Summary

The recent High court judgment in Macdonald Hotels Ltd v Bank of Scotland Plc [2025] EWHC 32 (Comm) addressed a number of interesting issues for finance transactions. These included the potential for a Braganza-style term to be implied into a lender's decision to withhold consent to the disposal of assets or the grant of security by the borrower, the nature and legal effect of a prohibition on assignment within a facility agreement where the 'assignor' may have ceased to be an Obligor/group member and the status of a document where one party executes it as a simple contract and another as a deed. 

Relevant facts 

The High Court considered claims against Bank of Scotland Plc (BOS) by Macdonald Hotels Limited (MHL) for the forced disposal of three hotels; the Randolph Hotel, the Old England Hotel and the Marine Hotel (the Hotels). MHL asserted the sales of the Hotels were forced at a time when market prices were historically low, in breach of the implied terms of a facility agreement and with reference the Randolph, the express terms of a shareholders agreement.  MHL asserted that BOS should have permitted MHL to repay in other ways (including via external refinancing) and/or over a longer period.  

Several years of discussion, complex documentation and detailed amendment to such documentation required consideration to determine the issues raised in this case. This article focuses on the financing arrangements between BOS and MHL and as such the primary relevant documents were various loan facility agreements between BOS and MHL, initially made available in 2005 then amended and restated numerous times including in 2010 and 2014 (the Facility Agreements). Security was provided by MHL and its subsidiaries over their assets (including the Hotels) to secure the loans made available by BOS. 

The sale of the Hotels became necessary following a failure by MHL to obtain external re-financing or to refinance with BOS on terms which avoided such sale. It became clear that MHL would need to refinance in the early 2010s and various external options were explored. None were successful, largely due to MHL's debt to EBITDA ratio being far outside those external banks' lending parameters. MHL therefore sought to renegotiate with BOS; a critical driver for MHL being to avoid the sale of any of the Hotels, noting market prices were at historically low levels. Negotiations were protracted, with BOS having similar concerns to the external banks in terms of EBITDA and loan value ratios and culminated in a refinancing with BOS in 2014 which included the sale and leaseback of the Randolph Hotel. Contracts were exchanged for the sale (with a leaseback to MHL) of the Randolph on 7 February 2014, such sale conditional on completion of the 2014 facility agreement (the 2014 Facility). 

Claims were submitted by MHL in relation to each Hotel; with such claims in relation to the Randolph Hotel being rejected on their facts.  Claims in relation to the 2015 sale of the Old England and Marine Hotels were based on "forced sale" due to various factors, including BOS's refusal to permit a prior release of security over them to allow their to be offered up as security for an external lender. The 2014 Facility included standard covenants including a negative pledge and a no disposals undertaking, which prevented MHL and/or its subsidiaries from both creating additional security interests over or disposing of any relevant assets (including the Hotels), without BOS' prior approval.  The standard provisions were included in the Facility Agreements to protect the value of the security provided by MHL, as is typical.  

'Disposal Implied Term' argument

Claims made by MHL in relation to the Old England and Marine Hotels were based on the 'Disposal Implied Term' argument. MHL's argument was that BOS, as sole lender under the 2014 Facility, had sole discretion to determine when and on what terms it would permit the creation of security over MHL's assets and/or the disposal of such assets by MHL. MHL argued this discretion was subject to an implied Braganza-style term (in accordance with the case of Braganza v BP Shipping Limited [2015] UKSC 17 ; [2015] 1 WLR 1661 (Braganza) which was necessary to give business efficacy to the contract and/or fell to be implied as a matter of law. MHL argued such term had been breached by BOS, resulting in MHL suffering loss. Such term would require that the lender in deciding whether to consent, would:

• act in good faith, and not arbitrarily or capriciously in exercising that discretion, including exercising its discretion consistent with its contractual purpose 
• take into account all relevant considerations and not take into account any irrelevant considerations and 
• not use the discretion for an improper purpose. 

It was argued that this would apply to the exercise of lender discretion under the negative pledge and no disposals clause, and would apply equally to the situation where the lender required MHL or a subsidiary to sell an asset or where the request came from MHL/a subsidiary.  It is more usual for a borrower to seek lender consent to a proposed sale (plus potential grant of security) that falls outside those that are expressly permitted. 

Applicable general principles were considered by the court, including the following which apply where there is a detailed commercial agreement:

• Terms are to be implied only if necessary in order to give the contract business efficacy.
• It is a necessary but not a sufficient requirement that the term a party seeks to have implied appears fair or is one that the court considers the parties would have agreed to had it been suggested to them.
• Construing the words used and implying terms into a contract both involve determining the scope and meaning of the contract.
• Construing the words used and implying additional words are different processes governed by different rules. 
• In most, possibly all, disputes about whether a term should be implied into a contract, it is only after the process of construing the express words is complete that the issue of an implied term falls to be considered. Only after the construction exercise has been undertaken can the necessity question and the question of whether the terms sought to be implied contradict the express terms of the contract concerned be answered. 
• If there is an express term in the contract which is inconsistent with the implied term, the latter cannot meet the required tests because the parties have demonstrated it is not their agreement. 
• Particular care is required when implying terms into a sophisticated and professionally drawn and negotiated agreement between well-resourced parties. 
• In relation to Braganza implied terms, generally such terms will not be implied to qualify an express and unqualified power.

The overall effect of such principles is that where, applying the above principles of construction, the express terms of a contract confer on a party an absolute contractual right, then to imply a term that qualifies such a right is not permitted as a matter of law because to do so would be to permit an implied term that contradicted an express term of the contract. 

Protections under general law – the 'Mortgage Exception'

The court's next step was to examine any protections under general law conferred on parties to specific types of contract. This analysis was significant when considering a loan secured by a charge over land given the equitable duties imposed at general law for the protection of a mortgagor and surety (referred to in the judgment as the 'Mortgage Exception'). The application of this protection was complicated on the facts because the permission under the 'no disposals' clause related to a contractual term connected with the secured loan but not directly linked to the rights of the parties as mortgagors or mortgagees. The court concluded that the prohibition on disposal without lender consent did not fall within the Mortgage Exception since it did not originate from the relationship between mortgagor and mortgagee. Instead it was likened to powers such as requiring a valuation or to increasing interest rates. 

Was the right an absolute right? 

Having determined that the exercise of the right did not fall within the Mortgage Exception, the court considered whether the 2014 Facility conferred an absolute (or unqualified) right on BOS to refuse its consent, as if so, the implication of a Braganza-style term would be excluded. BOS submitted that no reasonable person with the knowledge of all parties could have thought that by including an express right to dispose with BOS's prior written approval imposed an obligation on BOS to act in any way other than in its own best interests/ to balance its own interests against those of MHL. The parties had expressly agreed that the lender could consent to changes or releases from security, implying that MHL could request such changes. Had they not wished to agree that such consent could be given, they could have omitted paragraph (q) ("permitted with the prior written approval of the Majority Lenders") from the definition of 'Permitted Disposal' and left MHL to seek a variation of the facility agreement instead. Having concluded this, it followed that if a Braganza-style term was to be implied into the 2014 Facility, such a term would not contradict the express terms of that provision. 

Imposition of Braganza-style term

The court's conclusion was a Braganza-style term should be implied for the following reasons:

• The parties had expressly agreed BOS could agree a change to the security which necessarily implied that MHL was entitled to seek such change; something that was intended to benefit at least and perhaps only MHL.
• In considering such a request BOS was free to act in its own best interests and was not obliged to balance those against MHL nor to do anything other than exercise its own judgment.
• Neither party could have intended that BOS would be entitled to refuse consent for a reason unconnected with what it perceived to be its own commercial best interests nor to refuse consent where no reasonable entity in the position of BOS could have done so. An implied term to the effect that the lender was not entitled to refuse its consent for reasons unconnected with what it perceived to be its own commercial best interests, or when no reasonable entity in its position could have refused consent satisfied the requirement for the implication of terms and no other qualification was deemed to be necessary.

The court determined that BOS had not acted in breach of the implied term that it would act in good faith and not arbitrarily or capriciously when exercising its discretion as to consent to asset disposals and accordingly concluded that the claims in relation to the Old England and Marine Hotels failed.

The assignment issue

Assignments and transfers by borrowers or guarantors (Obligors) or group members are generally prohibited by a loan facility given that the strength of the borrower and supporting group will be key to the lender's risk assessment and decision to lend. BOS submitted that the prohibition on such assignments prevented Macdonald Marine Limited, MHL's subsidiary and owner of the Marine Hotel (MML) from assigning its rights, including causes of action, under the 2014 Facility Agreement. MHL argued that this prohibition ceased to apply to MML from October 2015 post the transfer of shares in MML to a different owner. 

Several questions needed to be answered to determine this point:

• Do rights include accrued causes of action? The answer to this was said to be yes on the basis a reasonable person with all of the background knowledge of the parties would agree that 'rights' encompass all rights that had accrued due to breach of the 2014 Facility. 
• Did the 2015 sale of shares in MML to an external company mean the prohibition did not apply? When MML's shares were sold in 2015, MML ceased to be a subsidiary of MHL according to both the definitions in the 2014 Facility and section 1159 of the Companies Act 2006, referenced in the 2014 Facility. However, the prohibition on assignment applied to both Obligors and group members. Clear mechanics were provided in the 2014 Facility whereby the Parent could submit a request for an Obligor to resign which the Agent could consider, and if agreed, accept. No such resignation letter was submitted, meaning MML remained an Obligor at the time of the share sale. The prohibition on assignment was intended to apply to causes of action accruing prior to an Obligor ceasing to have that status by the operation of such mechanics or the coming to an end of the agreement. 
• If the resignation mechanics had been followed, would that have affected the prohibition on assignment? If an Obligor submitted a resignation request which the Agent accepted, the facility provided that the Obligor would cease to have any obligations under the 2014 Facility. The court concluded that prohibiting certain actions (for example assigning a cause of action) should not be construed as an obligation as otherwise it would be difficult to see how BOS could be required to accept such a letter while invoking the resignation mechanism. It is more likely the parties intended for the prohibition on assignment to apply both before and after an Obligor ceases to hold that status. The cause of action relating to the Marine Hotel was determined non-assignable, and any assignment therefore invalid, and that it remained with MML. 

The Deed issue 

This part of the judgment assumes the assignment to MHL of the Marine Hotel claim cause of action was effective and considers whether it was nonetheless statute barred at the date MHL amended its pleadings to bring the claim as assignee of the cause of action. This depended on whether the limitation period applicable to deeds or simple contracts applied. 

The requirements for creation of a deed as set out in the Law of Property (Miscellaneous Provisions) Act 1989 s 1(2) were examined by the court, noting in particular (1) the face value requirement ie that it must be clear on the face of the instrument that all parties intended it to be a deed and (2) it must be validly executed as a deed by one or more of those parties. In this case the parties had executed in different ways; one as a simple contract and one as a deed. BOS argued where one party signs as a simple contract, the other party can only enforce it as a simple contract against them. 

In determining that s 1(2)(a) (the "face value requirement") was not satisfied (but not concluding whether it would fail as a deed for everyone or just certain parties), and that the applicable limitation period would be six years (rendering the claim statute barred) the following were relevant: 

• the agreement stated that it was executed as a deed by the borrowing/guaranteeing group and was intended to be delivered by them as a deed but there was no statement within the document to the effect that all of the parties intended the document to take effect as a deed, notwithstanding one or more parties executed it under hand. 
• a document that calls itself a deed but where it is clear (in this case from the execution blocks) that some of the parties intend it to be a deed, and some do not, and where there is no clear statement within it that confirms all parties intend it to take effect as a deed, does not provide the clarity the statute requires. 

Some useful takeaways 

This case highlighted a number of key points relevant to drafting in finance transactions: 

• Where the intention is that a document takes effect overall as a deed, including wording to the effect that all parties intend a document will take effect as a deed, notwithstanding that certain of the parties may execute under hand is important where one or more of the parties intend to execute under hand. 
• If mechanics are included in the facility agreement which provide for the resignation of an Obligor/group member, such mechanics should be carefully followed in order for that Obligor to effectively resign. 
• The decision whether or not to consent to disposals/the release of security is demonstrated by this case not to be an unqualified right but reassurance is offered to lenders on the basis any implied term as to how it should be exercised will not require a lender to act against its own commercial best interests.
• If a lender is concerned about its decision making process in relation to giving or refusing consent to a disposal of a property that forms part of its security package, and in particular it potentially being re-examined by a court, such express qualification can be omitted from a facility agreement.  As an alternative, if the situation arose, an Obligor could instead be obliged to seek a waiver or variation in respect of any disposal not coming within any of the classes of permitted disposal.
• It is worth noting that the rationale in this case in terms of implying such a term into the 'no disposals' and 'negative pledge' covenants may also be applied to other covenants where lender consent is required and lenders may wish to be mindful of this.

Find out more

To discuss the issues raised in this article in more detail, please contact a member of our Banking and Finance team in London.