“A QUESTION OF GREAT IMPORTANCE TO BANKERS, AND
TO THE MERCANTILE INTERESTS OF THE COUNTRY”1
A version of this article, written by Head of Banking & Finance, Jonathan Porteous &
Associate, Laura Shackleton, first featured in Butterworths Journal of International
Banking and Finance Law in July/August 2012.
Key Points:

The case of Hopkinson v Rolt established that in certain circumstances where
advances are made by the prior chargee after a subsequent charge is entered into,
the prior chargee is not entitled to “tack” further advances to his prior charge,
unless he had no knowledge of the subsequent charge.

Under statute, tacking is possible in limited circumstances.

A prior chargee can put protections in place to prevent a situation arising in which
he loses priority to amounts advanced by a subsequent chargee.
TACKING OF FURTHER ADVANCES – THE PRINCIPLE
The question Lord Campbell considered to be of such importance was whether a prior
chargee’s future advances made after the debtor has granted a subsequent charge over
the same property can be “tacked” to that prior chargee’s security in priority to
amounts owing to the subsequent chargee secured by the subsequent charge. The
point was considered in Gordon v Graham (2. Eq.Cas.Abr.598 pl16) which found in
favour of a general right to “tack” unless there are special circumstances which mean
the rule should not apply.
THE RULE IN HOPKINSON V ROLT
The later case of Hopkinson v Rolt established that, in circumstances in which:

1
there is a prior charge for present and future advances;
Lord Campbell, Hopkinson v Rolt (1861) 11 E.R. 829
1
PERSONAL\6997882v1
25 February 2015

there is a subsequent charge for present and future advances;

each party has notice of each other party’s charge; and

advances are made by the prior chargee after the subsequent charge is entered
into,
the prior chargee is not entitled to priority for its further advances over advances
already made by the subsequent chargee. The prior chargee is not, therefore, entitled
to “tack” further advances to its prior charge, unless it did not have knowledge of the
subsequent charge.
Whilst the doctrine in Gordon v Graham was partly predicated on the basis that “it
was the folly of the second mortgagee with notice to take such security”, Lord
Campbell adopted the contrary position in reaching judgement in Hopkinson v Rolt,
namely that where the prior chargee has knowledge of the subsequent charge, he
cannot be injured by the subsequent charge as the prior charge secures past advances
and there is no obligation to make further advances. If the prior chargee chooses to
make further advances, he must ensure he has adequate security.
THE STATUTORY POSITION
Real Property
The Law of Property Act 1925 (LPA), Land Registration Act 1925 and Land
Registration Act 2002 (LRA) codified the rule in Hopkinson v Rolt and extended the
ambit of the rule. Accordingly, the case of Hopkinson v Rolt does not apply to real
property.
Registered Land
Section 49 of the LRA gives a prior chargee the right to tack further advances to its
prior charge made after a subsequent charge is granted only in the following specific
situations, or with the agreement of the subsequent chargee (best recorded in a deed of
priority). However, as we explore further below, the prior chargee can alleviate any
risks of losing priority in respect of amounts advanced by registering a restriction on
2
PERSONAL\6997882v1
25 February 2015
dispositions of the property on the title and only consenting to a subsequent charge if
it is entered into contemporaneously with a deed of priority:
Prior chargee can tack if he has no notice of subsequent charge (section 49(1))
The Land Registration Rules2 provide that the prior chargee will have the requisite
notice if notice of the subsequent charge is served on the prior chargee at its address
entered in the register (or another notified address) in accordance with those rules.
The prior chargee should ensure the register is kept up to date with its service address
details and that any notices served at that address will be attended to rapidly to
ascertain whether it is anticipated further advances will be made. All further advances
should be stopped until the prior chargee has adequate security and/or priority
arrangements in place.
The subsequent chargee should ensure notice of the subsequent charge is served on
the prior chargee so that the subsequent chargee’s advances take priority over the
prior chargee’s further advances.
Prior chargee can tack if he has an obligation to make further advances and this is
noted on the register (section 49(3))
If a facility includes any obligation to make further advances, for example in a
development facility, this should be reflected in the legal charge by the inclusion of a
clause such as: “The parties hereby apply to the Chief Land Registrar to enter a note
on the register of Title Number [●] that the chargee is obliged to make further
advances”. This can then be noted on the register.
Prior chargee can tack if the parties to the prior charge have agreed a maximum
amount for which the charge is security and this is noted on the register (section
49(4))
2
Land Registration Rules 2003, rule 107
3
PERSONAL\6997882v1
25 February 2015
If a prior chargee envisages that he may need to make further advances to a debtor but
does not have an obligation to do so, then to ensure priority over a subsequent charge
the legal charge could include a clause reflecting a maximum amount (to include
interest and costs) such as “The parties hereby apply to the Chief Land Registrar to
enter a note on the register of Title Number [●] that they have a agreed a maximum
amount of £[●] to be secured by the Charge.” This can then be noted on the register.
Land Registry Form CH3 must be used to note a maximum amount on the relevant
title.
Unregistered property
Section 94 of the LPA provides that a legal or equitable chargee of unregistered land
may “tack” further advances to existing security, despite a subsequent chargee, if:

the subsequent chargee has agreed;

the prior charge includes an obligation to make further advances; or

the prior chargee had no notice of the subsequent charge. For these purposes, the
prior chargee will be deemed to have notice of the subsequent charge if it has been
registered as a land charge, unless it was not protected by registration as a land
charge at the time when the prior charge was created, or was not registered as a
land charge at the time the subsequent chargee made a search of the Land Charges
Register, whichever last happened.
Other than tacking permitted by one of the above methods, section 94 goes on to
provide that “save in regard to the making of further advances as aforesaid ….the
right to tack is hereby abolished”.
Other Property
Whether or not section 94 of the LPA applies to personalty is in question. An
argument may be made that it does not apply3, on the basis that section 94(4) of the
LPA states that “this section applies to mortgages of land made before or after the
commencement of this Act, but not to charges on registered land”, implying that
4
PERSONAL\6997882v1
25 February 2015
section 94 of the LPA does not purport to govern assets other than land. If that is the
case the rule in Hopkinson v Rolt will continue to apply to personalty. Whilst that
case addresses the situation in which the prior chargee does not have notice of the
subsequent charge4, it does not expressly address the situation in which there is an
obligation to make further advances5 nor, in our opinion, does it adequately address a
situation where there is an agreed maximum amount of security.
Applying the Hopkinson v Rolt line of case law, claims of a subsequent chargee will
have priority over claims of a prior chargee in respect of any advances made by the
prior chargee after he has notice of the subsequent charge, even if the prior charge has
a contractual obligation to make further advances. Accordingly, a prior chargee will
be presented with the choice of breaching his contract with the debtor or losing
priority in respect of further amounts advanced6. This position is at odds with the
basis for the conclusion in Hopkinson v Rolt that a prior chargee can protect himself
by not advancing further funds after he has received notice of a subsequent charge. It
is also surprising that it seems irrelevant that the subsequent chargee is on notice that
the prior chargee has a contractual obligation to make further advances.
In our view, on balance a court would be likely to extend the section 94 of the LPA
rules to personalty, even if there is doubt that the draftsman intended this to be the
case. The section is capable on its terms of being interpreted as applying to
personalty, and it would be somewhat perverse to insist on a fine distinction between
the treatment of land and personalty so as to reach a significantly different finding of
priority depending on whether the charged asset was land or personalty in the case
where the prior mortgagee was obliged to make further advances.
It is worth mentioning another legal principle which is relevant to this topic.
3
See however Goode (Commercial Law 3rd Edition) – section 94 “apparently applies to personalty as
well as realty”
4
The better view is that notice must be actual rather than constructive, see for example The Law of
Personal Property Security (Beale, Bridge, Gullifer, Lomnicka) (2007)
5
See West v Williams [1899] 1 Ch 132 which applied the rule even where there was an obligation to
make further advances
6
But see ibid, where it was observed that the entry into the subsequent charge released the prior
chargee from its obligation to make further advances
5
PERSONAL\6997882v1
25 February 2015
CLAYTON’S CASE
This is of course a very well known doctrine but with particular importance to
priorities between chargees.
Where a prior chargee has entered into an overdraft facility or revolving credit facility
under which amounts will be drawn, repaid and redrawn, it also needs to be concerned
about the “first in first out” rule in Clayton’s case (Devaynes v Noble (1814-1834) All
ER Rep 1) namely that monies paid into an overdrawn account are deemed to repay
the earliest debts first and any amounts redrawn are fresh drawings. Therefore,
subject to the various exclusions detailed above, if:

£10,000 is drawn down from the prior chargee under a secured revolving credit
facility;

a subsequent charge is granted with the knowledge of the prior chargee and
£20,000 drawn down from the subsequent chargee;

the £10,000 advanced under the revolving credit facility is repaid and £30,000
drawn,
then the £30,000 owing to the prior chargee will rank behind the £20,000 owing to the
subsequent chargee, as the prior charge secured amounts owing at the time the
subsequent charge was granted but which were repaid prior to drawdown of the
£30,000.
This risk of loss of priority can be avoided by the prior chargee, on finding out that a
subsequent charge has been granted, opening up a second account into which
repayments should be paid leaving the initial advance owing and having priority over
the advances of the subsequent chargee. However, in the absence of any arrangement
between the chargees, advances already made by the subsequent chargee will have
priority over any further advances of the prior chargee. The doctrine may be varied
by contractual terms to the contrary.
PROTECTIONS FOR THE PRIOR CHARGEE
6
PERSONAL\6997882v1
25 February 2015
A prior chargee can put protections in place to prevent a situation arising in which he
loses priority to amounts advanced by a subsequent chargee.
Deed of priority
Multiple chargees can enter into a deed of priority, deed of subordination or
intercreditor agreement to regulate the order in which amounts owing to them are paid
and the order in which any proceeds of security of the same asset will be applied.
The prior chargee should be aware that there are still potential risks of losing priority,
even with such a contract in place, for example:

A subsequent chargee might choose to assign its debt and security package, which
it will most likely be entitled to do pursuant to the terms of those documents
without the consent of the debtor. The assignee will only be bound by the deed of
priorities if it has notice of it – which, unless it is registered at the Land Registry,
is only likely to be the case if the assignor gives the assignee notice. Accordingly,
it is important to include restrictions on assignment in the deed of priorities
obliging the assignor to procure adherence by the assignee to the deed of priority.

The deed of priorities may not have been executed correctly so may be ineffective
against one or all parties.

If the underlying facility and security documents are amended, the deed of
priorities may be ineffective if the description of liabilities regulated is not
sufficiently widely drafted.
Negative pledge
The prior chargee’s facility documents and security will probably include a negative
pledge clause prohibiting the creation of further security.
To improve the
effectiveness of this clause (rather than simply relying on the debtor’s compliance),
third parties should be put on notice of it, as follows:
Charges registered against a company
7
PERSONAL\6997882v1
25 February 2015
On registration of the prior charge using Form MG01 the prior chargee should detail
the terms of the negative pledge. A subsequent chargee who has carried out a search
of the register will have actual knowledge of the negative pledge. However, whilst
there has been no decision on the matter, it is widely considered to be the case that the
inclusion of the negative pledge on the Form MG01 will not fix a subsequent chargee
with constructive notice.
Restriction on title
In respect of registered land, in addition to the protections referred to above, a Land
Registry standard form restriction in Form P should be included in the legal charge.
With such restriction on the title, the Land Registry will not register the subsequent
charge without the consent of the prior chargee.
EXAMPLE
The interplay of the rules set out above are best demonstrated with an example:

1 January: A borrower and a lender (Lender 1) enter into a £2,000,000 revolving
credit facility (RCF). First ranking security is granted. £750,000 is advanced.

1 February: The borrower enters into a £3,000,000 term loan (Term Loan), with a
second lender (Lender 2) to which it grants security over the same assets. The
borrower draws down £1,000,000 under the Term Loan.

1 March: The borrower borrows £100,000 from another lender (Lender 3) to
which it grants security over the same assets.

1 July: The £750,000 drawn down under the RCF is repaid and £2,000,000 is
drawn down.

1 August: A further £2,000,000 is drawn down under the Term Loan.

1 September: The borrower is declared insolvent and security enforced with the
following amounts owing:
o Lender 1: £2,000,000
o Lender 2: £3,000,000
o Lender 3: £100,000

There is no deed of priority in place and Clayton’s case is not disapplied.
8
PERSONAL\6997882v1
25 February 2015
Asset
Registered land
Applicable law: section
49 LRA
(1)
Lender 1’s position
– First drawdown
of £750,000
Pursuant to the rule
in Clayton’s Case,
this amount has been
repaid.
(2)
Lender 1’s position – Second drawdown of £2,000,000
The £2,000,000 will have priority over all amounts owing if:

Lender 1 did not have notice of the charges in favour of
Lender 2 or Lender 3; or

Lender 1 had an obligation to make further advances
which is noted on the register; or

Lender 1’s security is for an agreed maximum amount
of at least £2,000,000 noted on the register.
(3)
Lender 2’s
position –
First
drawdown of
£1,000,000
Unless Lender
1 has priority
in
the
circumstances
set out in
Column (2),
Lender 2 will
have priority.
(4)
Lender 2’s position – Second
drawdown of £2,000,000
(5)
Lender 3’s
position
See Lender 1 column for analysis of
ranking between Lender 1 and Lender
2.
See Lender 1
and Lender 2
columns (1) to
(4)
for
analysis
of
ranking.
The £2,000,000 will have priority over
Lender 3 if:

Lender 2 did not have notice
of the charge in favour of
Lender 3; or

Lender 2 had an obligation to
make further advances which
is noted on the register; or

Lender 2’s security is for an
agreed maximum amount of
at least £3,000,000 noted on
the register.
Otherwise, the £2,000,000 will rank behind:

£1,000,000 owing to Lender 2;

To the extent the secured facility by Lender 2 included
(i) an obligation to make further advances which was
noted on the register, £2,000,000 owing to Lender 2;
and (ii) an agreed maximum amount which was noted
on the register, that agreed amount capped at £2,000,000
(plus interest and cots) owing to Lender 2; and

Unregistered land
Applicable law: section
94 LPA
Pursuant to the rule
in Clayton’s Case,
this amount has been
All amounts owing to Lender 3.
The £2,000,000 will have priority over all amounts owing if:

Lender 1 did not have notice of the charges in favour of
Lender 2 or Lender 3; or
1
Unless Lender
1 has priority
in
the
Otherwise, the £2,000,000 will rank
behind all amounts owing to Lender 3.
See Lender 1 column for analysis of
ranking between Lender 1 and Lender
2.
See Lender 1
and Lender 2
columns (1) to
repaid.

Lender 1 had an obligation to make such an advance
under the secured facility.
Otherwise, the £2,000,000 will rank behind:

£1,000,000 owing to Lender 2;

To the extent the secured facility by Lender 2 included
an obligation to make the £2,000,000 further advance,
the £2,000,000 owing to Lender 2; and

Personalty
Applicable law: either
Hopkinson v Rolt or
section 94 LPA
Pursuant to the rule
in Clayton’s Case,
this amount has been
repaid.
All amounts owing to Lender 3.
As above for unregistered land unless Hopkinson v Rolt applies
in which case:
The £2,000,000 will have priority if Lender 1 did not have notice
of the charges in favour of Lender 2 or Lender 3.
Otherwise, the £2,000,000 will rank behind the


circumstances
set out in
Column (2),
Lender 2 will
have priority.
£1,000,000 owing to Lender 2 but not the £2,000,000
owing to Lender 2 (as Lender 2’s £2,000,000 was
advanced after Lender 1’s £2,000,000); and
All amounts owing to Lender 3.
2
Unless Lender
1 has priority
in
the
circumstances
set out in
Column (2),
Lender 2 will
have priority.
The £2,000,000 will have priority over
Lender 3 if:

Lender 2 did not have notice
of the charge in favour of
Lender 3; or

Lender 2 had an obligation to
make such an advance under
the secured facility.
Otherwise, the £2,000,000 will rank
behind all amounts owing to Lender 3.
As above for unregistered land unless
Hopkinson v Rolt applies in which
case:
The £2,000,000 will have priority over
Lender 3 if Lender 2 did not have
notice of the charge in favour of
Lender 3.
Otherwise, the £2,000,000 will rank
behind all amounts owing to Lender 3.
(4)
analysis
ranking.
for
of
See Lender 1
and Lender 2
columns (1) to
(4)
for
analysis
of
ranking.
PRACTICAL STEPS
The following practical steps should be observed by a lender looking to ensure that all amounts advanced by it have priority over amounts
advanced by any subsequent chargee, regardless of when advances are made:

Prior to any drawdown (or, if there is a maximum secured amount registered on the title, when that amount has been exceeded or the advance
is pursuant to an obligation to make further advances which has been registered on the title), a chargee should check that no subsequent
security has been granted by making enquiry of the debtor. For so long as the prior chargee does not have notice of subsequent charges,
amounts it advances will have priority.

As soon as a lender is aware subsequent security has been granted (whether in breach of a negative pledge or otherwise), no further advances
(including any re-drawings under any overdraft or revolving facility) should be permitted until a deed of priority is in place (unless the prior
chargee has accepted its further advances will rank behind the subsequent chargee).

In the case of charges of registered land, a restriction should be noted on the title in respect of granting further security so that the prior
chargee’s consent will be required before any subsequent security is registered. A lender should ensure its address for service registered on
the title is correct and all notices received to that address will be dealt with.

A negative pledge should be included in all relevant facility and security documentation and noted on Form MG01 on registration of charges
at Companies House. If a subsequent chargee is aware that a prior charge contains a negative pledge, it should not accept the security from
the debtor until the prior chargee’s consent has been received.
Jonathan Porteous is Head of Banking & Finance team and Laura Shackleton is an Associate in the banking and finance team at Stevens &
Bolton LLP. Jonathan can be contacted on jonathanon.porteous@stevens-bolton.com and Laura on laura.shackleton@stevens-bolton.com
3