Clarity for lenders dealing with borrowers in distress

The Supreme Court has refused the Appellant’s application for permission to appeal against the Court of Appeal’s decision in Morley (t/a Morley Estates) (Appellant) v The Royal Bank of Scotland Plc (Respondent) [2021] EWCA Civ 338, on the basis that the application raised no arguable point of law.

Background Facts

The Appellant was a commercial property developer who borrowed £75 million from the Respondent, secured on his portfolio of commercial properties in northern England. The loan was concluded in December 2006, not long before the sharp decline in property values during the financial crisis. Following a number of breaches of covenant during its term, the Appellant failed to repay the loan when its term expired in December 2009. Instead of enforcing its security, the Respondent continued to negotiate with the Appellant with a view to reaching a consensual solution and eventually concluded an agreement with him whereby £10 million of the loan was written off, some of the properties were transferred to a subsidiary of the Respondent, West Register (Property Investments) Ltd, at a price which was well above their market value, and the remainder were retained by the Appellant upon payment of £20.5 million.

The Appellant’s case was that in concluding this agreement the Respondent acted in breach of a duty owed to him pursuant to section 13 of the Supply of Goods and Services Act 1982 to provide banking services with reasonable care and skill and in breach of a duty of good faith. The Appellant contended further that he was coerced into concluding the agreement by unlawful pressure placed upon him by the Respondent, specifically a threat that, if no agreement was reached to transfer the whole portfolio to West Register, the Respondent would exercise its right as mortgagee to appoint receivers who would impose a pre-packaged sale of the portfolio to West Register. The Appellant asserted that as a result of this coercion, the Respondent committed the tort of intimidation and the agreement was voidable for economic duress.

Kerr J’s decision

At first instance, Kerr J held that there were commercial negotiations carried out at arm’s length and with the benefit of legal advice on both sides, which led to the agreement. Although Kerr J accepted that the Respondent did threaten to appoint receivers to sell the portfolio on a pre-packaged basis to West Register, this was not a threat to do an unlawful act and the Respondent acted in good faith at all times. As a result, the Appellant was not coerced into concluding the agreement, but rather, he affirmed it, by taking no step to set it aside for over five years, all of which meant that the claims for intimidation and economic duress were not properly founded. No permission to appeal was granted against Kerr KJ’s findings on the Appellant’s affirmation.

Court of Appeal’s decision

On the issues of intimidation and economic duress, the Court of Appeal determined that Kerr J was right to decide that the Appellant was not coerced by the Respondent into concluding the agreement in question.

On the issue of whether the bank was in breach of a duty to provide banking services with reasonable skill and care and of a duty to act in good faith, the Court of Appeal determined that the Respondent was not under any implied contractual duty to exercise skill and care in negotiating with the Appellant after his default, and that position was being governed by the equitable duties which the Respondent owed as a mortgagee. The Court of Appeal acknowledged that the Respondent’s objective remained the recovery of its loan, or at any rate as much of it as possible. The acquisition of the portfolio was only ever a second-best means of achieving this objective; and the agreement which was eventually concluded was one which the Appellant persuaded the Respondent to accept despite its reluctance to do so.

The Court of Appeal’s reluctance to imply any further duties on the Respondent, beyond the pre-existing equitable duties it owed as a mortgagee, and the determination that the Respondent was not under any obligation to provide banking services with reasonable skill and care in the course of negotiations should provide clarity for lenders negotiating with borrowers in distress. The Court of Appeal’s decision stands, in light of the Supreme Court’s refusal of the Appellant’s application for permission to appeal.

Harshil Patel