Some useful reminders for lenders on enforcement action and "no waiver" clauses

Summary

In the case of Lombard North Central Plc v European Skyjets Ltd (in liquidation) [2022] EWHC 728 (QB), the High Court determined that a lender's enforcement action was effective notwithstanding that its acceleration notice specified events of default (EODs) that had not occurred, and failed to reference other valid grounds of enforcement upon which it later sought to rely. The judgment also serves as a useful reminder to lenders of the need for caution when relying on "no waiver" and reservation of rights clauses within finance documents, and how their own conduct may affect their ability to rely on them.

Relevant facts

In October 2008, Lombard North Central plc (the Lender) advanced a US$8.8 million loan (the Loan) to European Skyjets Limited (the Borrower) to fund the Borrower's acquisition of a Bombardier Learjet aircraft. The Loan was repayable in monthly instalments in accordance with a loan agreement (the Loan Agreement) and the aircraft was secured in favour of the Lender pursuant to a first priority legal charge.
The Borrower experienced cashflow difficulties throughout the life of the Loan and a pattern of late, partial and non-payments arose, to which the Lender responded in various ways: i) in response to one payment default, the Lender applied a 15% default fee (the Default Fee), exceeding the 5% default interest the Lender was entitled to charge, ii) with respect certain payment defaults, the Lender communicated an offer of additional time to the Borrower, giving it until the end of that month to make payment and iii) in November 2012 the Lender served an acceleration notice (the Acceleration Notice) informing the Borrower that it was exercising its rights as mortgagee, including appointing an agent in respect of the sale of the aircraft. The Acceleration Notice claimed arrears of approx. US$295,000 (which included the Default Fee) and demanded immediate repayment of approx. US$5.9 million.
Sale of the aircraft recovered US$3.1m leaving the Lender with an outstanding balance for which it sued the Borrower. The Borrower counterclaimed in the sum of £26m. The High Court was required to consider, amongst other things, whether the Lender had validly terminated the Loan Agreement enabling it to take possession of the aircraft pursuant to its security.

Analysis of the Acceleration Notice

The Lender accepted that it was not entitled to include the Default Fee in the Acceleration Notice and the arrears were therefore incorrectly stated. The correct figure was thought to be less than US$180.

A number of points were discussed in relation to the Acceleration Notice:

Could the Lender enforce on a de minimis sum? The Court dismissed the de minimis argument, relying on existing case law which states where parties have made the breach of a particular obligation one that is a condition of the contract, that gives the right to terminate, that right is available "without regard to the magnitude of the breach".
Could the Lender rely on historic payment defaults to accelerate the Loan? The court held as the Loan Agreement did not require any EOD to be "continuing" at the point of enforcement, and such a term could not be implied into the Loan Agreement, historic payment defaults could be relied upon to accelerate the Loan.
Could the Lender rely on EODs, not specified in the notice, to accelerate the Loan, and did this affect the validity of the notice? This was of particular significance given that on the facts the Lender was able to establish further EODs including misrepresentation and a material adverse change. Such grounds were valid grounds for enforcement action and could each have been specified in the notice. In those circumstances and taking into account the fact the Loan Agreement contained no contractual obligation for the Lender to identify the EODs in an acceleration notice, the Court was satisfied that the validity of the notice would not be impugned by the Lender mentioning a ground for enforcement which had not in fact arisen. The notice remained effective.

The court drew particular reference to the fact the Loan Agreement did not contain any cure rights, and that there was no machinery within the relevant clause which envisaged the Borrower having an opportunity to consider and cure any breach. It found that the Borrower was no worse off by reason of inclusion of an invalid ground than if nothing had been said at all. Had the Loan Agreement contained cure rights the position may have been different, particularly as the clause may have been drafted in a substantially different manner, potentially requiring reference to specific breaches in any acceleration notice.

What about the doctrine of waiver?

The Borrower missed certain payments under the Loan Agreement. The Court considered the positive action taken by the Lender, when it provided the Borrower with additional time to pay in relation to certain defaults and accepted late payments. The Lender sought to rely on the "no waiver" and reservation of rights provisions in the Loan Agreement (which were formulated on fairly standard terms), and the statements in its correspondence offering additional time, that the correspondence was without prejudice and that the Lender continued to fully reserve its rights in respect of the Loan Agreement. The Lender asserted that it was entitled to rely on the missed payments as grounds for acceleration.

The Court considered it implicit that the Lender had waived the early payment defaults and could not rely on them as grounds for termination. This was the case even though the defaults were not required to be continuing at the time of enforcement. The judgment distinguished the Lender's positive action from inaction where the defence language may have continued to offer the Lender some protection. The Court reinforced the position that whether or not the Lender had waived its rights was a matter of objective interpretation and that the "ritual incantation" of language to the contrary would not be of any effect in such circumstances.

Key takeaways

At drafting stage, thought should be given to whether EODs which trigger acceleration rights should only operate to the extent they are "continuing" at the point of enforcement. This seeks to avoid a situation where a borrower is perpetually on the hook for EODs that have been subsequently remedied or waived in accordance with the terms of the finance documents.
Lenders may be reassured that where breach of a particular obligation gives rise to a termination right, that right is available to the lender irrespective of the magnitude of the breach (including if only in respect of a de minimis sum).
Lenders should include "no waiver" and reservation of rights language in their finance documents with the understanding that their conduct, particularly where such conduct involves positive action which affirms breaches, may cut across their ability to rely on such provisions.
In a default scenario, in practical terms lenders will always seek to bring borrowers to the negotiating table, and it would be unfortunate for a lender to be dissuaded from taking such action in fear of losing its termination rights. However, advice should be sought before entering into negotiations with a borrower to ensure that negotiations are clearly framed and rights reserved both in relation to the breach in question and any previous breaches for which the lender seeks to retain its rights to call as EODs.
Whilst this case serves as evidence that failing to do this may not be fatal (at least on these particular facts), lenders should exercise particular caution and seek advice when drafting acceleration notices. Lenders should ensure that EODs are accurately identified in accordance with any provisions of the loan agreement and that all other pre-enforcement formalities have been complied with. Failure to do so could materially prejudice a lender's enforcement rights.