High Court finds lender pursuing its own commercial best interests does not constitute Braganza-style irrationality

The High Court has found that, while a bank's contractual discretion to permit or prohibit a borrower's disposal of secured assets was subject to a Braganza-style implied term, the bank did not breach that duty by rejecting various alternative proposals for achieving the borrower's debt reduction, which were against the bank's own commercial interests: Macdonald Hotels Ltd & Anor v Bank of Scotland plc [2025] EWHC 32 (Comm).

As a reminder, where the so-called Braganza duty applies, a decision maker must exercise its discretion in a manner that is reasonable and not irrational, arbitrary or capricious, in accordance with the Supreme Court's decision in Braganza v BP Shipping Ltd [2015] UKSC 17. Under the terms of the facility agreement in the present case, the court held that no reasonable person with all the background knowledge of the parties would have thought the bank had an unqualified prohibition on disposal, and so a limited Braganza-style duty applied. However, the scope of that qualification did not prevent the bank from acting in its own best interests, and the bank was not required to balance its own commercial interests against those of the borrower.

This judgment will be of interest to lenders with terms requiring permission to dispose of real property assets within their security package. The case is also a useful illustration that, where in principle a Braganza-type duty applies to any contractual discretion, the effect and scope of the term implied will depend on the nature of the discretion in question. In the context of commercial arrangements between banks and their customers, it may well be arguable that any Braganza implied term is very narrow and should allow the bank to act in its own commercial interests.

This is the latest in a recent line of decisions considering the exercise of contractual discretions in a financial services context (see our previous blog posts here).

We consider the decision in more detail below.

Background

The claimant (MHL) and Bank of Scotland (the Bank) had a long-standing commercial lending relationship dating back to the 1990s. Central to the present judgment was a facility entered into in 2010 following a refinancing (the 2010 Facility). This included a prohibition on MHL disposing of any assets unless it was a "Permitted Disposal", which was defined as:

“…any sale, lease, licence, transfer or other disposal which, except in the case of paragraphs (b), (d) and (g) is on arm's length terms…

(g) permitted with the prior written approval of the Majority Lenders”

When the 2010 Facility became repayable in 2014, it remained largely outstanding. The parties renegotiated, with MHL agreeing to sell and lease back one of its portfolio hotels (the Randolph) to repay a portion of the facility. The parties then entered into a further facility agreement (the 2014 Facility), which included the same Permitted Disposal provision as the 2010 Facility.  

In 2014 and early 2015, MHL proposed selling various assets to repay the debt owed under the 2014 Facility. One proposal was the refinancing of an hotel asset in Manchester with another lender, which would have required the Bank to release its first-ranking charge over the hotel in exchange for a second-ranking charge and partial debt repayment (the Manchester proposal). The Bank rejected this proposal. Subsequently, MHL disposed of two other hotels (the Marine and Old England), to repay its borrowings under the 2014 Facility.

MHL brought proceedings against the Bank, claiming that the disposal of the Randolph Hotel was forced upon it by the Bank during a time when hotel values were at an historic low, in breach of an express duty of good faith; and that the Bank's rejection of the Manchester proposal forced it to sell the Marine Hotel and Old England Hotel in breach of a Braganza-type implied term in the 2014 Facility.

Decision

The High Court dismissed the claims and awarded the Bank indemnity costs. As regards the Randolph claim, the court held that the Bank did not breach the relevant good faith term.  As regards the other two hotels, the court found that a limited Braganza-style duty applied to the Bank's ability to accept, reject or offer a counterproposal to any request for disposal of an asset, but held that the Bank did not act in breach of that duty by pursuing its own commercial best interests over those of MHL.

This blog post focuses on the Braganza claim and a limitation issue. The judgment considered various other arguments, on which the Bank was successful, but which are not considered further here. The judgment may therefore be of wider interest to lenders. 

The Braganza-type term

The court summarised the principles applicable to the implication of terms into commercial agreements, set down in Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Limited & Anor [2015] UKSC 72 (see our blog post). It noted that if, as a matter of construction, a term confers on a party an absolute right, then the court is not able to imply a term that qualifies that right.  

The court examined the effect of the so-called "mortgage exception" in the context of an attempt to imply a term into the 2014 Facility, given that the loan was secured by land. This rule provides that the specific duties owed by a mortgagee to the mortgagor are contained within the express terms of the contract and in equity only; and so further terms cannot be implied into the contract. The court drew a distinction between contractual decisions: (i) directly related to enforcing rights as mortgagee; and (ii) related only to how a mortgagee conducts itself in relation to the charged asset. The court determined that the terms prohibiting MHL's disposals of assets, including the Permitted Disposals term, were "not…subject to or controlled by the general law that applied to the Bank in its capacity as a mortgagee".  On that basis, the relevant terms fell within category (ii) and were not subject to the "mortgage exception".

The court then considered whether the Permitted Disposal provision gave the Bank an absolute right to permit/prohibit the disposal of assets, or instead a discretion as to whether (and if so on what terms) it would permit a disposal. In the court's view, the 2014 Facility imposed an absolute prohibition on MHL disposing of assets subject to the Bank's security package. However, this was expressly subject to a disposal being permitted with the prior written approval of the Bank, which necessarily meant that the parties agreed that MHL might request the consent of the Bank. If such a request were made, the Bank would have "a number of options available to it, including at least accepting what was proposed, rejecting it or making counter proposals".  Accordingly, the court held that here a Braganza-type duty was capable of being implied. In the court's view, under the terms of the 2014 Facility Agreement, no reasonable person with all the background knowledge of the parties would have thought the Bank had an unqualified prohibition on disposal.

However, the court observed that where (in principle) a Braganza-type term is to be implied, the effect and scope of the term to be implied will depend to an extent at least on the nature of the right (referring to Property Alliance Group v Royal Bank of Scotland [2018] EWCA Civ 355 - see our blog post). In the present case, no reasonable person with background knowledge of the matter could have thought the scope of that qualification was intended "to impose on the Bank anything approaching an obligation to act otherwise than in what it perceived to be its own best interests". In the court's view, the Bank was not required to balance its own interests against those of MHL.

The court held that the rejection of the Manchester Hotel proposal, and subsequent sale of the Marine Hotel and Old England Hotel, were for commercial reasons, and therefore not in breach of the limited Braganza-type term.

Limitation

The court also considered - obiter - whether MHL's claim in respect of the Marine Hotel was time-barred. This turned on the question of whether the limitation period was 12 years (which it would be if the 2014 Facility took effect as a deed), or 6 years (if it took effect as a simple contract).

The Bank submitted that the 2014 Facility should be construed as a hybrid instrument, with MHL executing as a deed, and the Bank executing as a simple contract. On that basis, the Bank argued that MHL was entitled only to the benefit of the 6-year limitation period.

The court examined s.1(2) of the Law of Property (Miscellaneous Provisions) Act 1989, and in particular:

• the "face value" requirement (that an instrument must be clear on its face that it is intended to be a deed by all the parties to it); and
• the requirement that the instrument must be validly executed as a deed by one or more of those parties.

The court observed that the 2014 Facility included a form of words which stated that only certain parties executed it as a deed, and intended it to be a deed (in contrast to the scenario where the documents stated that all of the parties to that document intended it to take effect as a deed, notwithstanding that some of them had executed it as a simple contract only). On that basis, the court held (obiter) that the 2014 Facility did not satisfy the execution requirements in s.1(2) and the document was not a deed at all. It held that, on any view, the limitation period for claims by MHL against the Bank was 6 years, and that this aspect of the claim was therefore time-barred.

Note: In February 2025, the claimant applied to the Court of Appeal for permission to appeal.