In Macdonald Hotels Ltd and another v Bank of Scotland plc [2025], the High Court considered whether a lender's right to refuse consent to a borrower's disposal of secured assets was subject to an implied term to act in good faith.
Background
A facility agreement between Macdonald Hotels Limited (MHL) and Bank of Scotland plc (BOS) gave BOS contractual discretion over MHL's ability to dispose of or charge secured assets.
MHL sought to charge one of its hotels to a third-party lender, but BOS refused consent. MHL claimed it suffered a loss because this refusal meant it was unable to refinance and was forced to sell three hotels.
MHL argued that a term of the type in the case of Braganza v BP Shipping Limited [2015] was implied into the facility agreement, meaning that BOS was required to act in good faith and not arbitrarily or capriciously when considering a proposal.
Court's decision
The court agreed with MHL that a Braganza-style term was implied and that BOS did not have an absolute right to refuse consent.
However, the implied term was very limited and the court found that BOS was not in breach.
BOS was entitled to reject MHL's proposals to protect its own legitimate commercial interests, even though that included BOS's interest in MHL reducing both its debt and its loan-to-EBITDA ratio. BOS was entitled to prefer its own commercial best interests over MHL's.
Implications
Consent provisions are common in facility agreements, making the court's decision to imply a good faith term significant to both sides of a financing transaction. Although this ruling was in a financing context, commercial agreements are likely to be treated in the same way.
Lenders may want to keep detailed records of consent decisions to demonstrate that such decisions are rational and connected to their own commercial interests. A cautious lender may even prefer to exclude any lender consent qualifications, requiring a borrower to seek a contractual waiver or variation to the facility agreement.
Lenders can take comfort in knowing they are not expected to act against their own interests and are not obliged to balance these interests against those of a borrower.