How far can a Lender go in the legitimate enforcement of its security?
In the recent case of Morley t/a Morley Estates v. The Royal Bank of Scotland plc, Oliver Morley (Morley), a property developer, instigated a number of claims against the Royal Bank of Scotland (RBS) for breaches of duty, tortious intimidation and economic duress.
Morley obtained a non-recourse loan of £75 million from RBS secured by charges on a portfolio of commercial properties. When the global financial crisis hit in 2008, the value of the portfolio declined significantly, falling fell well below the outstanding indebtedness. Morley was unable to repay RBS in full when the loan facility expired. Discussions to restructure the indebtedness became contentious before being concluded in August 2010 when the parties entered into three agreements which enabled Morley to salvage a proportion of the portfolio, with the remainder being transferred to RBS’s subsidiary at the time, (West Register).
Morley subsequently sought damages arising from the loss of the property portfolio on grounds that RBS:
- breached its duty to exercise reasonable skill and care in the provision of banking services and to act in good faith and not for an ulterior purpose; failed in its capacity as mortgagee to take reasonable steps to obtain the best price reasonably obtainable; and
- inflicted economic duress by threatening to appoint a receiver who would arrange for the entire portfolio to be transferred in a "pre-pack" sale to West Register.
In terms of the duty to exercise reasonable skill and care, Mr Justice Kerr found RBS’s actions (included rejecting Morley’s offers) did not fall below the requisite standard. The steps taken were rationally exercised in pursuit of RBS’s own commercial interests. In applying the appropriate test, the Court should take account of compliance with regulatory standards but not necessarily (as was argued) of any internal policies which may have little to do with the standard of care required.
As to duress, the Court held that either the threatened act must be unlawful or an element of bad faith must exist. Here, there was no question that the threat to appoint receivers on its own was not unlawful. There was a contractual right to do so. But was the threat of a pre-pack sale to West Register a threat to commit an unlawful act?
Whilst borderline, Mr Justice Kerr, categorising it as “the rough and tumble of the pressures of normal commercial bargaining” concluded that the threat was not to do an act that was unequivocally unlawful and no bad faith was demonstrated. Further, other practical choices existed and no steps were taken to dispute the settlement until more than five years later.
Whilst RBS was successful in this case, it is an interesting exploration as to where the line may be for a lender in exercising its powers of enforcement.
