This case concerns a debt and possession action brought by Deutsche Bank (Suisse) SA (“DB”) against various Defendants, both individuals and corporates, but essentially one large, prominent family in Pakistan (the “Khan family”).
DB had advanced over £50,000,000 to the Khan family between August 2007 and May 2008, taking conventional mortgages over various high value properties in London. Following the onset of the financial crisis in September 2008, however, property prices in London dramatically declined and, during 2008 and 2009, the Khan family failed to service the loans and/or provide alternative collateral to the satisfaction of DB. In March 2011 DB commenced proceedings for recovery of its debt and for possession of the charged properties.
The Khan family defended DB’s claim arguing that, amongst other things, DB had breached both the express and implied terms of the facility agreement entered into between the Khan family and DB (the “Facility Agreement”). The Khan family claimed that they would have borrowed more monies in 2007 had DB allowed them to draw down the maximum loan offered: such funds would have allowed certain properties to be developed and those properties could have been sold for a large profit and satisfied the debt.
The Commercial Court was asked to examine, amongst other things, the terms of the Facility Agreement in order to determine whether DB had indeed breached its terms.
Discussions commenced in June 2007 between the parties for DB to provide mortgage finance secured over some of the Khan family’s existing properties.
DB offered a facility of £66,000,000 to be drawn in various tranches secured against various properties, representing a 75% LTV. DB’s obligation to make the facility available to the Khan family was conditional (pursuant to clause 12 of the Facility Agreement (“Clause 12”)) upon DB receiving, prior to the date on which any tranche was to be drawn, in form and substance satisfactory to it, certain documents, including a report or valuation on each property addressed to DB and signed by a chartered surveyor and expressed to be for mortgage purposes.
A valuation of a particular property called “Dryades” was carried out in order to support the drawing of a particular tranche of £33,700,000. This valuation “had regard to the value of the site with the benefit of the existing planning consent for the single housing as well as the potential to achieve planning consent for the larger, more valuable apartment scheme”. The valuer valued the property:
(1) at £36,000,000, on the basis of the current planning permission for a substantial house (ignoring alternative development potential); and
(2) at £54,000,000, on the basis that planning permission was obtained for a scheme of substantial apartments.
In light of the above figures, the valuer concluded that the current market value of Dryades was £45,000,000. This was calculated as £36,000,000 plus 50% of the difference between (1) and (2) above on the basis that a purchaser would not pay the entire £54,000,000 in case planning permission was not obtained. A purchaser would, however, pay an additional £9,000,000 to reflect this “hope value”.
Pursuant to the terms of the Facility Agreement, the Khan family was able to draw down a tranche of £33,700,000 providing Clause 12 had been satisfied prior to drawdown. DB’s Credit Risk Management team was concerned about the ‘hope value’ in the valuation as it had an element of uncertainty and speculation; whilst it wanted to lend on the strength of £45,000,000 if possible, it was not prepared to do so without certain conditions being satisfied in order to protect its position. A retention was therefore suggested: DB offered to advance funds on the basis of the £45,000,000 valuation providing that the Khan family retained £10,000,000 until a formal legal and detailed planning consent had been issued by the Local Planning Authority. It later became apparent that the requested planning consent would not be obtained and so DB did not release the retention of £10,000,000.
One of the key issues that arose during the trial was whether Clause 12 of the Facility Agreement had been satisfied or, alternatively, whether Clause 12 would have been satisfied if DB, when exercising the discretion conferred upon it in Clause 12, was not capricious, irrational, arbitrary and/or perverse (NB it was an implied term of the Facility Agreement, arising from the case of Socimer Bank v. Standard Bank , that DB would not exercise its discretion in such a way).
The Khan Family argued that prior to entering into the Facility Agreement, DB knew that Dryades had a market value of £45,000,000 which included a hope value of £9,000,000. DB could not therefore exercise its discretion under Clause 12 by reference to matters known before the Facility Agreement was entered into. Hamblen J disagreed. He commented that whilst all the indications were that the valuation in the final report would be £45,000,000 and that some people within DB were aware of the hope value issue prior to execution of the Facility Agreement, at the time of the Facility Agreement the final valuation had not been produced and it had not been considered by DB’s Credit Risk Management team. He held that the speculative and uncertain nature of the hope value element was a reasoned ground for DB’s decision and it was not capricious, perverse, irrational or arbitrary. DB was therefore not obliged to advance the £10,000,000.
This case is of interest, not because it established any ground breaking legal precedent, but for the fact that it is typical of the ferocity with which defendants on similar cases are defending themselves when lenders are seeking to take enforcement action. The interpretation of Clause 12 was just one of a myriad of defences raised by the defendants in this case. Various other defences were raised throughout the course of what started off as a simple debt and possession action, including arguments concerning whether the relationship between the parties was unfair within the meaning of the Consumer Credit Act, whether the Unfair Contract Terms Act 1977 or the Unfair Terms in Consumer Contracts Regulations 1999 were applicable and rendered certain terms of the Facility Agreement unfair, how to interpret default interest provisions and whether DB had made pre-contract misrepresentations to the borrower. All these defences were ultimately either dropped by the defendants before or during the trial or dismissed by Hamblen J.
This case also serves as a useful reminder of the Socimer implied term which requires parties not to act capriciously, irrationally, arbitrarily or perversely when exercising any discretion under the terms of a contract.
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