Negative pledge clauses | Can a bank refuse consent?
Negative pledge clauses, whether they relate to the incurring of third party borrowing, the grant of security or the disposal of assets, are almost always found within facility and/or security agreements. In the following case, was the bank within its rights to refuse consent to the borrower wanting to dispose of assets or grant third party security?
Background to Case
In Macdonald Hotels Ltd (MHL) and another v Bank of Scotland plc (Bank) [2025] EWHC 32 (Comm), the High Court had to decide whether a term should be implied in two facility agreements relating to whether a lender was entitled to refuse its consent to a proposed granting of security or disposal of assets by a borrower.
MHL owned a portfolio of hotels which were subject to finance provided by the Bank pursuant to two facility agreements. The bank also had an equity investment in the borrower which was governed by a shareholders’ agreement.
Due to the financial crisis of 2008/2009, the Bank decided to exit its joint venture relationships and reduce the size of its commercial loan book. In 2014, the Bank sold back its shares in MHL and the Bank sought ways to reduce MHL’s indebtedness and its loan value to EBITDA ratio (earnings before interest, taxes, depreciation and amortization), including by asset disposals. Despite lengthy negotiations, as MHL sought to find alternatives to selling its assets, three hotels were sold in 2014 and in 2015.
As is common, the facility agreements between the same parties contained negative covenants which prevented MHL from disposing of its assets, subject to certain exceptions and otherwise without the Bank’s written consent. Negative pledges which were construed to be subject to the same qualification were also included in the security agreements. MHL and the Bank entered into lengthy and detailed discussions in order to try and agree a refinancing package. MHL wished to enter into security arrangements relating to one of its properties with another lender, but it needed the Bank’s consent to such arrangements pursuant to the negative pledge clauses. The Bank refused to give its consent which resulted in the three hotels being sold in 2014 and. 2015.
MHL subsequently claimed that these “forced” sales, due to the refusal of consent, was in breach of an implied term of the facility agreements, and that as a result it had suffered loss. It asserted that a term should be implied in the agreements, on the basis explained in Braganza v BP Shipping Ltd [2015] UKSC 17, to the effect that the Bank, in deciding whether to consent, had to act in good faith and should not act capriciously. The Bank maintained that it had an unqualified right to refuse its consent.
High Court Conclusion
The High Court concluded that a term should be implied to the effect that the Bank was not entitled to refuse its consent “for a reason or reasons unconnected with what it perceived to be its own commercial best interests or … when no reasonable entity in the position of [the lender] could have refused consent”.
However, it crucially found that the Bank had not acted in breach of that implied term by preferring its own commercial best interests over those of MHL. The Bank’s actions were not irrational in the sense that no secured lender in the position of the Bank would have acted as it did in relation to the proposal to refinance Z. It had been entirely clear throughout its discussions with MHL that it sought a reduction in the MHL’s total indebtedness and a reduction of the ratio of total debt to EBITDA. The proposal did not achieve those objectives. It was not relevant whether MHL considered that the proposal was in its own best interests.
The facts of the case are common/standard and it is therefore likely that such an implied term will be construed into other agreements which contain negative pledge clauses. It is also important to note that the term implied in this case may well also be applicable to other covenants that are expressed not to apply if a lender’s consent is obtained.
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