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Yes or No? Lender’s Consent to Sale (or not)

The High Court has recently made a decision in a case about a loan agreement which contained a provision that the property over which the lender had security could not be sold unless the borrower had the lender’s approval, which was “not to be unreasonably withheld or delayed”.  The borrower’s indebtedness was €5.9 million and the lender had a charge over the borrower’s property estimated to be worth about €4 million.  The excess of indebtedness over security was known by the lender and the borrower at the time the consent provision was agreed; the lender knew that there would be an unsecured shortfall if the property was sold. 

The borrower received an offer for the property exceeding €4 million which was in line with the current valuation for the property.  The lender refused permission for the sale and insisted that the borrower should provide other security for the shortfall and a repayment plan.  The borrower argued that the lender was acting unreasonably and that it was entitled to sell the property at a fair market value without providing additional security. 

The Court decided that the test to establish whether the lender was acting reasonably was one of objective reasonableness.  The test was not whether the lender was acting in a way that no reasonable lender would have done and neither was it a case of balancing one party’s commercial interests against the other.  The Court said that it was required to look at the whole picture, including the background and the purpose of the provision and whether the lender’s decision to refuse permission for the sale was one that might be reached by a reasonable man in the circumstances.  The Court took note of the fact that at the time the provision was agreed the lender knew that the property did not provide security for the whole of the debt. 

Applying the objective test that it had laid down, the Judge decided that the provision in the agreement was to preserve the bank’s contractual rights and not enhance the lender’s powers by allowing it to request additional security for any outstanding debt.  The Judge therefore decided that the bank was acting unreasonably in refusing its consent to the sale. 

Each case will be looked at on its own facts, particularly as the courts have not laid down any hard and fast rules for determining what is “reasonable”.  Another issue to note is that even where “reasonableness” has not been stated to qualify a discretion it might be implied if there is nothing in the drafting to suggest otherwise. 

For further detail on this please contact our litigation team on 01274 306000.

About the Author

James Staton


James is a Partner and Head of the Dispute Resolution team and primarily handles commercial…

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