A recent High Court decision serves as a useful reminder of the risks that can arise in loan agreements and how lenders should handle situations of default.
In October 2008 European Skyjets Limited (“Skyjets”) entered into a loan agreement and mortgage with Lombard North Central Plc (“Lombard”) for a secured loan of $8.771 million to fund the acquisition of aircraft. The loan was to be repaid in 120 monthly instalments and Lombard was given a first priority legal charge over Skyjets’ aircraft.
Over the years, Skyjets regularly paid instalments late and their account became a source of frustration for Lombard. In order to try and deter these late payments, Lombard applied interest to Skyjets’ account in accordance with the terms of the loan agreement and also sought late payment charges. By 2012 Skyjets’ financial position worsened and Lombard became increasingly concerned. On 8 November 2012, Lombard served notice to terminate the loan agreement, demanded payment of the full amount due under the loan facility ($5,879.361.06) and stated that it would be exercising its powers as mortgagee to take possession and sell the aircraft. The only default Lombard relied upon in that termination notice was the previous late payments.
Was Lombard entitled to terminate and must any default be continuing as at the date of the alleged termination?
There was no doubt that Skyjets repeatedly failed to pay the monthly instalments on time. The question was whether there must be an amount outstanding at the date of termination.
The loan agreement stated that “At any time after the occurrence of an Event of Default the Lender may by notice to the Borrower; (a) cancel the Facility…”.
Mr Justice Foxton was satisfied that, as a matter of construction, the loan agreement did not require the default to be continuing at the date of termination and, in this instance, he did not think that a term could be implied into the loan agreement that Skyjets must remain in default as at the date of the notice.
Has there been any waiver of the right to terminate on account of the late payment?
Skyjets argued that Lombard waived any right to terminate on account of their late payments. On 10 October 2012, Lombard sent Skyjets an e-mail stating that “your mortgage account remains $154,701.36 in arrears and we remain uncomfortable with your payment history and your short term cash flow. Despite this and as a gesture of goodwill we will allow more time to bring the balance of the arrears up to date.”
Mr Justice Foxton found that, based on this email and Lombard’s decision to charge contractual interest as well as late payment charges, Lombard had waived any right to rely on the late payments as ‘Events of Default’. Lombard’s actions were consistent with the decision to keep the contract going, rather than terminate.
Although the loan agreement contained a “No Waiver Statement”, Mr Justice Foxton did not consider that it applied in circumstances where Lombard went further than simply failing to exercise a right to terminate, or a delay in exercising that right - Lombard made positive statements and assertions the effect of which was to regularise the payment position.
Was any breach de minimis or was it otherwise inequitable to release the security?
Once the late payment charges (which Lombard was not in fact entitled to claim) were taken off, the arrears on the date of termination were at most $179.99.
Mr Justice Foxton did not find that there was scope to say that the amount outstanding was too small to be meaningful when the parties made a breach of the obligation to make payment on time, a condition of the contract, which gave rise to the right to terminate.
Could Lombard rely on another Event of Default?
A party who decides to enforce a contractual right to terminate must comply with the conditions of the contract when doing so. In this loan agreement, the relevant provision did not require the ‘Event of Default’ to be identified and there was no mechanism in the loan agreement which allowed Skyjets the opportunity to consider and remedy the default. Lombard was therefore entitled to terminate without identifying (or correctly identifying) the breach(es) it was relying upon, nor did it even need to correctly specify the sum due.
Mr Justice Foxton commented that, ultimately, Skyjets was no worse off by the inclusion of an invalid ground then if nothing had been said at all. He found that Lombard was entitled terminate the loan agreement based on (a) material adverse changes in the business, assets, condition, operation or prospects of Skyjets (clause 9.1 of the loan agreement); and/or (b) Skyjets’ failure to notify Lombard that it had cancelled an aircraft service plan (which was a breach of clauses 7.1 and 7.2 of the loan agreement), despite the fact that neither ground was set out in the termination notice.
Was Lombard precluded from terminating by a contractual duty of good faith?
The general rule of English law is that contractual rights are enforceable regardless of how they are exercised. In limited situations there may be an implied duty to act rationally (known as the “Braganza duty”). Skyjets argued that the Braganza duty applied to the decision whether or not to terminate.
Mr Justice Foxton did not agree such a duty applied; Lombard had an “absolute contractual right” which it could exercise for its own purposes, as it saw fit.
What do I need to know?
The case serves as useful reminder of just how important it is to comply with the terms of an agreement. Lombard was perhaps lucky that the specific wording of their loan agreement saved a notice to terminate which did not correctly identify the ‘Event of Default’ justifying termination.
If you are a lender, be careful of accidental waivers. Whilst every loan agreement is different, consider whether your decision to charge interest or other late payment charges, or accept payments out of time, could amount to a waiver. If there is any doubt, take advice.
The decision in Lombard v Skyjets should give lenders some peace of mind when it comes to enforcing contractual obligations. However, it is important to note that whilst the issues litigated in this case are fairly common, the outcome is very much case specific and turns on the precise wording of the agreement and the actions of the parties.
