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Secured lender could only reasonably withhold consent to disposal on basis of price

In Crowther and another v Arbuthnot Latham & Co Ltd [2018] EWHC 504 (Comm) (27 February 2018), the High Court has held that a secured lender unreasonably withheld its consent to a disposal of property as its refusal had not been based on the sale price.
The background of this case was that the borrowers had previously brought proceedings against a lender in respect of various loan agreements. The proceedings were settled on the terms of a Tomlin order and under this order the lender agreed to continue a loan facility for five years. The borrowers’ outstanding indebtedness was €5.9 million, secured by their property in France which was worth approximately €4 million.
The Tomlin order inserted a provision into the remaining 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 sale”.
An offer was made on the property to the borrowers in the amount of just over €4 million, which was in line with valuations carried out at that time. The lender refused to provide its consent to the sale unless further security was given for the remaining indebtedness and unless a repayment plan was agreed.
The borrowers sought a declaration about the scope of the lender’s reasonableness, arguing that the only relevant consideration for the lender was whether the property was being sold at a fair market value; and that the lender had therefore unreasonably withheld its consent.
The court held that the lender was in breach of the requirement not to withhold consent unreasonably. The test used to assess whether the lender had acted reasonably in this case was one of objective reasonableness.
The objective test required the court to consider the background and purpose of the provision, and whether the decision to refuse consent was a decision which might be reached by a reasonable man in the circumstances. The court held that when the provision was agreed it was known that the property did not provide sufficient security for the whole indebtedness and that a sale would undoubtedly leave an unsecured shortfall. The lender’s refusal had not been based on the sale price or the possibility of this increasing so its refusal to provide consent had been unreasonable.
It is therefore important to note that, although each case will be determined on the facts, this case provides support for the position that the standard of “reasonableness” to be applied in the context of an express provision requiring “consent not be unreasonably withheld” will be an objective one.

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