Summary

A claimant bank, which made loan agreements secured against residential properties let on assured shorthold tenancies and subject to legal charges, was entitled to demand immediate repayment of the loans and to appoint receivers after the defendant borrowers defaulted on various terms of the agreements.

Facts

The claimant bank (B) claimed declaratory relief against the second defendant (K) and the first, third and fourth defendant companies (G, P and C). B had made loans to K, P and C, secured against residential properties. G purported to be entitled to receive rents from those properties as managing agent for K, P and C. The loan agreements provided that B could call for immediate repayment in certain circumstances, including in the event of a breach of any term or condition of any other loan or facility provided by B. B had legal charges over the properties that entitled it to appoint receivers and managers at any time after it had made a valid demand for immediate repayment. G managed all the properties involved on an aggregated basis that was analogous to a hotel business model, rather than as properties let to individual tenants. In due course, B learnt that the value of the loans it had made exceeded the value of the secured properties; it became suspicious of fraud and declined to lend further. C defaulted on an interest payment and promises of repayment were not kept. B called for immediate repayment of the loans and purported to exercise its power under the terms of the charges. B submitted that (1) C had defaulted on an interest payment and failed to repay a resulting unauthorised overdraft, and that K had failed to provide the data on tenancies required under the agreements or written evidence of valuation and had breached the agreed loan to security value ratio condition; all entitling B to demand immediate repayment; (2) it was entitled to treat C as in anticipatory breach of the debt service condition, as the evidence of the rent derived from the property at issue was below the level required under the debt service condition; (3) there were defaults in regard to the loans secured on the other secured properties involved, entitling B to demand immediate repayment and to appoint receivers. C contended that (4) B understood G's aggregated business model that allowed for income from different properties in the combined portfolio to be used to cover mortgage payments due on an individual property.

Held

On the evidence, and on a proper interpretation of the relevant clauses of the loan agreement, except for the debt service condition clause, B was entitled to call for immediate repayment of the loan to C. (2) There had been no overt renunciation of C's obligation to comply with the debt service obligation and any inability by C to do so was not known or appreciated by B when it called in the loan. Although the rent received from the property was below the required level when the loan was called in, B's actions and the appointment of receivers would have undermined any steps that C might otherwise have been able to take by the end of the financial year to comply with the debt service condition. B could have brought evidence of a general fall in rents in any relevant market to try to show that C could not make good any shortfall in rent necessary to comply with its debt service obligation. However, commercial certainty and fairness led to the conclusion that B could not rely on events following the calling in of the loan insofar as they might have been influenced by its own actions, Universal Cargo Carriers Corp v Citati (No1) (1957) 2 QB 401 QBD applied. Accordingly, B's case failed on that point. (3) On similar grounds to those relating to C's loan, there had been defaults in the cases of K and P that entitled B to demand repayment and appoint receivers. (4) On the evidence, B did not at any time understand that G's aggregated business model was being used, a model inconsistent with the business loan facilities extended by B. There was no evidence that K explained to B at any time what G's role was or how the G business model was to work, or invited B to treat the terms of the loans facilities as qualified in any way by what might be happening to other properties in the G portfolio. The G model would have been commercially very unattractive to B and the court was satisfied that at no stage would B have agreed that it would have been acceptable.

Judgment for claimant