Commercial First Business Ltd v Atkins [2012] EWHC 4388 (Ch) (13 July 2012)

This case before His Honour Judge Hodge QC raised a novel and important issue for lenders and borrowers in the context of commercial property. Given the Judgment is lengthy the reader is referred to the same .This article will concentrate on the legal issues outlined below.

As is common in most well drafted charges, a borrower is prevented from letting or parting with possession of the property without the lenders consent. The issue before the court in this case was in what circumstances is a lender of commercial property entitled to withhold its consent to a letting of that property?

The Background
The Defendant was owner of two proposed   office investment properties, in Oxford. In April 2007, he charged the properties to the Claimant to secure loans of circa 1.4 million pounds.  The mortgage was subject to the usual terms that the borrower would “not let or grant a licence or tenancy in respect of the Property, or any part of it (nor agree to do so) without the prior written consent of the Lender." (“The Consent Clause”).
The Defendant fell into arrears with the payments of interest due under the loans and the Claimant sought an order for possession of both properties, together with a money judgment.
The Defendant sought to resist the Claimant’s claim on the basis:
1. As regards the Consent Clause the Claimant failed, unreasonably to consider, and consent to applications for permission to let both properties. In respect of one of the properties the agreement for the lease pre dated the Claimant’s legal charge.
2. Had the Claimant consented to the lettings they would generated income and the Defendant would not be in debt to the Claimant.
3. The Claimant owed an equitable duty to act fairly and equitably towards the Defendant, and that, in the circumstance of the case, the Claimant was in breach of this equitable duty when it failed to consent to the proposed lettings.
4. The Consent Clause was capable of preventing the Defendant from deriving any income from his business and thus the restraint of trade doctrine was engaged.  The Claimant’s unreasonable withholding of its consent to the two proposed lettings constituted an unlawful restraint of trade which rendered the loan agreements unenforceable.
Although outside of the scope of this article it should be noted that the Defendant also sought to argue that the relationship between the parties arising out of the loan agreement and legal charge, was "unfair” to the Defendant within the meaning of Section 140A of the Consumer Credit Act 1974. 
The Legal Issues
The Court considered the following issues:
1. In respect of the Consent Clause whether there was an implied term that the lender should not unreasonably withhold consent (in similar fashion to section 19(1) of the Landlord and Tenant Act 1927).
The starting point was City Bank International plc v. Kessler [1999] Lloyds’s Law Reports Banking 123. In which it was held, in the context of a mortgage of residential property, the court cannot imply a positive obligation into a Consent Clause that the Lender, in the exercise of its right to withhold consent to a letting of the mortgaged property, must act reasonably. 
2. The Defendant sought to argue that Kessler did not apply in the context of a Commercial investment mortgage on the basis that the intended use of the properties were “to be let”. Counsel for the Claimant  ( perhaps appreciating that it would be difficult to resist some implied term into the Consenting Clause) submitted that  the court should do no more than read into the Consenting Clause the operative provisions of section 19 (1) of the Landlord and Tenant Act 1927 namely that “ consent is not to be unreasonably withheld”. His Honour Judge Hodge Q.C accepted that submission which he held was supported by the decision in Kessler and in Starling v. Lloyds TSB Bank plc [2000] 1 EGLR 101.
3. In Kessler Chadwick LJ observed at page 129 that an implied term which did no more than qualify the mortgagor’s power to withhold consent would not  give rise to a claim in damages if consent was withheld unreasonably (see Ideal Film Renting Company Ltd v. Neilson [1921] 1 Ch 676, at pages 581-582).
4. Whilst His Honour Judge Hodge QC held that in the case of a mortgage of a commercial investment property, the court should read into any Consent Clause a qualified implied limitation, that consent should not be unreasonably withheld. In the present case even if the Claimant had acted unreasonably in withholding its consent to any letting, this would merely have left the Defendant free to let without obtaining the Claimant’s consent. Importantly it would not mean the Defendant had a right against the claimant in damages.
The Scope of the Duty
5. As to the scope of the Claimant’s duty to act reasonably HHJ Hodge noted Balcombe LJ observations  in  International Drilling Fluids Ltd v Louisville Investments (Uxbridge) Ltd [1986] Ch 513, which he held  should be adopted with necessary reformulation. Accordingly by way of brief resume:
1. The purpose of a Consent Clause is to protect the lenders security, and to ensure that it is not burdened with an unsatisfactory lease.
2. The onus of proving that consent has been unreasonably withheld is on the borrower. 
3. The lender is not entitled to refuse his consent to a proposed letting on grounds which have nothing whatever to do with the relationship of lender and borrower in regard to the subject matter of the security and the proposed letting.
4. A lender does not need to prove that the conclusions which led him to refuse consent were justified, if they were conclusions which might be reached by a reasonable lender in the circumstances.
5. It may be reasonable for a lender to refuse his consent to a proposed letting on the grounds of the purpose for which the proposed tenant intends to use the premises, even though that purpose is not forbidden by the mortgage. 
6. A lender may also reasonably withhold his consent on the grounds of the level of rent payable under the proposed tenancy. It may be so reasonable where the rent is below current market rental values, or where the proposed rent would be insufficient to enable the borrower to service the mortgage, unless the borrower can point to some other reliable source of income, which it may, in addition, be necessary for the borrower to secure to the mortgagee. 
6. Equitable Duty
Did the lender have a duty to act fairly and equitably towards the borrower? Counsel for the lender submitted that following  Socimer International Bank Limited v. Standard Bank London Ltd [2008] EWCA Civ 16 the only equitable restraints upon the lender was to be found in the concepts of honesty, good faith and genuineness, and the need for the absence of arbitrariness, capriciousness, perversity and irrationality.
HHJ Hodge accepted the lenders submissions and held that the discretion enjoyed by a lender of commercial investment property, when considering an application to let that property, is limited by concepts of honesty, good faith and genuineness, and the need for the absence of arbitrariness, capriciousness, perversity and irrationality.  In his judgment there was no sound foundation for imposing any more extensive equitable duties upon the lender.
7. Restraint of Trade.
HHJ Hodge held that given the implied qualification upon the power of a Lender of commercial investment property to withhold its consent, and the limitations on such a lenders freedom of decision, there was no scope for the application of the restraint of trade doctrine to the Consent Clause.
The court observed that the Consent Clause merely regulates the normal contractual relationship between a lender and borrower in relation to the security. If a clause in a contract is an unlawful restraint of trade, it is unenforceable but that did not give rise to any claim for damages.
The Decision 
HHJ Hodge held that the Consent Clause was subject to an implied qualification that the lender’s consent to any lettings of the properties would not be unreasonably withheld. 
There was no breach of that implied term and even if there had been a breach that did not give rise to a claim for damages.
Accordingly the lender was entitled to possession of the properties and a monetary judgment.
This is an important decision in a number of respects. First, it provides clarification for lenders and indeed borrowers that in commercial loans the lenders consent is not to be unreasonably withheld.
It is interesting to note that the lender clearly anticipated the court would be likely to imply a term and hence sought to limit the scope of  such consent by reference  to section 19 (1) of the Landlord and Tenant Act 1927.
Secondly even if the Claimant had acted unreasonably in withholding its consent to any letting, the Defendant had no right against the claimant in damages.
Thirdly by applying and distilling the principles in Drilling Fluids Limited v Louiseville Investments Uxbridge Limited [1986] Ch 513 there are a number of important limitations on the scope of the duty. Crucially the borrower bears the burden of proof that consent has been unreasonably withheld.
In each case it is a question of fact, depending upon all the circumstances, whether the lenders consent to a proposed letting is being unreasonably withheld.
More importantly in the context of litigation and proportionate costs a borrower should ensure that they have a proper dialogue with their lender rather than embark upon a difficult and expensive claim. That fact is made clear in the judgment. 
Kind regards
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