This was first published in Butterworths Journal of International Banking and Financial Law in June 2018. To view a copy click here

Crowther & Crowther v Arbuthnot Latham & Co Limited [a2018] EWHC 504 (Comm) is the latest case to consider a “consent not to be unreasonably withheld” clause in a banking context. The court adopted the same approach as that taken in landlord and tenant cases concerning similar clauses. Emily Saunderson considers the implications for banks seeking to prioritise their own commercial interests when determining contractual consents.

The thorny issue of contractual discretions has arisen again with Crowther v Arbuthnot, a decision of His Honour Judge Waksman QC handed down in late February. The case raises the question of whether some types of consent clauses confer a true discretion in that they admit of only one right answer in certain circumstances, or whether there will always be a range within which a discretion can be exercised reasonably, including whether conditions can be imposed legitimately on consent.

Crowther v Arbuthnot turned on whether the defendant bank, which had extended a loan of €5.9m to the claimants, was entitled to withhold its consent to the sale of property upon which the loan was secured. The relevant clause (cl 8.2(d)) provided: 

“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."

The claimants received an offer for the property of around €4.1m net of commission and fees, which was in line with market valuations at the time. The bank described it as “an agreeable offer” but refused to approve the sale, relying on cl 8.2(d).

The bank’s position was that it would only consent if the claimants would provide security in respect of the balance of the loan that would remain otherwise unsecured after the proceeds of sale had been applied, which was around €1.7m. Since the claimants would not agree to provide further security, the bank refused its consent to sell and the sale was lost.

The claimants said that it was not reasonable for the bank to make its approval of the sale conditional upon the provision of further security and that the bank was in breach of cl 8.2(d). They said, in essence, that the question of reasonableness in this context was to be determined by reference to the proposed sale price of the property: if the proposed sale price was at or above market value and there was no other event that would materially affect the value of the property between the time of the proposed sale and the end of the term of the loan, the bank could not reasonably withhold consent. The claimants sought a declaration to that effect. 

The bank said that its refusal to approve the sale was reasonable because it was seeking to protect its own commercial interests. If it had extended an unsecured loan to the claimants of €1.7m, it would have charged a higher rate of interest than the interest that was accruing on the facility. Further, the bank said that if the property was sold and the sum outstanding under the facility was thereby reduced, the bank would be receiving interest on a significantly lower principal amount than it would be if part of the loan was not repaid. 

The judge noted that at the time the security agreement was reached, the property was thought to be worth around €4m, so from the outset, the bank appeared to be under-secured. The judge also found there was no evidence that the property market was considered to be in a slump when the sale of the property was proposed, or that it was considered that the property market would be more buoyant later. 

The defendant relied on Barclays Bank Plc v Unicredit AG [2014] EWCA Civ 302 where the Court of Appeal considered consent clauses in the early termination provisions of credit guarantees entered into between September and December 2008 under which Unicredit had transferred the credit risk in certain of its assets to Barclays. The lifetime of the guarantees was between 11 and 19 years. The provisions in question enabled Unicredit to bring the guarantees to an early end, after a period which the parties expected to be around five years from the date of the agreements, in certain circumstances, two of which required Barclays’ prior consent. Such consent was “to be determined by [Barclays] in a commercially reasonable manner”.

Unicredit sought a termination in June 2010. Barclays withheld consent on the basis that to terminate the guarantees so early in their term would deprive the bank of a significant proportion of the overall revenue it had bargained for and so cause it material economic detriment. Early termination would also have cost Barclays around €7.45m in closing out its own hedges on the guarantees.

At first instance, the judge held that Barclays was entitled to take account of its own interests in deciding to withhold consent.

The Court of Appeal said it was the manner of the determination that had to be commercially reasonable and that it did not follow that the outcome had to be commercially reasonable, although if it was not, that would cause one to look critically at the manner of the determination.

Longmore LJ said at para 16 of the judgment that Barclays was entitled to take account of its own interest in preference to that of Unicredit because “any commercial man whose consent to a course of action is required but to whom the determination (whether to give that consent) is entrusted would think it commercially reasonable to have primary regard to his own commercial interests”. The Court of Appeal held that Barclays had reasonably withheld consent to an early termination.

In Crowther, HHJ Waksman QC said Longmore LJ had applied a Wednesbury unreasonableness test (AP Picture Houses v Wednesbury Corporation [1947] 1 KB 223), which he noted would probably today be regarded as a form of “Braganza duty” (see Braganza v BP Shipping Ltd [2015] UKSC 17). HHJ Waksman QC said it was  a test of rationality rather than a common law, reasonable man test.

In Crowther v Arbuthnot, the bank argued that it could act in its own commercial interests in respect of giving consent and so, for example, seek a way to recoup the interest it would have earned had the property not been sold and had interest remained payable on the whole €5.9m. HHJ Waksman QC disagreed. He said there was no basis for a Wednesbury reasonableness test in this case; it was a different clause and the reasonable man test applied.

HHJ Waksman QC preferred the analysis of a similar clause in Straudley Investments Limited v Mount Eden Land Limited (1997) 74 P&CR 306 (wrongly referred to in the judgment as Mount Eden Land Limited v Bolsover Investment Limited [2014] EWHC 3523), a landlord and tenant case. Straudley was the tenant under a long lease in a building owned by Mount Eden. The headlease provided as follows: 

 “The Lessee will not underlet  or  part with or share possession or occupation of the Premises or any part of parts thereof without the previous consent in  writing of the Lessor such consent not to be unreasonably withheld or delayed.”

Straudley sought the consent of Mount Eden for a sublease to a new tenant. Mount Eden would only give consent on condition that it would hold half of the rental deposit to be paid by the tenant. Straudley said the condition was unreasonable and the new sublease did not proceed. Straudley succeeded in its claim for a declaration that Mount Eden had unreasonably withheld consent. Mount Eden appealed.

In the Court of Appeal, Phillips LJ noted that from authorities about assigning a lease, it appeared that the purpose of a covenant against assignment without landlord consent was to protect the landlord from having his premises used or occupied in an undesirable way or by an undesirable tenant. A corollary was that a landlord was not entitled to refuse consent on grounds which had nothing to do with the relationship of landlord and tenant, such as where the refusal was designed to achieve a collateral purpose unconnected with the terms of the lease.

Phillips LJ said that it was not necessary for a landlord to prove that the conclusions which led to his refusal of consent were justified, they just had to be conclusions that might be reached by a reasonable man in the circumstances, as per Pimms Limited v Tallow Chandlers Company [1964] 2 QB 547 at 564.

Phillips LJ also said that it would normally be reasonable for a landlord to refuse consent or to impose a condition if it was necessary to prevent his contractual rights from being prejudiced, and that it would not normally be reasonable for a landlord to seek to impose a condition which was designed to enhance the rights he already had.

The Court of Appeal held that Mount Eden’s proposed condition was an illegitimate attempt to improve its position under the headlease and that it was unreasonable.

Applying similar reasoning, HHJ Waksman QC in Crowther v Arbuthnot decided that the bank had unreasonably withheld consent to the sale of the property. He said it was hard to see why the scope of the clause should go further than a concern of permitting disposal of the property at a proper price, and that the bank’s reason for refusing consent to the sale had no connection with the aim of getting a sale at a proper value.

The wording of the relevant clause in Straudley was closer to that in Crowther than the clause in Barclays Bank v Unicredit, but the decision in Crowther does not necessarily mean that in a similar case with a similar clause, it would always be unreasonable for a bank to impose conditions on its consent. For example, it may be reasonable in certain circumstances for a bank to make its consent dependent upon the customer obtaining an independent valuation before it agreed a sale of security.

The question of when or whether it is reasonable to withhold consent will naturally depend on the precise terms of the clause, the factual background, and the reasons given for withholding consent. Crowther v Arbuthnot simply illustrates that there is sometimes a fine line between a bank seeking to exercise a discretion so as to protect its existing commercial rights and interests and a bank seeking to exercise a discretion so as to improve its position improperly.

Robert-Jan Temmink QC of Quadrant Chambers appeared for the Crowthers before HHJ Waksman QC and the bank’s application for permission to appeal was refused.