Reasonable or not

Earlier this year, we discussed that word so beloved by lawyers – ‘reasonable’ – in the context of reasonable/best endeavours. Another favourite context for its use is in loan and other funding agreements which contain negative undertakings (matters which the borrower/customer must not do or allow to happen) – these undertakings are often qualified by ‘without the consent of the lender’.

It is at this point that the borrower’s lawyer will ask that this consent wording be qualified by ‘such consent not to be unreasonably withheld’. But what if this further wording is not included because it is not requested or, actually refused? Can the funder be (in the words of the Court of Appeal in a leading case on the subject) ‘arbitrary, capricious or irrational’ in deciding whether or not to give consent?

Factors to consider 

In a case involving a loan secured by a mortgage over commercial property*, the borrower was prohibited from granting leases of the mortgaged property without the lender’s consent. It was held that such a consent could not be unreasonably withheld, even though those words were not actually used in the agreement. The court gave certain guidance to what this meant in practice:

  • A mortgagee should not refuse consent on grounds which have nothing to do with the mortgagor/mortgagee relationship as regards the mortgaged property and the proposed letting
  • It is for the mortgagor to show that consent has been unreasonably withheld
  • The mortgagee does not have to justify refusing consent, as long as the decision reached is one that might be made by a reasonable mortgagee in the circumstances
  • Consent can be refused for reasons not contained in the legal agreements and not disclosed to the mortgagor at the time the agreements were signed. However, the reasons must be objectively reasonable; for example, it could be reasonable to refuse consent on the grounds of the proposed use of the property or the level of rent payable under the proposed lease
  • A mortgagee need usually only consider its own interests
  • In each case, it is a question of fact, depending upon all the circumstances, whether the mortgagee’s consent is being unreasonably withheld.

The court also emphasised that an unreasonable refusal of consent merely meant that the refusal was ineffective – it would not give rise to a separate claim for damages.

Blanket ban

The alternative approach seen in some funding documents is to leave out any reference to a consent – there is just an absolute ban on doing (or not doing) the action in question. The merit of this approach is that any request to waive the prohibition in a particular case would be viewed as a variation of the agreement – in that event, the funder would (at least in legal terms) have absolute discretion as to whether to agree to it.

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*Commercial First Business Limited v. Atkins [2012] EWHC 4388

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This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.