High Court implies contractual duty on lender to act in good faith when considering a borrower’s request to grant security and dispose of assets

Beware of adding consent carve outs to restrictive undertakings after High Court implies Braganza duty on lender (to exercise a contractual discretion rationally, reasonably and in good faith, and not arbitrarily or capriciously) when considering a borrower’s request to grant security and dispose of assets.

The High Court held in Macdonald Hotels Ltd and another v Bank of Scotland plc [2025] EWHC 32 (Comm) in the context of a non-disposals undertaking and a negative pledge drafted with specific carve outs allowing the borrower to seek the lender’s consent, that a lender would not be entitled to refuse consent for a reason or reasons unconnected with what it perceived to be its own commercial best interests or to refuse consent when no reasonable entity in the position of the lender could have refused consent. On the facts, it was decided that the bank had not breached the implied term in not granting the consents requested, this being in its own commercial best interests, but the decision highlights the risks of weakening restrictive covenants by adding “subject to consent” provisos.

The facts of the case concerned a lengthy discussion with existing lenders around refinancing options during which the borrower wished to explore financing with an alternative lender and was unable to do so without being able to release assets from existing security to provide as security to the new lender. The terms of the loan and security restricted disposals and the granting of security unless with the prior consent of the existing lender.

The borrower argued this conferred a discretion on the lender to determine whether, when and on what terms the borrower was permitted to dispose of its assets in order to pay down its debt and was therefore subject to an implied term on the basis explained in Braganza v BP Shipping Limited [2015] UKSC 17 that the lender would (a) act in good faith and not arbitrarily or capriciously in exercising its discretion and exercise its discretion consistently with its contractual purpose; (b) take into account all relevant considerations and not take into account any irrelevant considerations, and (c) would not use the discretion for an improper purpose.

The lender argued the Braganza duty should not be implied because their right was an unqualified contractual right to give or withhold consent and also since a Braganza duty should not be applied to the protections provided by the general law for those who secure debt against property; in addition the lender argued they had not breached any such implied Braganza duty should it be implied.

Judge Pelling KC (sitting in the High Court), considered the decision to give consent to the refinancing arrangements proposed by the borrower did not fall within the relationship of mortgagor and mortgagee and was not controlled by the equitable rules applicable to that relationship. Going on to consider whether or not the power of the lender to give permission was an absolute or unqualified right of the sort that would preclude the implication of a Braganza type implied term, it was noted that the right was expressly made subject to being permitted with the prior written approval of the bank which necessarily meant that the parties were agreed that the borrower might request that consent and it necessarily followed that the bank could accept, reject or make counter proposals and that, “No reasonable person with all the background knowledge of the parties could have thought the Bank was entitled simply to refuse to consider the request or refuse it for reasons unconnected with its commercial best interests. Had that been the parties’ intention then there would have been no purpose in inserting the provision concerning permission, because it is always open to a party to a contract to request a variation to it and to the parties to such an agreement and to control that process by an appropriately drafted entire agreement provision…..the starting point is that the parties have agreed what is an otherwise unqualified prohibition on disposal. No reasonable person with all the knowledge of the parties could have thought that by including an express right to dispose with the prior written approval of [the Bank] it was intended to impose on [the Bank] anything approaching an obligation to act otherwise than in what it perceived to be its own best interests or even to attempt to balance its own interests against those of [the Borrower] when arriving at a conclusion or do anything other than exercise its own judgment (necessarily arrived at by its officials and subject to its own internal management controls). However, there is nothing in the language used by the parties that would lead a reasonable person with all the knowledge of the parties to understand what had been agreed as entitling the Bank to refuse its consent when no reasonable person in its position could have refused or for a purpose unrelated to its legitimate commercial interests. A more cautious lender might have omitted the express permission qualification and left the borrower to seek a variation to the agreement. However, that is not what the parties agreed. If the express reference to permission is to have any meaning at all it cannot be treated as creating nothing more than would be available to any party seeking a contractual variation.” The judge concluded this was a qualified right of the lender due to the right of the borrower to seek consent, and therefore a Braganza implied duty would not contradict the express terms of that provision.

The judge went on to then consider that the implication of a Braganza type term was necessary because the drafting gave the borrower the right to seek the lender’s consent, and the parties could not have intended consent could be refused for reasons unconnected with the commercial best interests of the lender: “The parties having expressly agreed that [the Bank] could agree a change in the Security, that necessarily implied that [the Borrower] was entitled to seek such a change – something that was intended to benefit at least, and perhaps only, [the Borrower]. Whilst I accept that in considering such a request, [the Bank] (a) was free to act in what it perceived to be its own best interests; (b) was not obliged to balance its interests against those of [the Borrower], when arriving at a conclusion or (c) do anything other than exercise its own judgment (necessarily arrived at by its officials and subject to its own internal management controls) in arriving at a conclusion. However, neither party could have intended that [the Bank] would be entitled to refuse consent for a reason or reasons unconnected with what it perceived to be its own commercial best interests or to refuse consent when no reasonable entity in the position of [the Bank] could have refused consent.”

Implications for secured lending transactions

It is interesting that the bank’s counsel argued that this decision would have implications for secured lending relationships and the response was that restrictive undertakings should be drafted without consent provisos to avoid this risk:

“It was suggested on behalf of [the Bank] that a decision to this effect would have “serious and far-reaching implications for all mortgagor-mortgagee relationships” because “… it would risk dragging the Court into a reexamination of the merits of – or apparently the adequacy of the reasons given for – any decision taken by a mortgagee in relation to the preservation of its security.” I disagree. First, I am concerned with a bespoke not a standard form agreement. Secondly, if a lender considered such a risk a real one in any particular case, it would take steps to ensure that its lending agreements were drafted so as to avoid that risk. One straightforward way of achieving that in the circumstances of this case would have been to omit paragraph (q) and leave it to [the Borrower] to seek a contractual waiver or variation in respect of any disposal not coming within any of the other species of Permitted Disposal. Thirdly, it has for many years been the practice to include in leases covenants against particular uses of property without the consent of the lessor, subject to a qualification that consent was not to be unreasonably withheld, without the consequences to which [the Bank] alludes being perceived to be a problem. Fourthly, whilst financial institutions can normally be relied on not to act in breach of a constrained and narrow term to the effect I have implied that cannot necessarily be said to be so for all lenders in all circumstances. Excluding such a term in all circumstances would risk unfairness and injustice for those who may not be as strong or well resourced as the parties in this case.”

Where one party to a contract wishes to retain an absolute discretion to approve or reject an action by a counterparty to the contract, it is better to draft the relevant undertaking as an absolute prohibition on the performance of such action without the inclusion of a consent proviso. For example, if a lender wishes to have an absolute right to approve or reject the disposal of an asset by a borrower, it would be better to say, “The borrower shall not dispose of [x]” rather than “The borrower shall not dispose of [x] without the consent of the lender.” If the borrower later wished to make a disposal, it could ask the lender for a variation of the contract or waiver of the prohibition to enable it to do so.

If a consent proviso is included, qualifying this by reference to “sole discretion” or a similar formulation may not be sufficient to refute an implication that the exercise of the discretion should be qualified as set out in this case.

The case did not concern a contract which was subject to an express proviso that consent should not be “unreasonably withheld”. However the judgment suggests that where this wording is used, the obligation of the party giving consent would be broadly equivalent to the term implied into the contract in this case – i.e. that the party taking the decision would not be entitled to refuse to consent for a reason or reasons unconnected with what it perceived to be in its own commercial interests or to refuse consent when no reasonable entity in the position of the party could have refused consent.

The Braganza duty is perhaps not as harsh as it might seem in the context of common banking restrictive undertakings as it is unlikely that a lender would be making decisions that could not be justified by its own commercial best interests, but it is nonetheless a warning that consent provisos potentially weaken absolute prohibitions, and of course the reasoning in the judgment could equally apply to any commercial contractual restriction that has been drafted subject to a consent proviso.