30 Jan 2019

How reasonable do lenders need to be?


When a finance document gives a lender the right to exercise a power or discretion it is common for borrowers and their lawyers to add "acting reasonably" qualifications. If a  lender must provide consent before a borrower can take a particular course of action, the borrower will also commonly add "not to be unreasonably withheld or delayed" drafting. Understandably, lenders often wonder whether they need to be concerned about these "reasonableness" qualifications.

Equally, lenders are not always clear what it means when a lender power or obligation is not expressly qualified by reasonableness drafting. Can the court imply a duty on a lender to act reasonably and, if so, when?

These issues were explored in three cases from 2018.

Requesting a valuation

In Property Alliance Group Limited v The Royal Bank of Scotland Plc1 (which is a decision best known in the context of the LIBOR fixing scandal) the Court of Appeal examined the lender's right to require the borrower to pay for a property valuation.

The loan agreement contained a clause which is likely to be familiar to real estate financiers:

"The Lender may, at any time, require the Valuer to prepare a Valuation of each Property.  The Borrower shall be liable to bear the cost of that valuation once in every 12 month period from the date of this Agreement or where a default is continuing".

The borrower ("PAG") argued that the cost of a valuation which the lender (RBS) had commissioned at a time when it had already decided not to renew the facility could not be recovered. Although the terms of the clause seemed to give RBS the right to obtain a valuation "at any time", the exercise of that right was subject to an implied term obliging the lender to act in a way which was not irrational, arbitrary or capricious (the so-called "Braganza" duty – named after a Court of Appeal decision of the same name).

The Court of Appeal agreed and confirmed that the power to seek a valuation was not wholly unfettered. The Court considered that the parties had intended RBS to exercise its power "in pursuit of legitimate commercial aims, rather than, say, to vex PAG maliciously." 

The fact that RBS had commissioned the valuation after it had decided not to renew the facility was clearly key and the Court of Appeal went onto say "It appears to us, accordingly, that RBS could not commission a valuation … for a purpose unrelated to its legitimate commercial interests or if doing so could not rationally be thought to advance them."

Calling in an "on demand" mortgage

In the case of UBS AG v Rose Capital Ventures Limited2, UBS had the ability, at its absolute discretion, to demand the immediate repayment in full of its mortgage debt.

The borrower argued (among other things) that in exercising its discretion to call in the loan UBS would be under a duty to exercise that discretion in a manner which was not irrational, arbitrary or capricious (i.e. the "Braganza" duty).

The judge looked carefully at whether it was proper to apply the Braganza duty to UBS' decision to call in its "on demand" mortgage debt.  In doing so, he helpfully summarised some important principles emerging from previous case law:

  1. Not every contractual power or discretion will be subject to a Braganza limitation. The language of the contract will be an important factor.
  2. The types of contractual discretions that are amenable to the implication of a Braganza term are decisions which affect the rights of both parties to the contract where the decision-maker has a clear conflict of interest.
  3. The nature of the contractual relationship, including the balance of power between the parties, is relevant. Accordingly, it is more likely for a Braganza term to be implied in a contract of employment than in other less "relational" contracts such as mortgages.
  4. The scope of the term to be implied will vary according to the circumstances and the terms of the contract.

In this case the judge observed that "the language of the contractual terms…could not be more stark". The standard conditions had been expressly amended to remove the need for there to be an event of default before UBS was entitled to call in the loan, and UBS was stated to be entitled to call in the loan in its absolute discretion. As the judge observed "This language does not obviously provide fertile ground for implying a Braganza term". In particular, the judge saw it as difficult to see how a decision to demand repayment of a loan could ever be in the interests of the mortgagor, so the power under consideration was "a power that is always exercised solely for the benefit of the mortgagee".

In this case the judge did not see any reason to imply a "Braganza" term and added that if he was wrong about that, the scope of any Braganza term would be no wider than the scope of the duty of good faith which has long existed in the context of mortgages anyway. The mortgagee's duty of good faith has a narrow scope. Provided UBS exercised its power to call in the loan for proper purposes and not for the sole purpose of vexing the mortgagor, it would not be in breach of its duty of good faith.

Withholding consent to the borrower's disposal of a secured property

In the cases discussed above, no reasonableness drafting had been added to qualify the lender's relevant power. So, the question before the court was whether the lender's ability to act should be fettered by implying a "Braganza" term.  The court will always look at the particular facts of a case when deciding whether it is appropriate to imply any term into a contract.  In the Property Alliance Group Limited v The Royal Bank of Scotland Plc case the court did imply a Braganza term, while in UBS AG v Rose Capital Ventures Limited it did not.

However, in the case of Crowther and another v Arbuthnot Latham & Co Ltd3 express drafting had been added in an attempt to curtail the exercise of a lender's power. The relevant agreement provided that the secured property could not be sold without the approval of the lender "(such approval not to be unreasonably withheld or delayed)".

The lender refused to grant its consent.  A sale would have left an unsecured shortfall and the lender required additional security as a condition of granting its consent.

The borrower argued that the lender had unreasonably withheld its consent and the court agreed. The court pointed out that at the time the agreement was entered into the estimated value of the property was considerably less than the outstanding indebtedness, with no prospect of it increasing. Also, it was common ground that the bank's refusal to grant consent was not based on an issue over the value of the property, which the bank had said was agreeable. The judge observed that if the bank was arguing that it was being presented with a commercially unviable position "then it is remarkable that the bank did not seek further security at the outset".

Most well-drafted facility agreements should not suffer from this flaw.  The LMA's form of real estate finance investment facility agreement includes an express prohibition on disposals of the secured assets. However, it also sets out some specific circumstances in which a particular secured property may be disposed of. As well as lender consent being required (with no unhelpful reasonableness-related qualifications, or assessments to be carried out) other more objective criteria are hard-wired into the drafting. These include the requirement for the net disposal proceeds to be at a minimum level by reference to the outstanding loan attributable to the relevant property.

This case demonstrates very clearly that it will always be safest for a lender to set out, up front, specifically and objectively, criteria for where its consent or approval will (or will not) be granted.  Loose and imprecise "not to be unreasonably withheld or delayed" drafting will leave the door open to an argument that the lender has acted unreasonably.

Take away points

Where a lender is given a power to act which is not expressed to be subject to any reasonableness qualification, the exercise of that power may (but will not always) be subject to an implied "Braganza" term.  Unfortunately, even after applying the 4 principles summarised by the judge in UBS AG v. Rose Capital Ventures Ltd, it can be hard to predict with total confidence which side of the line a court may decide that a discretion or power falls.

However, it is important to remember that the parties to an agreement need not be hostages to fortune.  If a particular factor will be key to the taking of a decision or its reasonableness then this can and should be addressed by clear drafting in the relevant agreement. This will be safer than assuming "it goes without saying". A court will always be less likely to see a need to imply terms or hear arguments over reasonableness of behaviour when the parties have been very clear about the terms of their agreement at the outset. 


1. [2018] EWCA Civ 355
2. [2018] EWHC 3137 (Ch)
3. [2018] EWHC 504