What is ‘reasonable’ or ‘unreasonable’ in a legal context can be a tricky thing to navigate. In a previous blog we considered the factors a lender should consider when deciding whether or not to give its consent to a borrower to do something, when that consent is “not to be unreasonably withheld”. This obligation has recently come back under the spotlight.
When negotiating loan documents, it is common for there to be provisions that prevent the borrower from doing certain things without lender consent. This could be any number of things, for example, disposing of assets. A borrower will usually request that the prohibition be adjusted so that the lender’s consent may not be unreasonably withheld. This was the scenario in a recent case.
When it’s a question of value…
In this case the lender’s consent was required for the sale of a charged property but that consent was “not to be unreasonably withheld or delayed“. The sale proceeds were then to be used to repay the bank.
Whilst trying to reduce the debt, the borrower received an offer of €4.1 million for the property. This was in line with valuations at the time (actually in excess of them). The bank said this was an “agreeable offer”. But, nonetheless, the bank refused to give its consent. Why? Because the bank wanted the borrower to grant further security to cover the shortfall between purchase price and the outstanding debt. In the end, no further security was granted (there was no contractual obligation to give it) and the sale fell through.
The issue the court addressed was what the proper purpose of the clause was – the borrower thought it was to ensure the sale was at a fair market value, the bank believed the scope was wider, bringing in other aspects of the lender/borrower relationship.
The court considered previous case law, in particular Mount Eden and found two points of particular relevance:
- The test is an objective test of reasonableness (i.e. what would ‘the reasonable man’ do).
- A collateral purpose includes where the party withholding consent does so in order to obtain rights he did not otherwise have.
The court also considered a case that required consent to be exercised in a ‘commercially reasonable manner’ (the well-known Unicredit case) but that was felt to be a different matter. That case was about balancing competing commercial interests when refusing consent. Furthermore, the Wednesbury test of reasonableness did not apply – it was not about acting in a rational manner in the context of that test.
In this case, the bank’s reasons for refusing the sale had no connection with value but that the provision of further security might alleviate the bank’s position. An “entirely different point”. It was a ‘collateral purpose’. The “objective factual, commercial and contractual context” of this clause meant that reasonableness should be determined by reference to whether the sale is at fair market value and at arm’s length. The bank was held to be in breach of the clause.
This ‘borrower friendly’ decision serves as a reminder that a lender needs to consider carefully what scope it actually has to refuse its consent where contracts include wording relating to consent not being unreasonably withheld. Every contract is different and the wording and context can have an impact on the legal test that will be applied. In this case, the objective ‘reasonable man’ test won the day.
This blog post was written by Sharon Malhi. For further information, please contact:
Sharon Malhi, solicitor, Banking & Finance
T: 0161 836 7707
 Crowther and another v Arbuthnot Latham & Co Ltd  EWHC 504 (Comm) (27 February 2018)