MacDonald Hotels Limited, MacDonald Botley Park Limited v Bank of Scotland Plc [2025] EWHC 32 (Comm)
The High Court recently examined whether the Bank of Scotland (“BoS”) acted in bad faith by refusing consent to MacDonald Hotels Limited (“MHL”) to introduce third-party lender financing. MHL claimed the refusal resulted in it having to sell three of its hotels at an undervalue. In its judgment, the court acknowledged an implied duty for BoS to act in good faith when exercising discretion but decided that BoS did not have to prioritise MHL’s interests over its own commercial best interests.
Facts of the case
MHL, a UK-based hotel operator, had an established lending relationship with BoS and facility agreements that included covenants restricting the securing, selling or otherwise disposing of MHL’s assets without the prior written approval of BoS. Following the 2008 financial crisis and BoS’s merger with Lloyds Banking Group, BoS aggressively reduced the size of its commercial loan book. MHL had many discussions with BoS and proposed alternative arrangements, including securing new financing from third-party lenders. However, BoS refused consent to these proposals, citing its commercial interests, and ultimately MHL sold several of its hotels which MHL claimed it was compelled to sell in unfavourable market conditions at the time. MHL alleged that BoS’s refusal to consent to its refinancing proposals was arbitrary and in bad faith, breaching implied contractual terms to:
- act in good faith and not arbitrarily or capriciously in exercising its discretion consistently with its contractual purpose;
- take into account all relevant considerations and not take into account any irrelevant considerations; and
- not use its discretion for an improper purpose.
The court considered the preceding case law, in particular the principles established in cases such as Braganza, in determining that if terms are to be implied into a contract, there must be an established necessity to do so for business efficacy purposes and the existing express wording of the contract must not contravene the meaning of the proposed implied terms. The court also considered that the facility agreement was negotiated and agreed by the parties with the benefit of each having legal representation, meaning any unresolved drafting matters are expected to be “the result of choice rather than error”.
Although the court agreed to imply the terms as set out at (i) to (iii) above with a more limited scope, based on the nature of the facility agreement under which MHL had the right to seek consent from BoS it determined BoS had rightfully exercised its power to refuse its consent based on its commercial judgement.
What does the court’s decision mean for borrowers?
Negative pledges and consent clauses in facility agreements remain especially important to borrowers. Whilst lenders are entitled to preserve their commercial interests in priority to that of a borrower, the term ‘acting in good faith’ can, and is most likely, to be implied into a contract and a borrower should seek to negotiate, where possible, when a lender may refuse consent.
In summary:
- seek legal advice before borrowing and during negotiation of the terms of a facility agreement;
- avoid reliance on implied terms;
- use more express terms e.g. saying “without the prior consent of the lender” may weaken a lender’s right to refuse consent;
- show for any consent sought it is in the best commercial interests of both parties; and
- remember a lender may prioritise its commercial interests over those of the borrower.
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Corporate law