This case concerns a term of a settlement order which was agreed after the borrower brought proceedings against the lender in relation to various loan agreements. Following the order, the borrower's outstanding indebtedness was €5.9 million secured against a French property valued at around €4 million.
The relevant clause 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 bank withheld consent to a sale on the basis that a €4.1 million offer price, though fair market value, would leave €1.8 million outstanding on an unsecured basis. The bank therefore made its consent to the sale of the property conditional upon the granting of security for the outstanding amount.
The borrower argued that the bank could only withhold approval when the relevant sale was not for a proper or fair market value. The bank's position was that the scope of the power was wider and could include other aspects of the creditor/debtor relationship.
The Court agreed with the borrower that the question of reasonableness should be determined with reference to the sale price. The lender should not be permitted to refuse consent provided the property would be sold for a fair price. In reaching this decision, the judge considered two cases in some depth. He referred to Mount Eden Land Limited v Bolsover Investment Limited, where the court found that a landlord had unreasonably withheld consent to a sublease. The landlord would only give consent on condition that it would be a joint account holder on the rental deposit account, such rentals to be paid by the proposed subtenant.
In Mount Eden, it was found that 'it would normally be reasonable for a landlord to refuse consent if it is necessary to prevent his contractual rights from being prejudiced by the proposed assignment or lease. It is not reasonable for a landlord to seek to impose a condition which is designed to increase or enhance the rights he enjoys under the head lease.'
The principle that the condition of consent should not be used a means to procure rights extending beyond those contemplated by the contractual relationship influenced the decision in the present case.
Mount Eden suggested the test for reasonableness in this context was an objective one and, furthermore, it suggested that a collateral purpose included circumstances where the party withholding consent did so in order to obtain rights he did not otherwise have.
The second case referred to was Barclays Bank v Unicredit in which consent was "to be determined by Barclays in a commercially reasonable manner". The bank refused consent to early repayment of the loan unless it received (effectively) a form of compensation for loss of fees which would have accrued over the full term of the loan. The court held that in determining whether the bank was acting in a commercially reasonable manner, the bank need not necessarily consider others' commercial interests.
It was not commercially reasonable for Barclays to demand a price which was way above what it could reasonably anticipate would have been a reasonable return from the loan. However, the condition for consent that the borrower should render the fees Barclays could reasonably expect under the contract was a commercially reasonable requirement.
The judge did not accept the analogy of the present case with the facts of Unicredit and reasoned as follows:
"…in my view the objective factual, commercial and contractual context of this particular clause means that it should be interpreted so that the reasonableness of any refusal of consent must be determined by reference to whether the proposed sale is at fair market value and at arm's length. Furthermore, I do not accept that the reasonableness criteria in that context is limited to ensuring that the bank acted in a Wednesbury reasonable or rational way in reaching its decision. The clause here is not about process or manner, the words in Unicredit. It is about outcome."
If the bank had wanted security to cover the shortfall, this should have been specifically agreed as part and parcel of the settlement order.
Accordingly, judgment was awarded in favour of the borrower.
The lender could not refuse its consent regarding a disposal of the property for a reason unconnected to the sale price.
This case highlights the importance of clear and comprehensive drafting as the courts will not see reasonableness as a subjective measure allowing the lender to act freely but will apply an objective standard measured in the context of the contract as drafted.
A lender seeking better protection would be better placed if it seeks absolute restrictions or provides for a list of situations in which withholding consent may be deemed reasonable.
Crowther and another v Arbuthnot Latham & Co Ltd  EWHC 504 (Comm)