The recent decision by the English High Court in Torre Asset Funding Limited & anr v The Royal Bank of Scotland plc1 considered whether RBS was liable to an investor, Torre, in relation to a structured lending facility arranged by RBS for Dunedin Property Industrial Fund (Holdings) Limited (Dunedin). Dunedin went into administrative receivership in late 2008 which led to significant losses to the lenders in the finance structure, including Torre.


In late 2005 to mid-2006, Dunedin acquired several portfolios of industrial units with the assistance of lending from RBS, known collectively as the Industrious portfolio. Following the Industrious acquisitions, RBS then put together a £630m structured finance facility for the Industrious portfolio.

The finance structure was split into six levels: (i) super senior lending in the form of commercial mortgage backed securities (CMBS); (ii) senior lending; (iii) mezzanine A loans (iv) mezzanine B1 loans; (v) subordinated mezzanine B2 loans; and (vi) equity participation, in the form of shares purchased by Dunedin and loan notes with equity characteristics purchased by RBS.

Torre purchased approximately £27.38m of the mezzanine B1 loans at face value from RBS in January 2007. By way of a deed of accession, Torre became a party to the Junior Mezzanine Facility Agreement (JMFA) and the Inter-Creditor Deed (ICD).

The principal financial covenants made by Dunedin to the lenders under the structure which are relevant to the case were:

"(i) an Interest Cover Ratio ("ICR") covenant, regarding the relationship between the income for Dunedin from the Industrious portfolio and the interest payments due to be made by Dunedin to the various levels of lender, and

(ii) a Loan to Value ("LTV") covenant, regarding the relationship between the value of the properties in the portfolio charged as security for the loans and the amount outstanding on the loans".

In the case of Torre’s mezzanine B1 loans, the ICR covenant was a minimum of 1 and the LTV covenant was 91.5%. A breach of either of those covenants would constitute a qualifying event of default and permit Torre (subject to the priority of the senior lenders) to call in the loans and enforce security over the underlying properties in the Industrious portfolio.

RBS, in addition to acting as lender (together with many other roles such as servicer, security trustee, equity participant etc) at a number of levels in the finance structure, also acted as agent under the ICD and JMFA at the mezzanine B1 level. Torre relied on RBS, acting as agent, for the flow of certain information from Dunedin in relation to financial reporting.

The valuation of the Industrious portfolio at 5 October 2006 was £688m. Even at that very early stage of the lending, the portfolio was "highly leveraged even by the standards of the time, though not abnormally so". In order for the finance structure to become profitable, it would not be sufficient for the portfolio to maintain its value. Dunedin would need to increase the value of the portfolio through growth of its rental income stream and decrease the amount of vacant units.

The portfolio did not in fact increase, or even maintain its value during the first year of operating. In July 2007, following a review of the Industrious portfolio, Dunedin and RBS reviewed the cashflows which had been projected in the original business plan. That review revealed that financing could not be fully serviced. By October 2007 a plan was devised which would see the interest payments due to RBS at mezzanine B2 level rolled up in order to alleviate the cashflow pressures. Dunedin prepared a revised business plan (the Business Plan) and quarterly cashflow statement for October to December 2007 (the Cashflow Statement).

During December 2007 and January 2008, RBS (in its role as the subordinated mezzanine B2 lender) sought consent from Torre (as a mezzanine B1 lender) to reschedule the interest payments due from Dunedin to RBS by rolling them up to maturity. RBS described the change to Torre as being necessary in order to allow Dunedin more room to manage the Industrious portfolio by, for example, incurring capital expenditure to improve the estate. The fact that RBS and Dunedin had concluded that the lending could not be fully serviced was not mentioned by RBS to Torre. Torre gave its consent to the restructuring. However, the other lenders at mezzanine B1 level refused to consent to the proposed changes and the restructuring never took place.

In July 2008 a valuation report was issued, which valued the Industrious portfolio at £520m, which effectively meant that all levels of the finance structure were in default. The CMBS note holders at super senior lending level became entitled to enforce their security against Dunedin and call in their loans. Dunedin entered into discussions with its creditors from July 2008 until September 2008 and, on 18 October 2008, appointed administrative receivers. Torre did not receive any funds out of the realisations of the receivership.

The claim

Torre advanced three main heads of claim:

The event of default claim

Torre claimed that RBS had knowledge in July 2007 that there had been an event of default under the JMFA and ICD, in that it had known that Dunedin could not service all of the debt under the facility. Torre argued that RBS owed it a duty of care to report to Torre that there had been such an event of default.

The Business Plan claim

Torre claimed that RBS had acted in breach of duty by not passing on to Torre the Business Plan and October Cashflow statement which it had received from Dunedin in October 2007, relying on RBS’ duty as agent under the JMFA to provide copies of "Annual Budget" documents to Torre (and other lenders).

The negligent misstatement claim

Torre claimed that RBS had made negligent mis-statements in December 2007 and January 2008 while seeking consent from Torre for the rescheduling of interest payments at B2 level, by asserting that the reason for the proposed rescheduling of the interest payments was to enable an increase in capex on the Industrious portfolio to improve the stock, whereas Torre argued that RBS knew that the real reason was that there would be insufficient funds to make all the interest payments due later in 2008.

The decision

The event of default claim

The judge found that there had in fact been an event of default as defined in the relevant agreements, when the recalibration of the projected cashflows carried out in July 2007 showed that there were "actual or anticipated financial difficulties" constituting an event of default under clause 23.5 of the JMFA.

However, the judge dismissed Torre’s arguments that RBS acting as agent owed any duty to report to Torre on the event of default. Torre relied on several contractual provisions, express and implied, but also sought to rely on the duty an agent owes under common law to provide relevant information to its principal. The judge rejected this, finding that the contractual duties which RBS assumed as agent were precisely and tightly defined and limited in scope, and that it was commercially unrealistic to expand the scope of those duties by importing additional duties from the common law of agency. The judge also rejected Torre’s argument that an equivalent duty should be implied into the JMFA. It was not a matter on which the contract was silent; there were existing express provisions (albeit narrowly defined), and it could not be said to be necessary to imply a wider duty.

The judge then considered those express contractual terms at length. In essence, he found that the contractual duty was to pass on notice of any event of default of which the agent became aware, and that while there had in fact been an event of default in July 2007, the agent (and RBS as a whole) had not been aware of that fact.

The Business Plan claim

The judge found that the Business Plan or October Cashflow did not fall within the relevant definition of Dunedin’s Annual Budget documents which RBS was obliged to supply to Torre under the JMFA. That definition referred to the Annual Budget "prepared by [Dunedin] and approved by [RBS]", but Dunedin had not submitted the Business Plan or October Cashflow to RBS as an Annual Budget in this sense, and nor had it asked RBS to approve it (and RBS had not approved it). In fact, Dunedin had never prepared an Annual Budget in the contractual sense, but the judge found that RBS had no duty to press Dunedin to do so, nor to pass on information such as the Business Plan or October Cashflow to lenders.

The negligent misstatement claim

The judge found that RBS had breached its duty to take reasonable care to give accurate information in the statements made to Torre in December 2007 and January 2008 when seeking consent to the rolling up of interest due to RBS as B2 mezzanine lender. He found that the statements were "a materially inaccurate and misleading account of the reason for the request" for consent to reschedule the interest payments and as such RBS had negligently mis-stated the position.

Further, he found that RBS had assumed a duty of care to Torre in the course of seeking Torre’s consent to the amendments to the scheme.

However, the judge then went on to consider the scope of that duty of care owed by RBS to Torre. He found that the purpose of the statements by RBS was very narrow in nature, and had been limited to seeking consent for the rescheduling of interest payments at B2 level. As such, the judge considered that the duty of care extended only to protecting Torre against any loss suffered "by reason of giving their consent to the rolling up of the B2 interest" to 2011 as a consequence of any misstatements which were made in the process of seeking that consent. Although Torre had consented, other lenders had not and the rescheduling of the interest payments did not happen. Accordingly, while RBS had breached its duty of care to Torre, that breach resulted in no relevant impact or loss.


After rejecting each of the three claims on liability grounds, the judge proceeded to find that Torre had also failed to substantiate its case on causation, both in principle on grounds that the loss fell outside RBS’ scope of duty to Torre, and on the facts.

Relying on the SAAMCO and Haugesund Kommune cases, the judge found that, even if RBS had breached duties to provide information to Torre, RBS’ duties to provide such information were intended to assist the lenders to operate their rights under the facility agreements, not to make investment decisions such as to sell their participation. Torre did not claim that its losses stemmed from the loss of any opportunity to exercise rights under the facility agreements – it was far too subordinated in the structure to be able to do anything to improve its position by so doing. It claimed that its losses stemmed from the loss of the opportunity to dispose of the investment, but that would have been an investment decision which fell outside of any duty owed by RBS. Further, the judge found that it was clear that the real reason for the loss suffered by Torre was the significant further decline in the commercial property market which took place in 2008 after any of the events which Torre pointed to as breaches of duty by RBS.

In relation to causation on the facts, the judge found that Torre’s mezzanine B1 investment was a long-term and illiquid investment, which had been bought to hold to maturity. In the earlier stages of the decline in July 2007, the market had generally regarded the decline in property as a blip, and investors were seeking to ride it out and avoid realising losses. The judge found that Torre would have held at that stage. By 2008, and against the backdrop of further deterioration in the property market, Torre’s investment would have been unsaleable especially given the deadlock over the rescheduling of the interest payments which if not resolved would inevitably lead to default and collapse of the structure. Ultimately, that deadlock proved to be irresolvable, so the judge could not see how Torre could have exited by sale or, as Torre also sought to argue, achieved a restructuring which would have avoided the total loss which it eventually suffered.


In many ways this was a case which turned on its particular facts and (significantly) its particular set of contractual documentation. Ultimately, the judge concluded that:

"The question whether RBS … breached any of its obligations… depends upon the analysis of the terms of those agreements. I have come to the conclusion that it did not. It matters not that this may be said to have been more by luck than judgement".

It is, however, notable quite how narrowly the Court was prepared to construe RBS’ duties as Torre’s agent under the contractual framework. To some extent, this will come as no surprise to those familiar with the way that the English courts approach the highly complex and detailed suites of contractual documents which are put in place for such sophisticated financial wholesale market transactions. However, it does underline the fact that participants in such transactions should treat what parties who are called their "agents" in the contractual documents very much as third parties, and as third parties with potentially divergent agendas to those of their principals. The duties of those "agents" will, it seems, be limited to the bare minimum stated in the express terms of the contract.

One of the most interesting aspects of the judgment was the approach taken to causation and loss. It is clear that on the facts, the judge did not believe that Torre would or could have done anything to avoid its losses if RBS had provided it with the information which it was complained had been withheld. That being so the comments on scope of duty were strictly obiter. However, the writers do have some concern about the application of the SAAMCO/Haugesund principles in the manner in which they were applied in the present case. In the Haugesund case, the defendant law firm had (a) provided incorrect advice that the Norwegian local authorities had capacity to enter into swaps contracts and (b) provided correct advice that in any event, the bank would not be able to enforce the contract against the local authorities. For that reason, it made sense to find that the bank took on the risk that the local authorities would not pay under the swaps contract and to find that their losses when that did eventuate were not attributable to the law firm (which had, after all, advised that the bank would have no remedy in those circumstances).

The present case was much more straightforward. If RBS had done anything wrong in not providing the information to Torre, then that would have been a simple failure to comply with its contractual duty to pass on the information (which RBS’ counsel described as a mere post-box role). It is not clear why, on that hypothesis, RBS should have been excused from liability from all the foreseeable damage which resulted from its failure to comply with contractual duty. The judge’s attempt to distinguish between the loss of Torre’s opportunity to exercise contractual rights under the framework and its loss of opportunity to dispose of or otherwise deal with its investment seems highly artificial. RBS as the promoting bank put the contractual documentation in place. If, in doing so, it had expressly limited the scope of its duty in this way, the Court would undoubtedly have upheld that in the name of freedom of contract. The Court refused to imply or overlay any extension of RBS’ role as agent beyond that set out expressly in the extensive contractual documentation. It is not clear why the Court should then take what amounts to a much more interventionist stance when it comes to examining the limitations on RBS’ liability under the same documentation by adding in limitations which were clearly not intended or articulated by the parties (which, in practice, means by RBS).