Oliver Dean Morley t/a Morley Estates v The Royal Bank of Scotland Plc
| Jurisdiction | England & Wales |
| Judge | Mr Justice Kerr |
| Judgment Date | 27 January 2020 |
| Neutral Citation | [2020] EWHC 88 (Ch) |
| Court | Chancery Division |
| Docket Number | Case No: CH-2017-002318 |
[2020] EWHC 88 (Ch)
The Hon Mr Justice Kerr
Case No: CH-2017-002318
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND & WALES
CHANCERY DIVISION
Royal Courts of Justice
7 Rolls Building, Fetter Lane,
London, EC4A 1NL
Judgment handed down at:
Royal Courts of Justice,
Strand, London WC2A 2LL
Hugh Sims QC and John Virgo (instructed by Cooke Young & Keidan LLP) for the Claimant
Paul Sinclair QC and Natasha Bennett (instructed by Addleshaw Goddard LLP) for the Defendant
Hearing dates: 28, 30–31 October 2019, 4–15 November 2019
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
Introduction
The claimant commercial property developer claims damages against the defendant bank (the bank, or RBS) arising from the loss in 2010 of part of the claimant's portfolio of commercial properties in northern England, which were charged to the bank in 2006 to secure a £75 million loan. The claimant was unable to repay the debt in full when the loan facility expired in late 2009. By then the value of the portfolio had dropped sharply in turbulent times.
The claims are brought in tort and contract. The claimant says the bank breached its duty to exercise reasonable skill and care in the provision of banking services; and that it tortiously intimidated him and subjected him to economic duress by threatening to appoint a receiver who would arrange for the entire portfolio to be transferred in a “pre-pack” sale to the bank's subsidiary, West Register (Property Investments) Limited (West Register).
In August 2010, the claimant entered into written agreements with the bank enabling him to salvage a proportion – less than half in value – of the portfolio, for which he paid the bank £20.5 million. The rest of the portfolio was transferred to West Register. The claimant says those agreements (the disputed agreements) can be rescinded on the ground of economic duress. He claims damages of tens of millions of pounds, in tort or in lieu of rescission.
The bank denies the claims in their entirety. It argues that the claimant breached the loan agreement in various ways, including by allowing his indebtedness to exceed the permitted level measured by reference to the market value of the secured properties (the “loan to value” covenant). The loan was not enforceable against the claimant personally, only against the properties. Their value fell far below the amount the claimant owed.
Thereafter, the bank says, it negotiated to minimise its losses by lawfully proceeding towards enforcing its security. Since the value of the security was substantially less than it was owed, the bank offered to accept less than the full debt in return for release of its security but the claimant failed to produce the sum of just over £70 million the bank required to redeem the portfolio in full.
Instead, the bank says, the claimant freely agreed to transfer part of the portfolio to West Register and to acquire the rest of it for £20.5 million, without any wrongdoing. Even if, contrary to the bank's case, it wronged the claimant in any way, it says he cannot prove that any loss was caused by any wrongdoing. The bank says it, not the claimant, is the loser, for it lent £75 million and got back much less.
Finally, the bank says that the disputed agreements cannot be rescinded; the claimant has affirmed them. Nor, the bank submits, can damages be awarded in lieu of rescission as a matter of law.
The Facts
The claimant's method was to acquire commercial properties with borrowed money, improve them and let them to business tenants, using the rental income to service interest on debt. He had banked with RBS from 1999 to 2005, when he moved to Barclays Bank plc. In 2006, he was wooed back to RBS's Liverpool office by Mr Craig Sneddon, who resumed his role as the claimant's relationship manager. They got on well. Mr Sneddon admired the high occupancy levels the claimant achieved.
On 18 December 2006, the parties executed a loan facility agreement (the loan agreement) enabling the claimant to borrow up to £75 million, to refinance the property portfolio, add new properties to it and provide a “bonus payment” to the claimant for his personal use. Both parties were pleased to renew the relationship in this way. The bank put out a press release to mark the occasion. The loan agreement included the following relevant provisions.
The term of the agreement was three years. The claimant had to repay the loan in full three years from the first drawdown (clause 5.1). Interest was payable at 1 per cent per annum above the bank's base rate, which then stood at 5 per cent, making interest payable at 6 per cent (clause 3.1). If an “Event of Default” occurred and was not put right, the bank could charge a “default” rate which would be 3 per cent over its base rate (clause 3.3).
The claimant had to provide financial statements and quarterly management accounts to the bank relating to the property portfolio (clause 9.3). The rental income had to be “mandated to the Bank” (clause 9.9). The claimant had to ensure that “an interest rate hedging instrument(s) acceptable to the Bank … is entered into and maintained” (clause 9.11).
By clause 10, the loan was to be secured by legal charges over the 21 properties then in the portfolio, without personal recourse to the claimant. The bank's recourse was limited to the net proceeds of sale of the portfolio, any liability under the hedging instrument, interest payments and rental income. The bank could not sue the claimant personally for repayment of the loan.
Various “Events of Default” were listed in clause 11. They included an interest cover ratio (ICR) requirement: rental income must not be less than 1.3 times interest payable, rising to 1.4 after the first year; and a “loan to value” (LTV) covenant: the amount owing must not be more than 75 per cent of the value of the bank's security, increasing to 80 per cent at certain times. The bank could call in the whole amount owing if an event of default occurred.
On 21 December 2006, the claimant entered into a “base rate collar” hedging agreement (the collar), earning the bank some £75,000. This was done through Mr Matthew McConville, who worked for the claimant. The notional amount was £49 million. The period was three years from 31 December 2006. Such hedging instruments were quite common at the time, but no longer are because customers fare badly when (as later happened) interest rates dropped.
The detailed terms of the collar are complex and do not matter, though they later generated a dispute. The bank's pleadings include a counterclaim for rectification of the collar, but that was not pursued at trial. The claimant's liability to the bank would increase or decrease, depending on the movement of interest rates generally. The effect was described thus in a later email (of 8 October 2008) by Mr Tony Bescoby, who sold it to Mr McConville:
“£49m notional. They have bought a cap at 6.00%. They have sold a floor at 4.83%. If average base rate fixes below 4.83% they will pay the floor rate plus the difference between floor rate and average base rate.”
About £45 million of the loan monies were used to pay off indebtedness to Barclays Bank plc and the Bank of Ireland. About £10 million was intended for acquisition and development of new properties. Mr Morley personally received some £15 to £20 million for his own use. He was then 35 years old and single. He had worked hard to build up his business and he wanted to enjoy this new, albeit borrowed, personal wealth.
Over the following months, he made various purchases, not all owned outright. He invested in a mining enterprise in South Africa. He bought land in the south of France and built a luxury villa there. He bought a yacht and sailed it in the Mediterranean. He maintained residences in the north of England and London. He bought a jet, with a mortgage, and some fast cars.
Mr McConville ran the detailed work of the business but Mr Morley kept in touch and liaised with him and Mr Sneddon. In early January 2007, professional valuers valued the 21 properties in the portfolio at £98.45 million. Mr McConville proposed to Mr Sneddon the acquisition of four new properties. Mr Sneddon wrote in April 2007 that the bank remained committed to helping the claimant and his team to meet its business objectives.
However, he raised concerns about the cashflow position. The bank's internal reporting system generated “excess referral” reports during the first half of 2007, indicating that the claimant's account with the bank was overdrawn. During the second half of 2007 the bank was recording breaches of the ICR and LTV covenants. Mr Sneddon warned in June 2007 that new business activity would have to be funded from other sources.
In July 2007, Mr Sneddon warned that interest payments were falling short of the ICR required level. He proposed waiving the breach of the ICR covenant in return for £10,000 and extending by six months the period for compliance with it. He proposed a £600,000 bridging loan to assist cashflow. Then at the start of October 2007, Mr Matthew Jones, at RBS in Manchester, took over from Mr Sneddon as the claimant's relationship manager.
On 10 October 2007, the valuers revalued the 21 properties at £95.77 million, down slightly from the January 2007 valuation. Mr Jones reported internally on or about 18 October that according to the claimant part of the problem was the collar, which due to recent interest rate rises totalling 0.75 per cent, to 5.75 per cent, had added some £180,000 a year to his...
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