Lenders remain entitled to refuse consent to refinancing proposals where a borrower has granted a negative pledge

On 24 January 2025, the High Court handed down its judgment in Macdonald Hotels v Bank of Scotland [2025] EWHC 32 — a favourable decision for lenders which provides reassurance that they remain entitled to refuse consent to a borrower’s proposed refinancing where that borrower has granted a negative pledge.

Here, Ellis McManus and Richard Cowan from our banking and finance team explore the facts of the case and outline the key takeaways for both borrowers and banks.

What is a negative pledge?

A negative pledge provision prohibits a borrower from granting further security over specific assets without the consent of the lender. It’s generally considered to be a key protection for a lender that ensures other creditors don’t obtain a preferred claim over the charged assets in the event of insolvency proceedings.

Background to the case

Macdonald Hotels Limited — the UK’s largest privately owned hotel group — entered (as Borrower) into two secured facility agreements with Bank of Scotland Plc (as Bank). Both these agreements contained a negative pledge that prevented the Borrower from granting further security over certain assets within the Borrower’s group. 

The Borrower had entered into the facility agreements before the 2008 financial crisis. Having reconsidered its borrowing strategy in a post-crisis economic climate, it approached the Bank with a request to refinance the facility agreements to reduce its debt burden. The Borrower would then — as a part of its refinancing strategy — enter into a new facility with a third-party lender. The Bank refused to grant consent to the refinancing. 

It was alleged by the Borrower that in failing to consent to the refinancing proposal and acting in bad faith and capriciously, the Bank had breached an implied term of good faith in the facility agreements. As a consequence, it had forced the Borrower to sell three of its hotels. 

The principle from Braganza v BP Shipping Ltd [2015] UKSC 17 (B v BP) was applied — a case in which it was decided that where one party to a contract had the right to exercise a discretion that might be to the detriment of the other party, an implied term of good faith should be implemented to ensure that the discretion wasn’t applied capriciously or in bad faith. 

Conversely, the Bank contended that it had an unqualified right — as contracted — to refuse consent and that an implied term of good faith shouldn’t be implied into facility agreements. 

Banks are entitled to serve their commercial best interests

In the decision by Judge Pelling KC, the Court found that while it was theoretically possible to imply the good faith principle from the Supreme Court ruling in B v BP into the context of facility agreements, the Bank remained entitled to act in a way that was in its own commercial best interests. 

Upon both parties signing the facility agreements and consequently expressly agreeing that the Bank had the right to consent to a change in security, the implied term was a limited one as the Bank had agreed and was aware of such a level of discretion. 

Once the Bank had proved that it wasn’t in its commercial interests to allow the Borrower to enter into a new facility agreement with another lender, the Borrower remained bound by the negative pledge provisions in the facility agreements. 

A reminder on refusals and good faith

This ruling extends the good faith principle from B v BP — initially created in a dispute over employment death-in-service rights — to be applicable to a secured creditor/debtor relationship scenario. This isn’t entirely surprising, considering that it has been applied to a wider range of contracts in the five years since B v BP was decided. 

While the decision does confirm that a negative pledge doesn’t provide a creditor with an unqualified right to refuse a borrower’s refinancing proposal, it acts as reassurance that any implied term is limited to the extent that the decision affects the commercial position of a lender. 

However, it should be noted by lenders that they can’t simply refuse a borrower’s refinancing proposals and exercising their discretion to refuse a proposal should be made in good faith. 

This case should serve as a reminder that borrowers won’t always be entitled to refinance themselves out of a facility agreement and the long-term effects of entering into such facility agreements should be carefully considered. 

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