The High Court heard a case regarding whether a bank acted in bad faith by forcing a hotel group, it partly owns, to sell valuable premises at below market rate.
Background:
Macdonald Hotels Ltd (MHL) sued Bank of Scotland PLC (BOS) for the alleged forced disposal of three hotels quantifying their claim at around £118 million. The BOS was, at all times, the commercial banking services provider for MHL. Although relatively unusual for a commercial bank, BOS was willing to enter into relationships with its customers that involved both an equity and a debt element. BOS actually acquired a 50% shareholding in MHL and the relationship was governed by a Shareholders Agreement (SA) which was terminated by mutual agreement on the 19th of March 2014 when they entered into a Facility Agreement (FA).
In October 2005, MHL refinanced its borrowings with BOS, with BOS providing loans of £620 million, including two term loan facilities for £275m and £55m, respectively, plus a bridging loan of £200m. By the end of 2007, the bridging loan had been repaid through the sale of 24 hotels. MHL claims that, following the financial crisis, MHL adopted a strategy of exiting its joint venture relationships and aggressively reducing the size of its commercial loan book.
MHL claims that they were forced to sell and lease back in March 2014 the Randolph Hotel in Oxford and sell and enter into a management agreement with the new owners in August 2015 the Old England Hotel on Lake Windermere. The last hotel was at all material times, owned by MHL’s subsidiary but still, MHL contended that the subsidiary was forced to sell the hotel and then enter into a management agreement with the new owners.
MHL alleges that the disposal of the Randolph was forced upon it by BOS in breach of the express terms of an SA dated 30 July 2003 between MHL and Uberior Investments Ltd., a wholly owned subsidiary of BOS. MHL alleges that the disposal of the Old England Hotel was forced upon it by BOS in breach of what are alleged to be the implied terms of an FA between MHL and BOS. The same allegations are made regarding the third hotel.
The core allegation made by MHL is that, by forcing the sale of the hotels, not only did BOS act in bad faith, contrary to the express term relied on and/or the alleged implied terms, but also that it violated the duty of good faith enshrined in the various agreements.
Decision:
The claim was dismissed after the Court interpreted the contracts objectively, considering what a reasonable person would understand the terms to mean. It also tried to avoid retrospective application of commercial common sense. The Court ruled that clause 6.5.1 of the SA was quite clear and “did not require BOS to subordinate what it considered to be its own commercial best interests when administering the facilities it had agreed with MHL”. As a result, it was not a breach of the terms of the agreement for “BOS to insist on MHL reducing its indebtedness and its loan value to EBITDA[2] ratio as part of the negotiations for a renewal of an existing facility since such a renewal was by definition a new facility that BOS could grant or not as it chose or grant only on such terms as it chose.”
The Court noted that it did not need to look at the quantum of damages having decided there was no breach of contract.
The Court also explained that “if a Braganza-type term was to be implied into the 2014 Facility Agreement, such a term would not contradict the express terms of that provision.” The Judge noted that the FA did not grant BOS an absolute right to refuse consent for property disposals.
Implications:
This rather lengthy and complex judgement demonstrates the importance of understanding the terms of any agreement signed. The claim was also dismissed due to the allegation of forced disposals not being substantiated under the terms of the relevant agreements. It underscores the high threshold to claim forced disposal when there are clear contractual agreements between the parties.
This decision highlights that extensive expert evidence might not always be necessary.