Background

In late 2018, JAK Property Jersey Limited (JAK) agreed to lend Mulbury Homes (Greg Street) Limited (Mulbury) £1.2 million to fund the purchase of a property in Salford, Greater Manchester (the Property). JAK's funding was secured by a charge over the Property. JAK and Mulbury agreed that Mulbury would then borrow further amounts from a third-party funder to fund the development of the Property. Following completion of the development, Mulbury would sell the relevant plots and use the proceeds to: (i) repay the development funder; (ii) repay JAK; and (iii) pay JAK a fixed profit share of £650,000, before receiving any remaining proceeds itself.

The arrangement was enshrined in a Development Services Agreement (or DSA) which also provided that the party funding the development could be offered a first priority charge over the same Property, ahead of that given to JAK, to enable Mulbury to raise financing on the best possible terms.

In early 2020, Mulbury agreed terms with a development funder, Together Commercial Finance Limited (Together). Together took a charge over the Property, and in order to regulate the priority of their competing security interests Together and JAK entered into a Deed of Postponement (DoP), which identified the charge over the Property granted in favour of Together (the Together Charge) as the 'First Charge' (with Together the 'First Chargee') and the charge over the Property granted in favour of JAK (the JAK Charge) as the 'Second Charge' (with JAK the 'Second Chargee').

The development at the Property did not go to plan, and in the summer of 2022 JAK wrote to Mulbury identifying a number of subsisting events of default under its loan agreement and declaring the amounts owed to it were accordingly now immediately due and payable. The following February, Together also made a demand for full repayment against Mulbury. Both lenders moved to enforce, with JAK obtaining a winding-up order against Mulbury while Together appointed a receiver under the Law of Property Act 1925 (an LPA receiver). The LPA receiver sold the Property for a price considerably below the aggregate amounts secured against it, meaning that whichever creditor ranked second was unlikely to recover in full.

Whilst the DoP was of critical importance to both of Together and JAK, the parties had very different interpretations of certain of its provisions.

The competing interpretations

The key provisions of the DoP for the court to consider were:

Clause 8 (the Postponement Clause), which provided in summary that the JAK Charge was postponed to the Together Charge such that the Together Charge would rank in priority to the JAK Charge.
Clause 13 (the Determination Clause), which was inserted into the draft by lawyers acting for JAK, and which provided that in the event the loan secured by the JAK Charge 'comes to an end' before the loan secured by the Together Charge, all amounts due and payable by Mulbury to JAK would be paid to JAK in accordance with the relevant loan agreement "notwithstanding the priority of the [Together Charge]" provided by the DoP.

JAK argued that the Determination Clause was unambiguous, and its effect was to reverse the order of priority otherwise set out in the Postponement Clause in a specific circumstance, namely where the term of its loan had come to an end before the loan from Together. As a result, it contested that all monies due to it should be paid out of the net proceeds of the sale of the Property, ahead of the monies owed to Together.

Together's view was that the Determination Clause was an 'avoidance of doubt' provision, making clear that if the loan owed to JAK was determined before the loan owing to Together, JAK would be entitled to receive payment, because only the respective security interests (and not the debts themselves) were subordinated/postponed. Accordingly, the DoP didn't affect JAK's ability to recover its debt in full by means other than enforcement of the JAK Charge should its loan be determined before that owed to Together.

Unlike JAK, Together acknowledged that the Determination Clause was sufficiently ambiguous to admit both it and JAK's interpretation, and therefore argued commercial common sense should be considered in order to determine the true and proper meaning of the clause.

The court's approach

The court was referred to a long line of cases through which the law of contractual interpretation has been established. In particular it was noted that if there are two potential ways of construing a contractual provision, the court is entitled to consider which is more consistent with 'business common sense', but if the meaning is unambiguous then this consideration should not be introduced (noting that there is "always the possibility that a party might have accepted something which with hindsight did not serve its interest").

His Honour Judge Cawson KC disagreed with JAK, finding the meaning of the Determination Clause was sufficiently unclear that he could not simply decide the matter on the basis of the clear meaning of the language used. He therefore considered a number of factors to assist him in establishing what the Determination Clause was seeking to achieve, including:

that it would not be uncommon for lenders to agree to subordinate both a security interest and the debt secured thereby such that if that wasn't to be the case, the parties may well want to spell this out
that the Determination Clause referred to payment of the underlying debt, as opposed to enforcement of the relevant charges
that if the Determination Clause intended to reverse the order of priority in the Postponement Clause it would have made sense for it to clearly state this, and/or for the Postponement Clause to be made expressly subject to the Determination Clause
that if JAK's interpretation of the Determination Clause was correct, it would significantly undermine the commercial purpose of the DoP and indeed the transaction contemplated by the DSA. This was because both Mulbury and JAK stood to gain a profit from the development provided appropriate funding could be raised, with the availability of a first priority charge over the Property being a significant inducement for the relevant funder
further, if JAK's interpretation was correct it effectively incentivised both lenders to race to determine their respective loan agreements first in order to ensure their security had priority, which wouldn't to an objective observer seem a rational position for the parties to have intended.

HHJ Cawson KC concluded that commercial common sense favoured Together's interpretation, confirming that the Together Charge had priority and Together was entitled to repayment from the sale proceeds.

A brief consideration of rectification

HHJ Cawson KC also considered a counterclaim brought by Together for rectification of the Determination Clause in the event that, if JAK's argument that the language used was sufficiently clear in supporting its interpretation, this would have been an error as between the parties in documenting their common intention.

He identified the key requirements for a claim in rectification based on common mistake being:

that the parties had a continuing common intention
there was an outward expression of accord
the intention continued at the time the instrument to be rectified was executed
by mistake, such instrument did not reflect that intention.

In considering whether these elements were made out, the court had regard to various witness statements, a cross-examination of the witnesses, relevant email correspondence and an analysis of the various drafts and mark-ups of the DoP which were traded between the parties and their lawyers.

A particular area of focus here was the significant back-and-forth on a different clause (as to whether Together should be required to consult with JAK if it proposed to determine its loan or take any enforcement action, or simply notify them). In the course of this debate, the solicitor acting for JAK stated that Together's objection to a consultation obligation on the basis it would hamper their collection ability did not make sense because "they would have a first legal charge", seemingly without any challenge from JAK.

Given the court had already found in favour of Together's interpretation of the Determination Clause, the outcome of the counterclaim on rectification was arguably neither here nor there. Nevertheless, HHJ Cawson KC found that all of the above elements were made out such that, if his decision as to the correct interpretation of the Determination Clause proved incorrect, the actual meaning of the clause would have mistakenly failed to reflect the parties' common intention at the point the DoP was signed and therefore ought to be rectified.

In all cases therefore, Together had the first priority security interest over the Property and was entitled to recover all amounts owed from the sale proceeds ahead of JAK.

Comment

For those who shudder at the idea that their careful drafting (and indeed their emails!) may one day end up being scrutinised by a High Court judge to determine if they failed to correctly document their client's instructions, this case is certainly sobering reading.
The main takeaway here should be that parties should think very carefully about the language used in Finance Documents. While 'commercial common sense' may have prevailed here (from Together's perspective), the case highlights that ambiguous language in intercreditor agreements could completely reverse intended security rankings, undermining the entire commercial structure. At the point the true meaning of a subordination/priority agreement is under scrutiny there is likely to be a value break in the structure and the intended second ranking creditor is clearly incentivised to exploit any ambiguity or drafting error that may serve to improve their position.
The decision in this case also reiterates that courts will only have regard to commercial considerations when the contractual language used is unclear. While there is heavy reliance in the market on template documentation, such as that published by the Loan Market Association or Loan Syndications and Trading Association, bespoke amendments are routinely made by lawyers to reflect the underlying terms of the commercial deal, and these must be considered thoroughly to ensure the intended meaning has been properly reflected and to avoid unintended consequences. Nobody wants to be in a position where they are trying to make a claim for rectification to a heavily negotiated finance agreement with their client's scope for recovering the full outstanding loan amount on the line.