Earlier this year we wrote about a recent case in which a bank failed to act reasonably when withholding its consent to the release of a secured asset.
At the time of our previous commentary (click here to read that more fully), the full case transcript was not available. It has since been released, giving us the luxury of the High Court’s conclusions which we summarise more fully below.
The case is one in a line of cases eroding lenders’ discretion to act in their own interests where to do so might be seen to be unreasonable. See also our previous alerts on the Watchfinder case and the separate case of BHL v Leumi ABL Limited. In this latest case, the High Court found it hard to think of a good reason why the lender could object to a sale of secured property at a fair price.
1. A quick re-cap
The claimant borrowers originally brought proceedings against the defendant bank based on misselling allegations in respect of various loans. Those proceedings were settled and what is known as a “Tomlin order” issued (effectively an order used to compromise litigation in the High Court). According to this order, the defendant bank would continue a remaining loan facility of around €5.9m for five years, secured against a property in France valued at around €4m, but with the following provision inserted in the loan agreement:
“If, with the prior approval of the bank (such approval not to be unreasonably withheld or delayed), the property is sold, you shall immediately repay to the bank the net proceeds of sale”.
The claimants subsequently tried to sell the property to reduce the outstanding debt. Late in 2016 they received an offer for the property of €4.1m after the deduction of commission and fees. The defendant bank acknowledged that this was “an agreeable offer”, but it declined to approve the sale in the absence of additional security for the remaining, unsecured loan balance. Ultimately the sale fell through, leaving the claimant borrowers facing a repayment date without any sale proceeds to help meet the indebtedness when due.
The claimants argued that the bank had unreasonably withheld its consent to the sale because the bank’s requirement for additional security as a condition to its consent was not a reasonable basis to give or withhold consent.
2. High Court’s decision
The High Court considered what test of reasonableness should apply to determine whether the bank had reasonably (or unreasonably) withheld its consent to the release of its security over the property. It declined to apply the well-known Wednesbury reasonableness test, according to which a court might ask whether the decision-making process applied by one person in reaching its conclusion was so irrational as to be unreasonable. Nor was this a case requiring the court to balance one party’s interests against the other party’s interests and assess which was the more reasonable outcome.
Instead, the High Court determined that all that was necessary here was to look at the clause in the objective sense and assess whether the facts achieved the object of the condition. Looked at objectively, the condition seemed to be solely concerned with enabling the sale of the property provided a proper price was achieved. The court noted that creditors do not usually object to the sale of secured property, particularly where the property is not undervalued and especially where the sale proceeds are used to discharge the debt. There was no suggestion here that the property had been undervalued, and the bank’s attempt to obtain more security to cover the shortfall on sale was dismissed as a good enough reason to withhold consent to the release of its security over the property. Accordingly the court concluded that the bank’s refusal to approve the property sale was unreasonable.
The High Court’s decision is one perhaps that may surprise lenders, who may be alarmed to think that they may not reasonably withhold consent to a sale that leaves them with an unsecured shortfall. But this was an unusual case where the lender was not fully secured.
It is not unusual to see exceptions which allow borrowers to take otherwise restricted actions under loan agreements with the consent of the lender “not to be unreasonably withheld or delayed” (or variations of such wording). As this case illustrates, such qualified consent rights will not always provide lenders with all the aces. Indeed, this case is a reminder that banks withholding their consent can expect to have their decisions challenged unless they have properly done their homework and come up with a very good reason why consent will not be provided.
This case also demonstrates the value of careful drafting; if the bank was going to insist upon replacement security as a condition to providing its consent, with the benefit of hindsight it should really have specified that requirement within the language of the release condition when it was first agreed. Or it could have resisted the inclusion of the “approval not to be unreasonably withheld or delayed” wording altogether. It illustrates the importance to lenders and borrowers of this quintessentially legal phrase.
The above case can be found using the following citation reference: Crowther and another v Arbuthnot Latham & Co Ltd  EWHC 504 (Comm) 27 February 2018