Court of Appeal rejects all claims relating to transfer of property portfolio to lender’s restructuring unit following borrower default

The Court of Appeal has upheld the High Court’s decision to reject all claims arising from the transfer of a defaulting borrower’s property portfolio to his lending bank’s restructuring unit during the global financial crisis. Dismissing the appeal in full, the Court of Appeal refused to imply any contractual terms into the mortgage, and did not accept claims that the bank owed a general duty to act in good faith in relation to the negotiation of the restructuring, or that the bank’s actions amounted to intimidation or economic duress: Morley (t/a Morley Estates) v The Royal Bank of Scotland plc [2021] EWCA Civ 338.

This decision is a reassuring one for financial institutions where borrower default has led to a restructuring and the bank is faced with attempts to rescind, especially where there has been significant market turmoil (such as the global financial crisis or the current COVID-19 pandemic). It highlights the difficulties for claimants bringing claims of this nature in circumstances where the bank’s exercise of its powers under a facility agreement are in line with its commercial interests and the negotiation of the relevant restructuring is between commercial parties with the benefit of legal advice.

The key points decided by the Court of Appeal that are likely to be of broader interest are as follows:

• Duty to provide services with reasonable skill and care. The Court of Appeal rejected the implication of a contractual term into the original loan agreement under section 13 of the Supply of Goods and Services Act 1982 (the Act). It did not accept that the bank was under any implied contractual duty to exercise reasonable skill and care in negotiating the restructuring with the claimant after his default on the original loan; by then the parties’ relationship was governed by the express terms of the loan and the equitable principles applicable to that relationship. Even if owed, the Court of Appeal commented that this duty was not breached on the facts.
• Duty to act in good faith. The Court of Appeal did not accept that the bank was subject to an implied contractual duty under the loan to act in good faith in its negotiations with the claimant. All the bank’s actions in any case, in the court’s view, were rationally connected to its commercial interests.  
• Intimidation and economic duress. The Court of Appeal underlined that the bank had not committed the tort of intimidation and that the restructuring agreement between the bank and claimant was therefore not voidable for economic duress. In its view, the restructuring agreement concluded was the result of a robust negotiation between commercial parties, each of which had legal advice and was well able to look after itself in that negotiation. Also, it was notable that the restructuring agreement concluded was one that the claimant had wanted and had originally proposed.

The decision is considered in further detail below.

Background

The claimant was a commercial property developer with a portfolio in the north of England. In December 2006, he entered into a three year, £75 million loan (the Loan Agreement) with the defendant bank (the Bank). The Bank took legal charges over all 21 properties in the claimant’s portfolio, but had no recourse to the claimant personally. During 2008 the parties discussed restructuring the loan, after the claimant failed to make interest payments, but did not reach agreement. In January 2009, the Bank obtained an updated valuation valuing the portfolio at approximately £59 million. On the basis of the valuation, the Bank: 1) notified the claimant of a breach of a loan to value ratio covenant; and 2) served a separate notice exercising its right to charge interest at an increased default rate of 3%.

In mid-2009, the Bank’s Global Restructuring Group (the GRG) took over the relationship with the claimant. Negotiations continued between the GRG and the claimant into 2010 (primarily focused on a discounted redemption of the loan by the claimant, on the basis that the value of the portfolio had dropped sharply in turbulent times) and the loan expiry date was extended several times, but the claimant was unable to raise sufficient funds.

At a meeting on Thursday 8 July 2010, the GRG sought the claimant’s consent to transfer the entire portfolio voluntarily to the Bank’s subsidiary, West Register (Property Investments) Limited (West Register). The GRG’s representative warned that if the claimant refused, the Bank would do a pre-pack insolvency and appoint a receiver on Monday 12 July 2010. The claimant did not agree to transfer his portfolio, but continued to negotiate. A few weeks later, the claimant’s solicitors wrote to the GRG threatening injunction proceedings if the appointment of a receiver went ahead. In August 2010, the parties executed an agreement  under which the claimant repurchased five of the properties for £20.5 million and surrendered the rest to West Register and in return the Bank released its security and the claimant was released from his obligations under the loan (the Restructuring Agreement).

The claimant brought proceedings against the Bank on the basis that in concluding this Restructuring Agreement, the Bank acted in breach of a duty owed to him pursuant to section 13 of the Act to provide banking services with reasonable care and skill and in breach of a duty of good faith, and seeking damages for breach of these duties. The claimant also contended that he was coerced into concluding the Restructuring Agreement by unlawful pressure placed upon him by the Bank, and that as a result of this coercion, the Bank committed the tort of intimidation and the Restructuring Agreement was voidable for economic duress.

High Court decision

The High Court dismissed the claim in full. The High Court’s reasoning is summarised in our previous blog post here. The claimant appealed.

Court of Appeal decision

The Court of Appeal found in favour of the Bank and upheld the High Court’s decision to dismiss the claimant’s claim. We consider below some of key issues considered by the court.

Issue 1: Duty to exercise reasonable skill and care in providing lending services

The claimant argued that the Bank was: (i) subject to a duty under the Act to provide lending services with reasonable care and skill (such a duty operated as an implied term of the original Loan Agreement); and (ii) in breach of duty because, in negotiating for the transfer of the properties to West Register, the Bank was acting as a buyer (i.e. seeking to obtain the properties with a view to medium or long term capital gain) rather than as a lender (i.e. seeking to recover the money which it had lent).

The Court of Appeal did not accept that the Bank was under any implied contractual duty to exercise reasonable skill and care in negotiating the Restructuring Agreement with the claimant after his default on the original Loan Agreement in December 2009. The Court of Appeal underlined that by then the parties’ relationship was governed by the express terms of the Loan Agreement and the equitable principles applicable to that relationship; an implied term in the original Loan Agreement therefore did not have any part to play in the parties’ relationship in the circumstances.

The Court of Appeal commented that even if the Bank did owe a relevant duty under the Act, it had committed no breach of duty; throughout the Bank’s only objective was to recover as much as possible of the amount which it had loaned to the claimant, but even if the Bank had mixed motives that would have made no difference – it was unnecessary that a mortgagee should have “purity of purpose”, i.e. that its only motive is to recover in whole or part the debt secured by the mortgage.

Issue 2: Duty to act in good faith

The claimant argued that the Bank was under an implied contractual duty under the original Loan Agreement to act in good faith, or not to act vexatiously or contrary to its “legitimate commercial interests”.

The Court of Appeal did not accept that the Bank was subject to such a duty in its negotiations with the claimant and noted that all the Bank’s actions in any case were rationally connected to its commercial interests.

The Court of Appeal highlighted that the High Court had already made a factual finding rejecting that the manner in which the negotiations were conducted were acts done in order to vex the claimant maliciously.

Issue 3: Intimidation and economic duress

The claimant argued that the High Court’s finding that he had not been coerced was wrong.

The Court of Appeal disagreed and highlighted that, on the facts of the case, there had been no coercion. The Court of Appeal said that the Restructuring Agreement concluded was the result of a robust negotiation between commercial parties, each of which had legal advice and was well able to look after itself in that negotiation. The Court of Appeal noted that the claimant: (a) was not above making threats (such as walking away from the properties to cause serious damage to the Bank’s security); (b) was prepared to exert political and public relations pressure on the Bank (by enlisting his MP and by engaging public relations consultations); and (c) was prepared to threaten an emergency application to a court for an injunction.

The Court of Appeal also commented that the claimant did not submit to the Bank’s demand and that the Restructuring Agreement concluded was one that the claimant had wanted and had originally proposed; it was the claimant’s successful persistence in the negotiations (e.g. in not being coerced) which enabled him to achieve his object and he therefore had entered into the Restructuring Agreement with the Bank of his own free will. The Court of Appeal said the fact that claimant did not take any steps to set the Restructuring Agreement aside until 5 years later was significant, as it not only demonstrated his affirmation of the Restructuring Agreement but also negated any finding of coercion. The Court of Appeal underlined that any doubt was dispelled by a submission document prepared by the claimant or on his behalf in August 2010 for a separate bank, in which the virtues of the deal with the Bank was extolled and described as a consensual deal which was driven by the claimant.

Accordingly, the Court of Appeal dismissed the appeal in full.

Note: In June 2021, the claimant applied to the Supreme Court for permission to appeal.

In June 2022, the Supreme Court refused permission to appeal.