When is it reasonable for a lender to withhold consent?

Secured lenders often restrict a borrower's ability to dispose of a property by requiring their prior consent, which is often qualified by

The High Court in the recent case of Crowther and another v Arbuthnot Latham & Co Ltd [2018] explored this before concluding that a secured lender had unreasonably withheld its consent to a disposal of a property as its refusal had not been based on the sale price.

Facts

In this case, there was a provision in a loan agreement stating that "if, with the prior approval of the bank (such approval not to be unreasonably withheld or delayed), the property is sold, you shall immediately repay to the bank the net proceeds of the sale". The borrower then received an offer for the property which was in line with the valuation at the time. However, the parties were aware that the property did not provide security for the full amount of the loan which would result in an unsecured shortfall if sold. It was for that reason, together with the absence of a repayment plan, that the lender did not consent to the sale. The sale was therefore lost.

The borrower contended that the lender had acted unreasonably and that it was entitled to sell the property at fair market value without the provision of additional security.

Decision

The court held that the test to be applied was one of objective reasonableness, as opposed to either a Wednesbury unreasonableness (i.e. whether the decision-making process was rational) or one seeking to balance commercial interests. The court was therefore required to consider whether withholding consent would be a decision which a reasonable man in the circumstances would come to. By applying this test, the court held that the purpose of the provision in the loan agreement was to preserve the contractual rights of the lender but not to put the lender in a better position than it was at the time that the security was agreed, by allowing it to request additional security for any outstanding indebtedness. Reasonableness in this instance meant that sale should be at arm's length and at market value. It was therefore concluded that the lender was in breach of its requirement not to withhold consent unreasonably, as the decision was not based on sale price or the possibility that a better price might be obtained, which may have resulted in a reasonable delay to consent.

Test

From a lender's perspective, it may seem that it would be preferable to avoid expressly qualifying any requirement for consent by reasonableness as it could limit their scope to refuse consent to a particular action or require a lender to justify its action. The lack of a reasonableness qualifier does not, however, give a lender carte blanche; there are general equitable principles (for example nothing should fetter the equity of redemption) as well as reputational concerns and overarching principles of treating customers fairly that provide a level of protection to borrowers. It is also likely to raise practical issues and most likely would not reflect the commercial reality of the borrower-lender relationship.

Commentary

In another recent case, it was noted that reasonableness could be implicit in the relevant documents where it has not been expressly added to qualify a consent requirement. In this case, the High Court held that where a lender of a commercial property was entitled to withhold its consent to a letting, it was subject to an implied condition that consent should not be unreasonably withheld. Certain factors were considered relevant when considering what constitutes "reasonable" which included:

• consent can be refused for reasons not contained in the relevant documentation provided that the reasons are objectively reasonable;
• if there is an imbalance between the benefit to the mortgagee and the detriment to the mortgagor if consent was refused, it would be unreasonable to refuse such consent; and
• the onus for proving that the consent has been unreasonably withheld is on the mortgagor. This therefore provides a clear test for how a lender's power to refuse consent to let a property should be exercised.

When considering the standard of reasonableness, case law on this matter is conflicting, however the cases referenced above support the position that the test to be applied is an objective one. Therefore, relying on a provision that says the lender is entitled to reasonably withhold its consent is not necessarily in the lenders' gift. The interests of both lender and borrower, therefore, need to be balanced, coupled with considered drafting with any concerns raised at the outset, in order to minimise the risk of future litigation.