Drawing a line under Macdonald Hotels: CLLS reassures the finance market on split execution

Macdonald Hotels judgment and CLLS note

Under section 1(2)(a) LP(MP)A 1989, a document is only a deed if “it makes it clear on its face that it is intended to be a deed by the person making it or, as the case may be, by the parties to it (whether by describing itself as a deed or expressing itself to be executed or signed as a deed or otherwise)”. This is often referred to as the ‘face-value requirement’. In practical terms, this means a reader should be able to tell from the document itself whether it is intended to be a deed. This is separate from the requirement that the document must also be validly executed and delivered as a deed

Whilst the Macdonald Hotels judgment was resolved on other legal issues, one of the arguments made by Bank of Scotland (BoS) was that the claim against it was time-barred as the shorter six-year limitation period afforded to a simple contract applied. The facts were that, as is commonplace with finance documents, a “split” execution occurred in which a restatement agreement relating to the facility agreement was executed as a deed by the relevant obligors but signed under hand by BoS. The Judge accepted that BoS had intended to execute the restatement agreement under hand and that, accordingly, only the shorter limitation period applied to claims against it. However, he went on to make obiter comments challenging whether the restatement agreement satisfied the face-value requirement at all. He considered that its testimonium indicated an intention on the part of only some, rather than all, of the parties that the document should be a deed. On that analysis, the document would not take effect as a deed even against the parties that had validly executed it as a deed. Given the number of financing documents executed on a split basis, those comments created considerable uncertainty for established market practice.

Following this case, the Financial Law Committee of the City of London Law Society (CLLS) has published a note which disputed the obiter comments made in the Macdonald judgment and supported the more established position that, where split execution occurs, the document would then be enforceable as a deed only against the parties executing it as a deed and as a simple contract against those parties that sign it under hand.

The CLLS notes that split execution is expressly contemplated by Section 1(2)(b) of the LP(MP)A, which was drafted by the Law Commission and refers to execution as a deed by ‘one or more of’ the parties to the relevant document. The CLLS also considers pre-existing case law, including Euro Securities and Finance Ltd v Barrett and OTV Birwelco Limited v Technical & General Guarantee Company Limited, which supports the position that the same document may take effect as a deed against a party executing it as a deed and as a simple contract against a party signing it under hand. Against that background, the CLLS considers that the Macdonald Hotels obiter comments do not reflect either the wider legislative context or pre-existing case law.

The CLLS note further expresses the view that, based on this analysis, the Loan Market Association (LMA)’s recommended testimonium provisions in intercreditor agreements satisfy the face value requirement. Following its review of the Macdonald case and the CLLS note, the LMA has confirmed that it does not propose to amend its standard wording. This provides a degree of reassurance for parties using LMA based documentation that existing market practice remains appropriate.

The finance market can accordingly breathe a sigh of relief. The CLLS Note supports the established position that a single document may take effect as a deed against parties executing it as a deed and as a simple contract against parties signing it under hand, and provides support for the continued use of current LMA-style execution provisions.

When do finance documents have to be signed as a deed?

Two notable features of deeds are that:

• Claims may be brought for up to 12 years, rather than the six-year limitation period applicable to simple contracts.
• A deed is binding even in the absence of consideration, unlike a simple contract, which must be supported by consideration.

In finance documents involving split execution, it is typically the party assuming substantive obligations (e.g. the obligors) that execute the document as a deed, while the party benefiting from those obligations (e.g. the finance parties) that sign under hand. This reflects the fact that it is the obligations assumed by the obligor, for example, to dispose of a legal interest in land by way of legal mortgage, that need to be enforceable as a deed and should be subject to a longer limitation period.

By way of example, intercreditor agreements and security documents are usually executed as deeds by the obligors, while security releases of legal mortgage over land must be executed as a deed by the lender. In each case, it is the party giving the relevant legal commitment or disposition that needs to use deed execution formalities.

Other documents such as guarantees do not typically need to be deeds as a matter of law but are often structured as deeds to benefit from the two features mentioned above.

In light of the above, it is always prudent to check and ensure that a document carries the intended legal effect where different parties are executing the same document in different ways.