Case Law Update: Macdonald Hotels Ltd & another v Bank of Scotland plc (2025)
The recent High Court decision in Macdonald Hotels Ltd & another v Bank of Scotland plc (2025) examined a number of issues that relate to the interpretation of loan agreements. In particular, the Court considered whether a term should be implied into a loan agreement, which related to the exercise of the lender’s consent to a proposed release of its security or disposal of assets by a borrower.
Background
Macdonald Hotels Ltd (MHL) had entered into secured facility agreements with Bank of Scotland (BOS) to finance the acquisition and development of a number of hotels around the Auckland. Following the global financial crisis, MHL and BOS were at loggerheads as to how to reduce the gearing and debt profile of the loan. MHL had been trying to find a solution which did not involve them disposing of any of their properties and included trying to find equity or debt to repay BOS. However, none of these refinancing options became available (mainly because MHL’s debt to EBITDA ratio was too high for other lenders to be comfortable with). In the end MHL refinanced the loan with BOS which required the sale and leaseback of some of the hotels.
With market prices being historically low, MHL contended that it had been forced by BOS to dispose of its hotel properties when it should not have, and that BOS was in breach of an implied term to act in good faith when exercising its discretion to give consent to a disposal.
Did BOS have an absolute right to refuse consent?
The facility agreements contained covenants prohibiting MHL from disposing of any assets (subject to some specified exceptions) without BOS’s consent. This is a common covenant in facility agreements which seeks to protect the secured assets by restricting a borrower’s ability to dispose of them. Additionally, the facility agreements included negative pledges by MHL, not to create other security over any of the assets secured to BOS in favour of other creditors, without BOS’s consent. This is again a fundamental provision which seeks to protect the lender’s position.
In the present case, there was a caveat (which is common) for “Permitted Disposals” that was defined as “any sale, lease, licence, transfer or other disposal which…(q) permitted with the prior written consent of the Majority Lenders”. BOS was the sole lender and therefore in control of granting such a consent.
MHL argued that when BOS was exercising its discretion to decide whether it would permit the disposal of its assets and/or release of its security over these assets, a Braganza type term should be implied into the facility agreements (this is based on the Supreme court case of Braganza v BP Shipping Limited (2015)).
Specifically, MHL argued that the terms to be in implied in the facility agreements are that BOS would:
- Act in good faith and not arbitrarily or capriciously in exercising its discretion and exercise its discretion consistently with its contractual purpose;
- Take into account all relevant considerations and not take into account any irrelevant considerations; and
- Not use the discretion for an improper purpose
This argument was referred to in the case as the “Disposal Implied Term”.
BOS denied that a Disposal Implied Term applied to the facility agreements. BOS argued that no reasonable person would have throught that by including an absolute prohibition in the facility agreements, without its prior written approval, would impose on it an obligation to act in a way other than in its own interest.
The Court’s decision
The High Court did accept there was a Braganza type term to be implied regarding the discretion of the lender because the carve out for permitted consent meant it was not an unqualified right. The Court said that if the parties had intended for the prohibition to be absolute then they were open to drafting the term this way (without the carveout).
No reasonable person with the knowledge of the parties would have thought that BOS was entitled to refuse to consider MHL’s request or refuse it for a reason which was unconnected to its commercial interests. However, the Court rejected the “Disposal Implied Term” and, instead, said that BOS:
- Could act in what it considered its best interests;
- Was not obliged to balance its interests with those of MHL; or
- Do anything other than exercise its own judgement.
BOS would not be entitled to refuse consent for a reason which was unconnected to what it considered to be its commercial best interests or where no reasonable entity in its position would have refused consent.
The High Court did not agree with BOS’s submission that implying this term “…would risk dragging the Court into a re-examination of the merits – or apparently the adequacy of the reasons given for – any decision taken by a mortgagee in relation to the preservation of its security” and said that if a lender considered such a risk a real one, it could take steps to ensure that its lending agreements were drafted to avoid this risk. For example, by omitting the consent clause from the facility agreement, and leave it to a borrower to seek a contractual variation or waiver in any particular case.
The High Court then went on to decide that BOS had not acted in breach of the implied terms in this case as it did not act arbitrarily or capriciously when exercising its discretion to grant consent.
Commentary
The decision is perhaps surprising from the point of view of lenders who rely on the type of very standard drafting that was the subject of this case. The court’s suggestion that such drafting can be altered so that no consent language is included and instead a variation or waiver can be sought seems impractical since disposals and release of security during the life of the loan are common.
However, lenders should take comfort from the fact that when exercising their discretion to give consent, the Court has affirmed they only need to focus on their own commercial interests and not have to consider the borrower’s conclusions.
The implications of the case extend to any drafting where a lender’s consent is required and so in all those circumstances (as should always be the case) the lender should ensure that where it refuses consent it can show a contemporaneous record of its decision based on its commercial best interests. This is to reduce the risk of challenge at court by a borrower if a lender’s decision appears to lack any connection to such commercial considerations.
