In a concerning case for borrowers, the High Court has ruled that a lender’s discretion to demand full repayment of a loan means exactly that.
The particular case before the court concerned a mortgage contract which was secured as a charge over a Grade 1 listed building in central London. Funds were being loaned on an interest only basis, and were advanced in part to assist with a remortgage, and in part to fund ongoing developing works with a view to convert the former office into a high class residential building.
Although the mortgage term was stated to be five years, there was a provision that permitted the lender to require full repayment of the mortgage at any time upon giving three months written notice. The lender could exercise this right as its “absolute discretion”. Such discretion was the focus of the hearing as the borrower claimed that in calling for the loan to be repaid early the lender had not acted in good faith or demonstrated a “Braganza” duty to behave rationally and not arbitrarily or capriciously.
The High Court dismissed the borrower’s arguments. It decided that the Braganza duty could not be implied since it was a feature of “relational” contracts where parties are on an unequal bargaining footing, such as employment contracts. In such circumstances the duty would protect the weaker party from an abuse of contractual power. Given the circumstances and the facts surrounding the loan, the court found a relative equality of bargaining power in this case.
While the Shakespearean expression might be loosely interpreted to mean caution is preferable to rash bravery, absolute discretion in this case really did mean that the lender could be rash if it so decided.
A further reason forwarded by the High Court was that the Braganza duty will only be implied in contractual decisions where the decision maker has a role in the ongoing performance of the contract creating a conflict of interest. Such ongoing performance was not a characteristic of this mortgage.
The High Court highlighted that the contract’s standard terms had been amended to remove the need for a trigger event to occur prior to being entitled to call in the loan. Although this failed to switch the absolute right to demand repayment into a discretion, it underlined the lender’s rebuttal of the Baganza duty.
In passing the court observed that a secured lender owes a more limited duty of good faith in demanding repayment, particularly when the contractual terms are clear.
Ultimately the case was decided on its own facts, with the language of the loan agreement being cited as “clear and unequivocal” by the court in this case.
Such a decision reinforces the importance for the use of clear and unambiguous drafting in all contractual arrangements.
UBS AG v Rose Capital Ventures and others  EWHC 3137 (Ch)
For further information and assistance on contract matters, please contact our Commercial Department for more information – call us or email by using the form to the right.This article was written by Edward Garston, Senior Associate at Pinney Talfourd LLP Solicitors. The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. Specific legal advice should be taken on each individual matter. This article is based on the law as of December 2018.