High Court finds bank unreasonably withheld consent to sale of secured property where sale would not have satisfied the secured liability in full

Paul Crowther & Anor v Arbuthnot Latham & Co Ltd[2018] EWHC 504 (Comm) provides an interesting example of how the High Court applied the test of objective reasonableness to the exercise of a bank's discretion to consent to the sale of a secured property. In reaching this conclusion, the court refused to apply the so-called Braganza duty to the exercise of the contractual discretion, i.e. whether it was exercised in a way which was not arbitrary, capricious or irrational in the public law sense. Central to the court's decision was its conclusion that the wording of the clause in the instant case (that the bank's consent should not be "unreasonably withheld or delayed") was "essentially the same" as the wording of a clause in a landlord and tenant case in which the Court of Appeal applied the objective test of reasonableness: Straudley Investments Ltd v Mount Eden Land Ltd [1996] EWCA Civ 673(citation corrected from the judgment).

Applying this objective test, the court held that the bank's refusal was unreasonable. The bank's position was that any consent to sell was conditional on the provision by the claimants of further security, because the proceeds of the sale would not discharge the outstanding debt in full. However, the court emphasised that at the time the relevant agreement was entered into, the estimated value of the property was "very considerably less" than the outstanding indebtedness, and so the position had not really changed. Essentially, the court took the view that the bank should have sought further security (in excess of the value of the secured property) at the outset, if it wished to have security for the full amount of the outstanding debt.

This decision will be of interest to lenders, particularly those considering the exercise of a contractual veto to prevent the sale of secured property, although each case will turn on its own facts and the express wording of the clause.  One way in which the interpretation of a similarly worded clause might be distinguished in the future is where (at the time the relevant agreement was executed) the full outstanding liability was secured by the property in question. The instant decision is also vulnerable to criticism that the principles applied were specific to the landlord and tenant context and attempts to transfer such principles outside of that sector are inappropriate. In particular, the court failed to address the fact that the analysis of the requirement not to unreasonably withhold or delay consent in Mount Eden, on which much emphasis was placed, was (at least in part) informed by the requirements of the Landlord and Tenant Act 1988 which also uses the same wording.

However, if this decision is followed, it may increase the risk for lenders who withhold consent to the sale of secured property in circumstances where there is an express provision that such consent should not be withheld unreasonably. This is because the application of an objective test (as opposed to one based on rationality) will arguably make it more difficult for a lender to prove that consent has been withheld legitimately.

Factual background 

In December 2001 the claimants issued proceedings against Arbuthnot Latham & Co Ltd (the "Bank") before the Brighton County Court alleging that, as a result of a number of loan facilities entered into between them, an unfair relationship within the context of the Consumer Credit Act 1974 arose. These loans were secured by a charge over the claimants' property in France (the "Property"). The proceedings were subsequently transferred to the High Court, and the claim was settled in September 2013 by a Tomlin order, with settlement terms included in a schedule to that order (the "Settlement Agreement"). Further to the Settlement Agreement, the charge and only one facility (with approximately €5.9 million outstanding) remained in place and their original terms were superseded by those included in the Settlement Agreement.

Over the years the claimants tried to sell the secured Property to reduce their indebtedness and towards the end of 2016 they received an offer of €4.5 million, which was in line or slightly over the market valuations at the time and was considered by the Bank as "an agreeable offer".  However, the sale would have left the Bank with a considerable shortfall (€1.7 million) and no security. The Bank was prepared to agree to the sale on the condition that further security was provided by the claimants. Since no further security was provided, the sale was lost. The claimants did not accept that the Bank's requirement for further security as a condition of consent was a legitimate or reasonable basis for its refusal.

The current dispute between the parties concerned the construction of the following clause of the Settlement Agreement (the "Clause"): "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 sought a declaration that the Bank had unreasonably withheld its consent to the sale of the Property.

Decision

The court held that the Bank's refusal to consent to the sale was unreasonable, granting declaratory relief against the Bank. The key question considered by the court was the proper scope of the Bank's discretion to consent to the sale, in other words, the proper purpose of the Clause.

The court first referred to Mount Eden, a landlord and tenant case  where the wording of the landlord's veto clause was essentially the same as the Clause in the instant case, i.e. that consent should not be unreasonably withheld. The landlord was only prepared to give consent for its tenant to sublet, subject to a condition which would improve the landlord's own security position, whereby the deposit from the new subtenant was required to be held in a joint account. The court held that the landlord's consent to the subletting was unreasonably withheld, stating that it would not normally be reasonable for a landlord to seek to impose a condition which was designed to increase or enhance the rights that he enjoyed under the headlease (i.e. retaining a security interest in the deposit to which only the tenant would normally be beneficially entitled). In the instant case, the court said that the decision in Mount Eden was of assistance in two ways:

• Mount Eden stated that it was not necessary for a landlord to prove that the conclusions which led him to refuse consent were justified, if they were conclusions which might be reached by a reasonable man in the circumstances. This suggested that the test for reasonableness was an objective assessment.
• Mount Eden stated that a landlord is not entitled to refuse his consent to an assignment on grounds which have nothing to do with the relationship of landlord and tenant in regard to the subject matter of the lease, referring to a recent example of a case where the landlord's consent was unreasonably withheld because the refusal was designed to achieve a "collateral purpose" unconnected with the terms of the lease. As such, a "collateral purpose" would include where a party withholding consent does so in order to obtain rights he did not otherwise have.

It is noted that Mount Eden appears to have been decided (at least in part) on the requirements of the Landlord and Tenant Act 1988, rather than purely on the basis of a landlord's veto clause in the head lease. The implications of this are discussed in the introduction.

The court distinguished Barclays Bank Plc v Unicredit Bank AG (formerly Bayerische Hypo-und Vereinsbank AG) [2014] EWCA Civ 302, in which the fact that the bank had only regarded its own commercial interests in refusing consent to an early termination of derivative transactions was found to be reasonable. In Unicredit, the clause required consent to be determined in a "commercially reasonable manner" and the nature of the reasonableness test was by reference to Wednesbury unreasonableness or a form of Braganzaduty, i.e. a test of rationality as opposed to the common law, reasonable person test. The key points of distinction made were as follows:

• In the instant case, the court saw no basis for a Wednesbury reasonableness test, given that the wording of the Clause followed the landlord and tenant-type clause (per Mount Eden, which applied a reasonable person test) and was different to the wording of the clause in Unicredit.
• Further, the court noted that the discretion considered by the Court of Appeal in Unicredit concerned the process or manner of the determination of whether to consent to the early termination, by contrast to the Clause in this case, which was about outcome.

The court noted that the Clause did not qualify or define its object or target in respect of the reasonableness of the refusal in any way, but stated it was "very hard to see why the scope of the [Clause] should go any further than a concern which [sic] the aim of permitting disposal of the [Property] at a proper price". In this context, the court held that the Bank's reasons for refusing the sale had no connection with the aim of getting a sale at a proper value at all. Although the proposed sale would have left a shortfall, the court noted that the value of the Property at the time of the Settlement Agreement was "very considerably" less than the outstanding indebtedness. As such there was no expectation at that time that a potential sale of the Property would pay off the entirety of the outstanding loan and so the position had not really changed. The court commented that, although the Bank's desire for more security was about the loan and its relationship with its debtors, that did not stop it from being a collateral purpose as the decision in Mount Eden made clear.

Accordingly, the court held that the disputed Clause should be construed so that the reasonableness of the discretion exercised by the Bank was determined by reference to whether the proposed sale was "at fair market value and at arm's length". The court did not accept that the reasonableness criteria in that context was limited to ensuring that the Bank acted in a Wednesbury reasonable or rational way in reaching its decision. Consequently, upon the facts of the case, the Bank's refusal to the sale was deemed unreasonable.