On What Basis Can A Secured Lender Refuse Consent To A Disposal When Its Consent Is 'Not To Be Unreasonably Withheld'?

A contractual provision to the effect that a party's consent should not be unreasonably withheld is a familiar one. When will it be unreasonable to refuse consent and how will reasonableness be tested? In Crowther v. Arbuthnot Latham & Co Ltd [2018] EWHC 504 (Comm) the court considered such wording in the context of a facility agreement which provided that the borrowers could sell property held as security with the approval of the bank, such approval not to be unreasonably withheld. Reasonableness was to be assessed objectively, requiring the court to look at the background and purpose of the provision. It held that in this case it had been unreasonable for the bank to refuse consent where its refusal was not based on the sale price.

Factual background

The claimant borrowers brought mis-selling claims against the defendant bank. The litigation was settled on the terms of a consent order. Under the settlement the bank agreed to continue a loan for €5.9 million for a new five-year term. The bank held a property in France, worth around €4 million, as security. The consent order inserted the following provision into the facility agreement:

"If, with the prior approval of the bank (such approval not to be unreasonably withheld), the property is sold, [the borrowers] shall immediately repay the bank the net proceeds of sale."

A third party offered to buy the property for a price in excess of €4 million, which was in line with valuations at that time. The bank refused to give its approval for the sale unless the borrowers provided further security for the shortfall in the security of c.€1.7 million. The sale was lost as a result. The borrowers' position was that the requirement for further security as a condition of the bank's consent was illegitimate and was not a reasonable basis for withholding its consent.

The borrowers therefore sought the court's declaration that:

the bank's refusal to approve the sale was in breach of the terms of the agreement (as amended by the consent order); and the borrowers were entitled to sell the property at fair market value without providing additional security. Decision

The key issue, as the judge put it, was what was the proper scope of the bank's "reasonableness veto"? This required looking at the purpose of the provision. The borrowers argued that this was about ensuring that the sale was at fair market value, whereas the bank's contention was that the scope was wider, and could include other aspects of the...