Alert 01.17.25
Loan Market Association Publishes Green Loan Terms, Smoothing Path for Green Finance in 2025
The green term sheet accompanies the provisions for green loans previously published at the end of 2024.
Alert
Alert
03.21.25
In MacDonald Hotels Limited & Anr v Bank of Scotland Plc [2025] EWHC 32 (Comm), the High Court recently considered a lender’s ability to withhold consent under loan agreements. This case is significant because it clarifies how lenders must act when granting or withholding consent. While historically hesitant to imply terms into commercial contracts, the High Court considered if lenders must act reasonably when approving (or rejecting) consent requests from their borrowers. While several jurisdictions (such as the United States, Canada and Australia) recognize that parties entering into a contract owe each other a duty of good faith, English law does not imply a duty of good faith into commercial contracts. This concept is continuing to be challenged in English courts, and claimants are slowly chipping away at the traditional English stance.
Macdonald Hotels Limited (MHL) entered into a facility agreement with the Bank of Scotland (BOS), which included terms by which MHL would be entitled to dispose of certain assets by way of “Permitted Disposals.” This term was defined as “any sale, lease, licence, transfer or other disposal which [is] […] (q) permitted with the prior written approval of the Majority Lenders.” BOS was the only lender, and therefore the only entity required to give prior written approval. While not included in the standard form Loan Market Association leveraged facilities agreement, such a carveout is relatively standard in the English loan market, particularly where the loan agreement is secured.
This case centered around MHL alleging BOS compelled the sale of several of its prime hotel assets at undervalued prices, leading to significant financial losses. Following the financial crisis and the merger of HBOS Plc (BOS’ parent company) with Lloyds TSB Bank Limited, BOS sought to reduce its exposure to certain property loans. MHL contended that this deleveraging strategy led BOS to pressure the company into selling certain properties when the market was at a historically low level. MHL was therefore seeking damages of £118 million.
It is a well-known principle of English law (from Marks and Spencer Plc v. BNP Paribas Securities Services Trust Co (Jersey) Limited [2015] UKSC 72; [2016] AC 742), that the courts imply terms into contracts only where it is strictly necessary to do so to arrive at the obvious meaning of the term—the classic formulation being that the implied term is necessary to give business efficacy to the contract and/or that the implied term is so obvious that it goes without saying. This is even more so in a sophisticated and negotiated legal document where all parties received professional legal advice. The default position is that the parties are aware of what they are negotiating, so any inclusion (or lack thereof) was the intended position.
MHL’s argument was that an implied term should be read into the definition of “Permitted Disposals” on the basis of the Braganza reasonableness principles. BOS insisted that because there was no reasonableness qualification included in paragraph (q) of the definition of Permitted Disposals, BOS had absolute discretion to determine on what terms it would permit a disposal, regardless of whether such disposal was reasonable.
The Braganza Duty
The duty from Braganza v BP Shipping Ltd [2015] UKSC 17; [2015] 1 WLR 1661 is a term implied into a contract to act in good faith and rationally when exercising “sole” or “absolute” discretion. It is implied in contracts when:
It is more likely for the Braganza duty to be implemented when the parties have unequal bargaining power. In any event, such discretion should not be used arbitrarily, capriciously or irrationally; it should be exercised consistently with its contractual purpose, take into account all relevant considerations, disregard any irrelevant considerations, and should not be exercised for an improper purpose. In Watson v Watchfinder.co.uk Ltd [2017] EWHC 1275 (Comm), HHJ Waksman QC summarized the Braganza duty: The “fulfilment of that duty will entail […] not reaching an outcome which was outside what any reasonable decision-maker could decide, regardless of the process adopted.” Therefore, the decision-maker will need to show that they arrived at the decision rationally via a reasoned decision-making process.
High Court’s Findings
The High Court indicated that Braganza would not apply if there was an unqualified power. Since a Permitted Disposal required BOS’ prior written approval, BOS had discretion as to whether or not to approve the disposal and on what terms it would permit a disposal. Therefore, it was not an express obligation, and Braganza would apply.
Since BOS needed to provide its prior written approval, it follows that upon receiving a request under paragraph (q) of the definition of “Permitted Disposals,” BOS was entitled to approve the request, reject the request or make a counter proposal. The High Court considered that no reasonable person would interpret this paragraph to mean that BOS was entitled to “simply refuse to consider the request or refuse it for reasons unconnected with its commercial best interest.” Had this been the intention, paragraph (q) would have never been included. Instead, MHL could have simply requested an amendment to the definition of Permitted Disposal at the relevant time.
The High Court, however, largely dismissed MHL’s wider allegations of bad faith, misrepresentation and irrationality, finding that the allegations of forced disposals and breaches of good faith did not hold up under the terms of the loan agreement. We note that permission to appeal has been granted, and the appeal process has started. (As of March 21, 2025, it is awaiting a judicial decision on the papers.)
Implications for Financial Institutions
Including the wording “with prior written consent” into a loan agreement will not give a lender an unqualified right to withhold consent. Instead, to achieve such a goal, the relevant phrase should be excluded from the contract to revert to a straight prohibition on disposals. Otherwise, lenders will need to justify their decisions and ensure that any decision makes good commercial sense. It may be sensible for lenders who need to exercise discretion in these circumstances to document their internal thought process to reach their conclusion in case it is challenged in a similar way down the line.
The suggestion that borrowers should seek an amendment or waiver at all times seems impractical for loans where disposals and security releases are likely to be common during the term of the loan. Of course, ensuring decisions make commercial sense should not necessarily be a high bar for the lender to pass.
Implications for Borrowers
Lenders cannot act capriciously, and any consents they give or withhold must be for reasonable and commercial objectives. However, the implied term is a very limited one: there is no requirement for a lender to go against its own commercial interests in favour of the interests of the borrower. Any decisions should be justified with sound financial reasoning. Borrowers that are sceptical about the exercise of the lender’s discretion at the time might want to consider challenging it contemporaneously to preserve their right to argue Braganza principles later.
Conclusion
This case serves as a reminder of the importance of precise contractual language and is surprising for lenders who commonly rely on such language in many covenants throughout their loan agreements. The High Court’s suggestion that amendments or waivers should be granted at the relevant time could be considered impractical since disposals and security releases are often common during the life of a loan. To err on the side of caution, certain discretions could be expressly excluded from the contract, and/or lenders should keep good records of their rationale for consenting or refusing to consent to requests to ensure that ready justification can be provided when questioned. It is possible that this concept could bleed into commercial contracts generally and not be restricted to the loan market.
Whether you are starting to negotiate a contract or thinking about litigating an existing one, the teams at Pillsbury are always up to date with market trends and ready and willing to assist.