UK: Lender Discretions: Understanding The Limits

Last Updated: 31 July 2014
Article by Adam Pierce
Most Read Contributor in UK, August 2018

Most facility agreements give the lender certain discretions. Sometimes the agreement will say the lender must exercise a discretion reasonably. But what if it doesn't? Adam Pierce explains the extent to which implied terms may limit a lender's discretions, with particular focus on some recent cases.

No arbitrary, capricious or irrational use of discretions

In the 2013 case Mid Essex Hospital Services NHS Trust v. Compass Group, the Court of Appeal noted that where a contract gives a party a discretion which "involve[s] making an assessment or choosing from a range of options" it is "extremely difficult to exclude" an implied term that the discretion will not be exercised "in an arbitrary, capricious or irrational manner" (a rationality implied term). So to what extent are the rights a lender typically enjoys subject to a rationality implied term?

The right to accelerate

Lenders usually have a contractual right to demand repayment on an event of default. Is this a discretion, and so limited by an implied term? The Mid Essex case (which concerned an analogous situation) suggests a court would not usually imply any limits on this right to accelerate.

In Mid Essex, if a contractor's performance fell below required levels, its counterparty (an NHS Trust) had a right to deduct amounts from the price payable under the contract. The Court of Appeal held there was no implied term limiting the Trust's right to deduct. Once the right arose, the Trust had "a simple decision whether or not to exercise an absolute contractual right". No implied terms were necessary.

It would seem logical to apply a similar approach to a lender's right to accelerate.

Approving conditions precedent

Where a borrower has to deliver conditions precedent "in form and substance satisfactory to the lender", this involves the lender "making an assessment" - to use the wording in Mid Essex. So the lender's freedom to reject a condition precedent will usually be limited by a rationality implied term.

The lender is free to take an unusually cautious approach in ensuring the conditions precedent adequately protect it. But it cannot arbitrarily refuse to accept conditions precedent simply to avoid having to lend.

Discretion to change commercial terms

Where a lender has a discretion to set or change the commercial terms of the loan, a court will generally apply a rationality implied term to that discretion. This was the approach of the Court of Appeal in the 2002 case Paragon Finance v. Staunton, where a facility agreement gave the lender a unilateral right to change the rate of interest.

However, the court took a different approach in the non-banking 2012 case Yilport Konteyner Terminali v. Buxcliff. Yilport agreed to carry out urgent work on a damaged ship. The work had to be arranged at such short notice that the only thing the parties managed to agree about the price was that it was to be determined by Yilport. The court held that Yilport's charges had to be reasonable. Unconvincingly, it distinguished between the more limited rationality implied term applied in previous reported cases on the basis that the cost was such a central part of the commercial terms (arguably the interest rate on a loan is similarly central).

However, other than in similarly extreme circumstances (an urgent loan arranged at short notice with key terms to be set by the lender(?)) it seems unlikely a court would apply a similar test to lender discretions under a facility agreement.

Lender consents

Most facility agreements include negative undertakings: things the borrower must not do or allow to happen. A lender generally has complete discretion whether or not to waive these undertakings. What if the agreement states that the borrower must not take a particular action "without the consent of the lender"?

For some types of consent, there is likely to be an implied term limiting the lender's discretion. In the 2012 case Commercial First Business Ltd v. Atkins, a landlord had borrowed money under a loan agreement. This required him to obtain the consent of the lender before granting new leases. The court held that a lender cannot "unreasonably withhold" its consent to this type of request.

The court's reference to reasonableness suggests a lender's freedom to withhold consent in these circumstances is more restricted than it would be if it were merely subject to a rationality implied term. The difference may not be as significant as it would first appear. For example, the court made clear that a lender "need usually only consider his own interests". This implied term does not create an even balance between the interests of lender and borrower.

Parties should not assume this implied term always applies where there is a lender consent mechanism. A court may sometimes interpret a clause prohibiting an action without the lender's consent in the same way as an absolute prohibition, if an absolute prohibition would make sense in the context of the agreement.  However, if lenders want to be sure that borrowers are subject to an absolute prohibition, they should avoid adding "without the consent of the Lender" to the negative undertakings in their agreements.

Law stated as at 30 July 2014.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Events from this Firm
27 Sep 2018, Conference, Budapest, Hungary

Dentons will be sponsoring the Future Law conference taking place on September 27 in Budapest. The event aims at providing a global view on the possible responses of legal industry to technological challenges and will host leading experts in the field.

2 Oct 2018, Other, London, UK

The Build-to-rent (BTR) market in the UK has grown substantially in recent years. In ever-increasing numbers, investors and developers are buying up land and properties for the purpose of BTR - benefitting from both value rises in their acquired assets and from rising rents.

2 Oct 2018, Other, London, UK

Dentons is pleased to invite you to register for a place at an interactive debate, "Is Franchising Good or Bad? And if so, for whom?", which is part of Dentons' International Retail Franchising programme.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions