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No general equitable duty for lender to act in good faith

Standish v RBS – 30 July 2018 – Chief Master Marsh
The High Court in England has considered a claim that a lender breached an equitable duty to act in good faith by taking a significant shareholding in a borrower in a debt restructuring.
Receivers and mortgagees in England owe equitable duties (for example, to act in good faith) to a mortgagor when selling a mortgaged property. In Medforth v Blake [2000] Ch 86 it was stated that the “duties imposed on a mortgagee in possession, and on a mortgagee exercising his powers whether or not in possession, were introduced in order to ensure that a mortgagee dealt fairly and equitably with the mortgagor”.
The claimants in this recent case argued that as the duties arise even when a mortgagee is not in possession, a lender holding a real property mortgage has a general implied duty to act in good faith and to act fairly, even when not exercising powers under its security. Rejecting this argument, Chief Master Marsh noted that the Medforth case concerned whether a receiver owed similar duties when managing the mortgagor’s business to when selling a mortgaged property. It was impossible to extrapolate from this a wide-ranging duty of good faith, applying to all the lender’s dealings with the mortgagor, even when it has not enforced (or threatened to enforce) its security, merely because it holds a real estate mortgage.
The claimants’ other arguments that there had been a breach of an implied contractual duty of good faith and a breach of the lender’s fiduciary duties as a shadow director were also rejected. The claim was struck out as the particulars of claim showed no reasonable grounds for bringing the claim.
Lenders will be relieved that the attempt to extend a mortgagee’s equitable duty to act in good faith in relation to enforcing security to a restructuring situation was given short shrift. Extension of this duty would open an avenue for challenging additional lender protections, enhanced pricing, or the grant of an equity stake agreed with a secured lender during a debt restructuring.