McDonagh v Bank Of Scotland & Others [2018] EWHC 3262 (Ch)

McDonagh v Bank of Scotland & Others [2018] EWHC 3262 (Ch) concerned a dispute between a borrower, Mr McDonagh ("the Claimant") and a lender, Bank of Scotland ("the Bank") in respect of the borrower's default on a loan facility which had been used to refinance commercial property in an out of town business park near Liverpool. There was a consequential and related dispute between the Claimant and the fixed charge receivers appointed by the Bank, in which the Claimant alleged that the receivers had failed to achieve the 'best price reasonably obtainable' when selling the premises, and had failed to expose the property to the market because it had only been marketed for sale as part of a mixed borrower portfolio.

McDonagh not only gave rise to questions of contractual construction regarding the Claimant's loan facility with the Bank, but also concerned allegations of duress, intimidation and, in the action against the receivers, resulted in an interesting consideration of the duties owed by fixed charge receivers when selling a property as part of a larger portfolio. Morgan J's conclusions will be of interest to those practising in the area.

Siân Mirchandani of 4 New Square represented the fixed charge receivers ("the LPA Receivers"). The decision of Morgan J is considered by Nicholas Broomfield of 4 New Square.

The facts

In 2007 the Claimant obtained a loan of £7.5m ("the First Loan Agreement") from the Bank for the purposes of purchasing commercial premises in Liverpool known as Sony House ("the Property"). In addition to the Bank's standard terms and conditions, the material provisions of the First Loan Agreement were:

1.1. Amount

"Seven Million Five Hundred (sic) (£7,500,000) to be drawn down in Euros (the "term loan")."

1.2. Purpose

"You may only use the term loan to assist with the purchase of [the Property].

The term loan will be drawn down into your Euro account with us (to be opened) which will operate as the servicing account for the term loan."

1.3. Interest

"You will pay interest on the term loan at the annual rate equal to one point two per cent (1.2%) over the cost of funds incurred by us for making the term loan available, such interest payable quarterly in arrear ...

The relevant cost of funds will be set by us on or before the date of drawdown of the term loan and will be based on the Euro fixing rates provided by the British Bankers Association on the relevant date which shall be the date of drawdown or such earlier agreed date.

...

Interest will be debited to your servicing account quarterly in arrears unless that day is not a Business Day, in which case it will be applied on the next Business Day

...

All sums payable under this letter, with the exception of the arrangement fee and the interest rate contract fee, shall be paid in Euros. If you fail to pay any amount due under the term loan when due, we may at any time purchase an equivalent amount of Euros as we consider necessary or desirable to cover the amount due and payable under the term loan at its prevailing spot rate of exchange and you shall indemnify us against the full cost to us (including all costs, charges and expenses) incurred by us in purchasing the said Euros.

Whenever the "Sterling equivalent" of the term loan requires to be calculated, it shall be calculated at our spot rate of exchange for Euros on the applicable date at such time as we may select.

The Default Rate of interest which will apply to the term loan is the annual rate of two point four per cent (2.4%) over the rate at which interest is paid on the term loan under this letter.

1.5. Repayment

"The term loan will be repaid in one lump sum of Seven Million Five Hundred (sic) (£7,500,000) on the date being thirty six months from the date of drawdown or (if earlier) upon receipt of the proceeds of the Property. If for any reason the proceeds are less than the outstanding amount of the term loan a balancing payment will be debited to your servicing account on the date of the disposal of the Property or an Event of Default whichever is the earlier ... For the avoidance of doubt, you will apply the net sale proceeds of any disposal of all or any part of any real or heritable property owned by you and secured to us in permanent reduction of the term loan."

The Claimant purchased the Property using the First Loan Agreement monies and granted the Bank a first legal charge over the two leasehold titles that comprised the Property. The terms of the charge permitted the Bank to appoint receivers in the event of default; reserved the Bank's right to do so pursuant to the Law of Property Act 1925 ("the LPA 1925") and granted the receivers full power to sell the Property.

On 11 February 2010 the Claimant and the Bank entered into a second loan agreement ("the Second Loan Agreement"), the purpose of which was to refinance the First Loan Agreement. The material provisions were:

Clause 2.1

"The Borrower may only use the Facility to refinance existing facilities made available by [the Bank] to the Borrower."

Clause 2.2.3

"When drawn, the Term Loan may only be applied in repayment of the Borrower's existing term loan facility with [the Bank] and the Borrower authorises [the Bank] to apply the Term Loan for that purpose."

Clause 2.3.1

"The Term Loan shall (subject to the other provisions of this letter) be repaid in full by a single bullet repayment on 13 July 2010."

Clause 5.1

"The Borrower will, as security for the Term Loan, deliver or procure delivery of the Security Documents detailed in Schedule 1."

Schedule 1 of the Second Loan required a first legal charge to be...