Ramblas Investments entered into a suite of financing agreements for the purchase of the Ciudad Financiera in Madrid, one of the most valuable commercial real estate assets in Europe. Two years into the arrangement, Edgeworth, the financier, claimed a Euros 105 million fee from Ramblas under an Upside Fee Agreement (UFA), triggered by cross-default under a related agreement.

Ramblas argued that, on a proper construction of the terms of the UFA, no fee was payable. Since the Supreme Court’s decision in Rainy Sky, contracts will be interpreted in the way that is most consistent with business common sense. The more the ambiguity, the stronger the business common sense arguments. However, that only applies where there is more than one potential meaning which was not the case in relation to the UFA. There was a single meaning to the wording which was not inconsistent with business commerciality, a fee was payable for services.

Ramblas’ argument that the fee arrangement was an unenforceable penalty also failed. As set out in El Makdessi -v- Cavendish Square Holdings BV [2013] the reasoning behind the rule against penalties is that the court will not enforce a provision for payment which has the predominant function of deterrence. Clauses which provide for payment of money on the happening of a specific event which is not a breach of contractual duty by the payee are not penalties. A payment event had occurred and the effect of the cross default provisions was to advance the time for payment of the fee but not increase the amount payable. Acceleration clauses are not, generally, considered to be penal.

The Judge went on to say that the fee, although large, was commercially justifiable and its predominant function was not deterrence. Ramblas entered into the arrangement in the credit crunch and the lender was able to insist on remunerative terms for what was, effectively, a short term bridging loan. The Court upheld the bargain made and Ramblas was found to be liable to pay the 105 million Euros to Edgeworth.

This decision has implications for commercial contracts and for lenders.