The recent spate of litigation in CMBS transactions by
noteholders to obtain interpretations of their rights directly in
the English courts rather than through the note trustee raises two
distinct questions: do investors have standing as a matter of both
the transaction documents and general contract law to launch such
proceedings and secondly should they be able to?
A typical limited recourse CMBS transaction will contain a
general restriction on noteholders proceedings directly against the
issuer to enforce their rights under the transaction documents
(that right being reserved for the note trustee). On its face that
should prohibit noteholders launching proceedings where the issuer
is named as a defendant. However, depending on the wording of the
clause on question, it could be argued that proceedings launched
under Part 8 of the Civil Procedure Rules ("Part 8
Proceedings") which are aimed at resolving matters of
interpretation are not caught by such restrictions even if the
issuer in such proceedings is technically listed as a
At law the situation is slightly different, in a global note
structure an investor will hold their entitlement through the
clearing systems (and related intermediaries) and while we refer to
such investors as 'noteholders' in the colloquial sense (as
such persons will be beneficially entitled to a proportion of the
interest and principal paid by an issuer) they do not have a direct
contractual relationship with the issuer. The actual
'noteholder', as a matter of contract law, is the holder of
the global note and without direct rights being granted to the
ultimate investors in the issuance (e.g. through additional deeds
of covenant or drafting in the transaction documents), such
investors will not arguably have the locus standii required to
launch proceedings against as issuer (as they are not a party to
the relevant contracts). In order to get around this restriction,
the English courts would have to look through the global note
structure and grant direct rights to the ultimate investors. The
courts have been reluctant to do so and have adopted a 'no look
through' principle (as recently affirmed, although not in a
CMBS transaction, in Secure Capital SA v Credit Suisse AG  EWHC
388 (Comm)) in relation to notes held in the clearing
The second question is whether the ultimate investors should be
able to launch Part 8 Proceedings in order to interpret certain
provisions of the transaction documents. There is, of course, an
advantage in achieving certainty of interpretation when it comes to
ambiguous provisions of the documents and should a genuine
ambiguity in interpretation arise, it is open for the relevant
transaction parties to agree that it would be sensible for a
noteholder to lead and indeed launch Part 8 Proceedings (rather
than having a note trustee front their position). However, the
obvious danger in allowing any and all ultimate investors to launch
such proceedings without the consent of the other transaction
parties is that multiple proceedings could be launched either
simultaneously or consecutively significantly increasing the costs
of the transaction and ultimately impacting junior noteholder
recoveries. In addition, without the ability of the note trustee to
'filter' investor concerns and allegations, the process is
open to abuse as investors could launch Part 8 Proceedings which do
not purely deal with matters of interpretation but seek to obtain
access to additional information and/or involve disputes of fact.
In such circumstances, the issuance of Part 8 Proceedings would
likely be disputed by the transaction parties but that in itself
will come at a cost to the transaction. As in most cases, the
drafting of in the individual clauses will be key. Better start
reading those terms and conditions closely...
Happy Holidays all!
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