Secured lenders: priority of charges not always determined by order of registration

The rule that the first charge to be registered ranks first in priority over other secured lenders’ charges may not apply where there is an understanding between charge holders to the contrary, and where one party has acted to its detriment in reliance on that understanding.

Last week, the Court of Appeal upheld a decision that allowed Lender B, who registered its security after Lender A’s security had been registered over the same property, to be paid in full before Lender A. Although this seems to be contrary to s. 29 Land Registration Act 1925 (which sets out the rule that priority between lenders is determined by the order of registration of the security), the Court held that there had been an ‘understanding’ between the lenders that Lender B would rank first. The understanding was not formally documented in writing, but was evidenced by references to priority in notes of telephone calls, and letters between the parties’ representatives. As a result of that understanding, Lender B had acted to its detriment in lending to the borrower, who used part of the loan to repay some of the debt owed to Lender A. Although Lender A had registered its charge two days before Lender B, the court said that Lender A was “estopped” or prevented from asserting its priority over Lender B.

This case serves as a reminder to lenders who take security over property, to ensure that there is a clearly written agreement that sets out the order of priority between all the lenders taking security over the same property.

Further reading: Lancashire Mortgage Corporation Ltd -v- Scottish & Newcastle plc [2007] EWCA Civ 684