UK: On What Basis Can A Secured Lender Refuse Consent To A Disposal When Its Consent Is "Not To Be Unreasonably Withheld"?

Last Updated: 9 May 2018
Article by Felicity Ewing, Thomas Leyland and Tanya Alfillé

A contractual provision to the effect that a party's consent should not be unreasonably withheld is a familiar one. When will it be unreasonable to refuse consent and how will reasonableness be tested? In Crowther v. Arbuthnot Latham & Co Ltd [2018] EWHC 504 (Comm) the court considered such wording in the context of a facility agreement which provided that the borrowers could sell property held as security with the approval of the bank, such approval not to be unreasonably withheld. Reasonableness was to be assessed objectively, requiring the court to look at the background and purpose of the provision. It held that in this case it had been unreasonable for the bank to refuse consent where its refusal was not based on the sale price.

Factual background

The claimant borrowers brought mis-selling claims against the defendant bank. The litigation was settled on the terms of a consent order. Under the settlement the bank agreed to continue a loan for €5.9 million for a new five-year term. The bank held a property in France, worth around €4 million, as security. The consent order inserted the following provision into the facility agreement:

"If, with the prior approval of the bank (such approval not to be unreasonably withheld), the property is sold, [the borrowers] shall immediately repay the bank the net proceeds of sale."

A third party offered to buy the property for a price in excess of €4 million, which was in line with valuations at that time. The bank refused to give its approval for the sale unless the borrowers provided further security for the shortfall in the security of c.€1.7 million. The sale was lost as a result. The borrowers' position was that the requirement for further security as a condition of the bank's consent was illegitimate and was not a reasonable basis for withholding its consent. 

The borrowers therefore sought the court's declaration that:

  • the bank's refusal to approve the sale was in breach of the terms of the agreement (as amended by the consent order); and
  • the borrowers were entitled to sell the property at fair market value without providing additional security.

Decision

The key issue, as the judge put it, was what was the proper scope of the bank's "reasonableness veto"? This required looking at the purpose of the provision. The borrowers argued that this was about ensuring that the sale was at fair market value, whereas the bank's contention was that the scope was wider, and could include other aspects of the creditor and debtor relationship. The judge emphasised the importance of interpreting the provision in its own particular contractual, factual and commercial context.

In determining what was the proper test to apply in assessing reasonableness, the court referred to Straudley Investments Ltd v. Mount Eden Land Ltd [1996] EWCA Civ 673, a landlord and tenant case, which had considered a similarly worded clause. The Mount Eden case suggested that the correct test in the present case was an objective assessment of reasonableness. 

The court rejected the bank's contention that some form of rationality test applied – either in the Wednesbury sense, or the analogous concept of a duty of rationality in relation to a contractual discretion (the so-called "Braganza duty"). Nor did the court agree that in this case it was a question of whether one party's commercial interests needed to be balanced against the other's, as in the Barclays v. Unicredit case, which involved an entirely different sort of provision in a different context (consent to early termination of the contract): Barclays Bank plc v. Unicredit Bank AG [2014] EWCA Civ 302.

In order to assess reasonableness objectively, the court was required to examine the background and purpose of the provision and to determine whether, in the particular circumstances, the bank's decision was one that a reasonable man could have taken.

The court observed that, generally, a secured creditor will not object to the disposal of security, provided it is not undervalued and the proceeds are used to discharge the debt. It was hard to see why the scope of the provision in this case should go beyond a concern to permit the sale of the property at a proper price.

The provision in this instance was intended to preserve the lender's rights, not to increase them. At the time the provision had been agreed, the bank had known that the property would not provide security for the whole of the borrowers' indebtedness and that a sale could result in an unsecured shortfall. Whilst the bank's desire for further security was understandable, this was collateral to the purpose of the provision. That purpose was to enable the disposal of the property at a fair market price. Whilst it might be reasonable to postpone the sale if this resulted in a better price, there was no suggestion that a better price could in fact have been achieved. Viewed in its context, the provision required the reasonableness of any refusal to consent to be determined by reference to whether the sale was at arm's length and at fair market value.

The court concluded that the bank's refusal was not based on any issue about the price of the property (which it had said was agreeable), or on the possibility of its value increasing in time. The bank was instead seeking to improve its security position. The court therefore held that the bank had acted unreasonably in refusing to approve the sale and had therefore breached the terms of the loan agreement. 

Implications

Although each case will be determined on its own facts, the decision suggests that in the context of an express provision requiring approval not to be unreasonably withheld, reasonableness will be tested objectively. 

In the circumstances of this case, applying the objective test, the court was clear that it was not open to the lender to refuse to consent to the disposal of the property on grounds that were not based on its sale price. Had the lender considered the price to be below fair market value or had reason to think that a delay in selling might see an increase in the property's value, refusing consent may have been reasonable.

It goes without saying that lenders should take care to ensure that any security is sufficient to cover a borrower's indebtedness as it is unlikely that they will be able to rely on withholding consent to its disposal if the sale is at a fair market value. As the judge in this case observed, if the bank had wanted security for the entirety of its loan, it could have asked for it when negotiating the terms of its facility (at the time of the settlement).

Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries. www.dentons.com.

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 Mondaq.com.

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

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
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
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
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

Mondaq.com (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 www.mondaq.com

To Use Mondaq.com 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.

Disclaimer

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.

General

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