Torre Asset Funding Ltd & Anor v The Royal Bank of Scotland Plc

This claim arises out of structured lending to a property company, Dunedin Property Industrial Fund (Holdings) Limited (“Dunedin”) and associated entities, which encountered difficulties resulting in it going into default in 2008 and entering administrative receivership in September 2008. The lending was called in and the security realised at a level well below the amount of the lending outstanding, with the result that lenders at several tiers in the finance structure did not recover their loans.

The claim is brought by the Claimants (“Torre” and “Torre II”, respectively), who participated in the finance structure at the Junior Mezzanine (or “B1”) level. The Claimants were amongst those who did not recover their loans. The claim is brought against the Defendant (“RBS”). Amongst other roles it had in the finance structure, RBS was the Agent at the Junior Mezzanine lending level. RBS had initially created the finance structure and also retained a number of other roles within that structure, as lender, equity participant, Security Trustee and so on.

The finance structure involved a number of inter-related agreements, including in particular a loan facility agreement applicable to each tier of loans in the finance structure and an Inter-Creditor Deed dated 5 October 2006 (“the Inter-Creditor Deed”) which governed the relationship between the lenders at the different tiers in the structure. The Claimants rely on duties they say were owed by RBS as the Agent at the B1 lending tier under the relevant loan facility agreement for that tier (the Junior Mezzanine Facility Agreement dated 5 October 2006: “the JMFA”) and on duties they say were owed by RBS as both Agent and as a lender to Dunedin under the Inter-Creditor Deed.

The claim is advanced by the Claimants in relation to three distinct matters:

RBS had had a profitable banking relationship with Dunedin dating back to 1996, which grew over the years. Dunedin had a proven track record as effective investors in and managers of property portfolios. RBS had provided lending and equity participation, and had helped secure third party senior lending from other banks, in a series of joint venture property investment transactions with Dunedin up to 2006.

In June 2006 Dunedin acquired a portfolio of multi-let industrial properties from Brixton plc, known as the “Industrious” portfolio. Dunedin decided to amalgamate this portfolio with two other portfolios of industrial properties it had acquired in October 2005 and December 2005, using RBS funding, so as to create a large unified portfolio using the “Industrious” brand name. In the latter part of 2006, Dunedin and RBS sought to re-finance the unified Industrious portfolio using a complex and highly leveraged finance structure.

The size of the loan for the Industrious re-financing transaction was much larger than in Dunedin’s previous transactions with RBS. The total finance required was about £630 million.

The idea was to obtain low-cost funding using securitisation and the sale of securitised mortgage backed notes (commercial mortgage backed securities – “CMBS”) into the capital markets, known as Super Senior lending in the finance structure eventually put in place, in addition to Senior lending provided by RBS, mezzanine lending at three levels (A loans and B1 loans, also for sale into the market, and a B2 subordinated mezzanine loan provided by RBS), and equity participation by both Dunedin (in the form of shares) and RBS (in the form of loan notes with equity characteristics). Initially, RBS itself lent the whole sum required, but with a view to then selling the CMBS notes and the A and B1 tiers of the mezzanine lending in the market. The CMBS notes were to be issued by a special purpose vehicle set up for that, Epic (Industrious) plc (“Epic”).

The seniority of lending within the structure reflected different risk and reward profiles at the different levels along a spectrum from the Super Senior level (where the CMBS noteholders had first call on - and hence the highest level of protection afforded by - the security offered by Dunedin over the properties in the portfolio and first call on the income stream from the portfolio to meet interest payments due to them; but received a comparatively low rate of interest), through the Senior level to the various levels of mezzanine debt (in the order A, B1 and B2, with the lower tier in each case ranking behind the tiers above them with respect to entitlement to call upon the income from the portfolio and to have resort to the security provided; but receiving a higher rate of interest) and then to the equity level at the bottom of the structure.

The lending structure was constituted by a series of complex, very detailed, interlocking agreements. Each tier of lending had its own loan facility agreement, which was in similar terms at each level in all its essentials (save for the basic financial ratios applicable at each level, which varied to reflect the higher protection conferred as one moved up through the levels of seniority in the lending stack). Thus, the principal terms of the JMFA replicated those of the facility agreements at the Super Senior, Senior, Mezzanine A and Mezzanine B2 levels. In particular, the provisions defining Events of Default in each facility agreement were in identical terms. Each facility agreement included, as a party, an Agent for the lenders at that level and contained equivalent terms to those in the JMFA regarding the role and responsibilities of the Agent. At the Super Senior level, the relevant agreement provided for a Servicer responsible for operating the agreement on behalf of CMBS note-holders.

In addition to the facility agreements at each tier of the lending stack, each Lender and each Agent was also a party to the Inter-Creditor Deed, which was the principal instrument governing the relationship between the various Lenders, including in relation to their rights with respect to acceleration of repayment by Dunedin and enforcement against security given by Dunedin where an Event of Default occurred. In broad terms, in the case of an Event of Default the most senior Lenders were to have control of the enforcement process until such time as they were repaid, at which point control would pass to the next senior lenders until repaid and so on down the lending stack. There were also certain other agreements to govern matters such as the role of the Security Trustee.

These agreements were all put in place on 5 October 2006, at which time RBS re-financed the Industrious portfolio by providing the whole £630 million required. Thus, at the outset RBS provided the lending required at every tier and the loan notes (its share of the equity in the joint venture) at the bottom of the finance structure. The Super Senior lending was in the sum of £487.5 million; the Senior lending was £32.5 million; the Mezzanine lending (the mezzanine A loans) was £32.5 million; the Junior Mezzanine lending (the mezzanine B1 loans) was £32.5 million; and the Junior Subordinated Mezzanine lending (the mezzanine B2 loans) was £46 million. At the bottom of the financing structure was a sum of £31 million in loan notes held 50/50 by RBS and Dunedin, as the equity element under a joint venture arrangement in respect of the portfolio. The loans were to mature after four and a half years, in 2011, at which time the portfolio would be sold or refinanced. At that stage, Dunedin and RBS expected all the loans to be repaid and each hoped to make a healthy profit in relation to the equity element (the loan notes which they shared).

The interest in respect of the Super Senior, Senior and mezzanine A lending ran at about £8 million per quarter, rising to about £8.2 million as the relevant rate increased in the latter part of the loan period.

The interest in relation to the B1 lending was at a higher rate, but was partly rolled up in the initial period of the lending so as to become due for payment only at maturity. For the first year 100% of the B1 interest was rolled up; after that, 50% of the B1 interest was to be rolled up until the end of December 2008, falling to 25% for the following year. Thereafter, the full amount of interest would be payable each quarter, amounting to about £1.1 million per quarter.

The interest in relation to the B2 lending was at a higher rate again, but 100% was rolled up for the first year, falling to 50% thereafter until maturity. When 50% of the B2 interest became payable, the amount due from Dunedin each month ran at about £700,000 per quarter, rising to about £864,000 by the end of the loan period as the interest rate increased slightly over the term of the loan. The first date on which an interest payment in relation to the B2 lending was due to be made was 22 January 2008.

The finance structure included two principal financial covenants given by Dunedin in respect of each tier of the lending, reflecting the paramount interest of the lenders in the ability of the borrower to service the loans by payment of interest due throughout the life of the loans (and repayment of the loans at maturity) and in having a satisfactory level of security in place should there ever be a need to have resort to it, if the loans were not repaid: (i) an Interest Cover Ratio (“ICR”) covenant, regarding the relationship between the income for Dunedin from the Industrious portfolio and the interest payments due to be made by Dunedin to the various levels of lender, and (ii) a Loan to Value (“LTV”) covenant, regarding the relationship between the value of the properties in the portfolio charged as security for the loans and the amount outstanding on the loans. The ICR and LTV covenants were more favourable for lenders towards the Senior end of the lending stack (reflecting the reduced level of risk they were taking in relation to the finance structure) and tighter towards the Junior end (reflecting the higher risk lenders took at the lower levels of the stack). If either the ICR covenant or the LTV covenant were breached, that would qualify as an Event of Default, which could lead to the loans to Dunedin being called in (accelerated) and enforcement against the property given as security.

The ICR covenant was set at 1.3 for the Super Senior lending; 1.2 for the Senior lending; 1.11 (rising to 1.14 by the end of the loan period) for the mezzanine A lending; and at a minimum rate of 1.00 for the mezzanine B1 and B2 lending. The LTV covenant was set at 75% for the Super Senior lending; 80% for the Senior lending; 85% for the mezzanine A lending; and 91.5% the mezzanine B1 lending. There was no LTV covenant in relation to the mezzanine B2 lending. The initial valuation of the Industrious portfolio obtained by RBS at the time the finance structure was put in place was £688 million.

The finance structure was put in place at a time (October 2006) when the value of commercial and industrial property had been rising strongly. Dunedin and RBS (and the purchasers of the CMBS notes and the mezzanine loans) expected that growth to continue. The financing structure was highly leveraged even by the standards of the time, though not abnormally so.

The success of the venture depended upon Dunedin being able to increase the income stream from the Industrious portfolio through active and effective management, both to reduce the rate at which units in the portfolio stood vacant and to increase the rents agreed on letting units. Dunedin and RBS felt confident Dunedin could achieve this. Achieving growth in the income stream was an important piece of the financing jigsaw, since it was clear at the outset that if the income stream remained the same rate as it stood in October 2006 or declined there would come a time well before maturity when Dunedin would not have enough income to meet interest payments as they fell due (particularly as interest became due in relation to the mezzanine B1 and B2 loans as the initial roll up periods ended) and there would be a breach of the various ICR covenants.

Having initially provided the whole loan funding at every level, RBS then proceeded to sponsor the placing of the CMBS notes into the public capital markets, which were taken up by a range of other institutions and lenders who took the place of RBS as the Super Senior Lenders. The CMBS notes were freely traded and became dispersed in the market.

In January 2007 RBS also sold on (or syndicated) the mezzanine A loans to funds managed by Marathon Asset Management LLP (“Marathon”) and to the Cheshire Building Society and sold on the mezzanine B1 loans to the Claimants and a related company, Noosa Asset Management Limited. The sales were made on the basis of an Information Memorandum issued by RBS (“the Information Memorandum”). Under the syndication arrangements, RBS retained a small part of the interest payments due, known as a “skim”, as payment for arranging the financing and acting as Agent for these lending tiers. From the information provided in the Information Memorandum, the importance of Dunedin’s ability to achieve increases in the income from the portfolio was clear.

The market for mezzanine loans, particularly at the B1 level, is not a public capital market such as that for the CMBS notes and is less liquid and well-developed. Sales of mezzanine loans occur in more bespoke, individually negotiated transactions and the undertakings which acquire them will typically expect to hold them to maturity. The purchasers of the mezzanine loans all stepped into the shoes of RBS as Lenders at the respective tiers of the lending stack, becoming parties to the relevant facility agreement for the tier in question and parties to the Inter-Creditor Deed by virtue of deeds of accession which had that effect.

The Claimants purchased B1 loans from RBS in this way in January 2007 and at that stage became parties to the JMFA and the Inter-Creditor Deed. The Claimants acquired about £27.38 million of the B1 loans at face value (£10,849,267.22 was paid by Torre and £16,532,216.72 by Torre II). There is no suggestion that RBS made any misrepresentation in the Information Memorandum or mis-sold the loans in any way.

At the outset of the financing transaction in October 2006, RBS occupied most of the different roles set out in the various agreements which structured the finance arrangements, acting by a variety of different offices. After the CMBS notes had been sold in the market and the mezzanine A and B1 loans sold to investors including the Claimants, so that they stepped into RBS’s shoes as Lenders at the relevant tiers, RBS continued to occupy roles as Servicer in relation to the Super Senior lending (acting by Ian Brett in RBS’s CMBS Loan Servicing Unit in London); Senior Lender and Agent in relation to the Senior lending (in both cases acting by RBS’s Edinburgh Corporate Office represented by Alasdair Deignon); Agent in relation to the mezzanine A lending (acting by the PV Team, part of RBS’s Real Estate Finance department in Edinburgh); Agent in relation to the mezzanine B1 lending (again acting by the PV Team); Junior Subordinated Mezzanine Lender and Agent in relation to the mezzanine B2 lending (in both cases acting by the PV Team); and provider of half the loan note equity (again acting by the PV Team). The various finance agreements provided that for the purposes of the agreements these different parts of RBS should be treated as acting as distinct entities.

The Claimants had no existing relationship with Dunedin when they acquired their B1 lending. Once they became B1 Lenders, they relied on the flow of information through the PV Team as Agent in relation to the B1 lending.

The JMFA included the following relevant definitions in clause 1:

“1.

DEFINITIONS AND INTERPRETATION

1.1

Definitions

…

“Annual Budget” means, for any financial year, a budget (including capital expenditure for the relevant year) prepared by the Borrower and approved by the Agent pursuant to Clause 19.1(c) (Financial Statements). …

“Default” means an Event of Default or any event or circumstance specified in Clause 23 (Events of Default) which would, (with the expiry of a grace period, the giving of notice, the making of any determination under the Finance Documents or any combination of any of the foregoing) be an Event of Default. …

“Event of Default” means any event or circumstance specified as such in Clause 23 (Events of Default). …

“Finance Document” means each of this Agreement, any Fee Letter, any Accession Letter, a Security Document, the Hedging Agreements, the Intercreditor Deed, each Duty of Care Deed, each Beneficiary Undertaking and any other document designated as such by the Agent and accepted by the Borrower as such. …

“Finance Party” means the Agent, the Arranger, the Security Trustee, a Lender and any Hedging Counterparty. …

“Material Adverse Effect” means, in the reasonable opinion of the Agent, a material adverse effect on:

(a)

the ability of an Obligor, a Trustee, a Nominee or any other Chargor to comply with any of its obligations under a Finance Document; or

(b)

the business or financial condition of the Group taken as a whole; or

(c)

the validity or enforceability of, or the effectiveness or ranking of, any Security granted or purporting to be granted pursuant to any of the Finance Documents or the rights of or remedies of any Finance Party under any of the Finance Documents. …

“Party” means a party to this Agreement. …”

The JMFA included the following provisions:

19.

INFORMATION UNDERTAKINGS …

19.1

Financial statements

The Borrower shall supply to the Agent in sufficient copies for all the Lenders:

(a)

as soon as the same become available, but in any event within 180 days after the end of each of its financial years, its Financial Statements for that financial year;

(b)

as soon as the same become available, but in any event within 45 days after the end of each quarter, consolidated management accounts (including balance sheet, profit and loss account and cash flow statement);

(c)

at least 30 Business Days before its financial year end, the Annual Budget for the Group (including profit and loss account, balance sheet and cash flow forecasts and capital expenditure) for the next financial year; and

(d)

such further financial information as the Agent (acting reasonably) may require regarding the financial condition, assets and operations of the Group and/or any member of the Group.

19.2

Compliance Certificate

(a)

The Borrower shall supply to the Agent not less than five (5) Business Days before each Test Date a Compliance Certificate for the then current Test Period.

(b)

Each Compliance Certificate shall be signed by two directors of the Borrower (without personal liability). …

19.4

Information Properties

(a)

The borrower shall provide to the Agent, within 30 Business Days of the end of each quarter in its financial year, the following information (in form and substance satisfactory to the Agent and in sufficient copies for all the Lenders) in respect of that quarterly period:

(i)

A schedule of the existing occupational tenants of each Property showing for each tenant the rent, service charge and any other payments payable (and, separately, paid) in that period by each of those tenants together with details of the area rented, the term and the date of any rent reviews in respect of the relevant Occupational Lease held by such tenant; …

19.5

Information: miscellaneous

Each Obligor shall supply or shall procure that there are supplied to the Agent (in sufficient copies for all the Lenders, if the Agent so requests):

(a)

all documents dispatched by an Obligor to its shareholders (or any class of them) or its creditors generally at the same time as they are dispatched;

(b)

all Valuation Reports, reports and investigations on any Property commissioned during the term of the Facility;

(c)

promptly upon written notification by the Agent to the Obligor, such financial or other information regarding it or any of the Minority Unitholders, Trustees or Nominees as any Finance Party may reasonably request; …

19.6

Notification of default

(a)

Each Obligor shall notify the Agent of any Default (and the steps, if any, being taken to remedy it) promptly upon becoming aware of its occurrence (unless that Obligor is aware that a notification has already been provided by another Obligor). …

23.

EVENTS OF DEFAULT

Each of the events or circumstances set out in Clause 23 (other than Clause 23.21 (Acceleration)) is an Event of Default. …

23.5

Insolvency

(a)

A Chargor is unable or admits inability to pay its debts as they fall due, suspends making payments on any of its debts or, by reason of actual or anticipated financial difficulties, commences negotiations with one or more of its creditors with a view to rescheduling any of its indebtedness.

(b)

The value of the assets of any Chargor is less than its liabilities (taking into account contingent and prospective liabilities).

(c)

A moratorium is declared in respect of any indebtedness of a Chargor.

23.6

Insolvency proceedings

Any corporate action, legal proceedings or step is taken in relation to:

(a)

the suspension of payments, a moratorium of any indebtedness, winding-up, dissolution, administration or reorganisation (by way of a voluntary arrangement, scheme of arrangement or otherwise) of any Chargor other than a solvent liquidation or reorganisation of any member of the Group which is not a Chargor previously approved in writing by the Agent (or any proceedings or step which is, in the opinion of the Agent, frivolous or vexatious and is discharged within five Business Days); …

or any analogous procedure or step is taken in any jurisdiction. …

23.20

Material Adverse Effect

Any circumstance or event occurs or arises which is reasonably likely to have a Material Adverse Effect.

23.21

Acceleration

On and at any time after the occurrence of an Event of Default which is continuing the Agent (or Security Trustee in respect of (iv) below) may, and shall if so directed by the Majority Lenders, by notice to the Borrower:

(a)

cancel the Total Commitments whereupon they shall immediately be cancelled;

(b)

declare that all or part of the Loan, together with accrued interest, and all other amounts accrued or outstanding under the Finance Documents be immediately due and payable, whereupon they shall become immediately due and payable; and/or

(c)

declare that all or part of the Loan be payable on demand, whereupon they shall immediately become payable on demand by the Agent on the instructions of the Majority Lenders; and/or

(d)

exercise its rights under the Security Documents; and/or

(e)

apply any monies standing to the credit of each Account in or towards repayment of any amount due to a Finance Party under the Finance Documents.

24.4

Limitation of responsibility of Existing Lenders …

(b)

Each New Lender confirms to the Existing Lender and the other Finance Parties that it:

(i)

has made (and shall continue to make) its own independent investigation and assessment of the financial condition and affairs of each Chargor and its related entities in connection with its participation in this Agreement and has not relied exclusively on any information provided to it by the Existing Lender in connection with any Finance Document; and

(ii)

will continue to make its own independent appraisal of the creditworthiness of each Chargor and its related entitites whilst any amount is or may be outstanding under the Finance Documents or any Commitment is in force. …

26.

ROLE OF THE AGENT AND THE ARRANGER

26.1

Appointment of the Agent

(a)

Each Lender appoints the Agent to act as its agent under and in connection with the Finance Documents.

(b)

Each other Finance Party authorises the Agent to exercise the rights, powers, authorities and discretions specifically given to it under or in connection with the Finance Documents together with any other incidental rights, powers, authorities and discretions.

26.2

Duties of the Agent

(a)

The Agent shall promptly forward to a Party the original or a copy of any document which is delivered to the Agent for that Party by any other Party.

(b)

Except where a Finance Document specifically provides otherwise, the Agent is not obliged to review or check the adequacy, accuracy or completeness of any document it forwards to another Party.

(c)

If the Agent receives notice from a Party referring to this Agreement, describing a Default and stating that the circumstance described is a Default, it shall promptly notify the Finance Parties.

(d)

If the Agent is aware of the non-payment of any principal, interest, commitment fee or other fee payable to a Finance Party (other than the Agent or the Arranger) under this Agreement it shall promptly notify the other Finance Parties.

(e)

The duties of the Agent under the Finance Documents are solely mechanical and administrative in nature.

26.3

Role of the Arranger

Except as specifically provided in the Finance Documents, the Arranger has no obligations of any kind to any other Party under or in connection with any Finance Document.

26.4

No fiduciary duties

(a)

Unless otherwise expressly stated in any other Finance Document, nothing in this Agreement constitutes the Agent, the Security Trustee or the Arranger as a trustee or fiduciary of any other person.

(b)

Neither the Agent, the Security Trustee nor the Arranger shall be bound to account to any Lender for any sum or the profit element of any sum received by it for its own account.

26.5

Business with the Obligors

The Agent, the Security Trustee and the Arranger may accept deposits from, lend money to and generally engage in any kind of banking or other business with any Obligor.

26.6

Rights and discretions of the Agent

(a)

The Agent may rely on:

(i)

any representation, notice or document believed by it to be genuine, correct and appropriately authorised; and

(ii)

any statement made by a director, authorised signatory or employee of any person regarding any matters which may reasonably be assumed to be within his knowledge or within his power to verify.

(b)

The Agent may assume (unless it has received notice to the contrary in its capacity as agent for the Lenders) that:

(i)

no Default has occurred (unless it has actual knowledge of a Default arising under Clause 23.1 (Non-payment);

(ii)

any right, power, authority or discretion vested in any Party or the Majority Lenders has not been exercised; and

(iii)

any notice or request made by an Obligor (other than a Utilisation Request) is made on behalf of and with the consent and knowledge of all the Obligors.

(c)

The Agent may engage, pay for and rely on the advice or services of any lawyers, accountants, surveyors or other experts.

(d)

The Agent may act in relation to the Finance Documents through its personnel and agents.

(e)

The Agent may disclose to any other Party any information it reasonably believes it has received as agent under this Agreement.

(f)

Notwithstanding any other provision of any Finance Document to the contrary, neither the Agent nor the Arranger is obliged to do or omit to do anything if it would or might in its reasonable opinion constitute a breach of any law or a breach of fiduciary duty or duty of confidentiality.

26.7

Majority Lenders’ instructions

(a)

Unless a contrary indication appears in a Finance Document, the Agent shall (i) exercise any right, power, authority or discretion vested in it as Agent in accordance with any instructions given to it by the Majority Lenders (or, if so instructed by the Majority Lenders, refrain exercising any right, power, authority or discretion vested in it as Agent) and (ii) not be liable for any act (or omission) if it acts (or refrains from taking any action) in accordance with such an instruction of the Majority Lenders.

(b)

Unless a contrary indication appears in a Finance Document, any instructions given by the Majority Lenders will be binding on all the Finance Parties.

(c)

The Agent may refrain from acting in accordance with the instructions of the Majority Lenders (or, if appropriate, the Lenders) until it has received such security as it may require for any cost, loss or liability (together with any associated VAT) which it may incur in complying with the instructions.

(d)

In the absence of instructions from the Majority Lenders, (or, if appropriate, the Lenders) the Agent may act (or refrain from taking action) as it considers to be in the best interest of the Lenders.

(e)

The Agent is not authorised to act on behalf of a Lender or a Hedging Counterparty (without first obtaining that Lender’s or, as the case may be, the relevant Hedging Counterparty’s consent) in any legal or arbitration proceedings relating to any Finance Document.

26.8

Responsibility for documentation

Neither the Agent nor the Arranger:

(a)

is responsible for the adequacy, accuracy and/or completeness of any information (whether oral or written) supplied by the Agent, the Arranger, an Obligor or any other person given in or in connection with any Finance Document; or

(b)

is responsible for the legality, validity, effectiveness, adequacy or enforceability of any Finance Document or any other agreement, arrangement or document entered into, made or executed in anticipation of or in connection with any Finance Document.

26.9

Exclusion of liability

(a)

Without limiting paragraph (b) below, the Agent will not be liable for any action taken by it under or in connection with any Finance Document, unless directly caused by its gross negligence or wilful misconduct.

(b)

No Party (other than the Agent) may take any proceedings against any officer, employee or agent of the Agent in respect of any claim it might have against the Agent in respect of any act or omission of any kind by that officer, employee or agent in relation to any Finance Document and any officer, employee or agent of the Agent may rely on and enforce this Clause. Any third party referred to in this paragraph (b) may enjoy the benefit and enforce the terms of this paragraph in accordance with the provisions of the Contracts (Rights of Third Parties) Act 1999.

(c)

No Party (other than the Security Trustee) may take any proceedings against any officer, employee or agent of the Security Trustee in respect of any claim it might have against the Security Trustee or in respect of any act or omission of any kind by that officer, employee or agent in relation to any Finance Document and any officer, employee or agent of the Security Trustee may rely on and enforce this Clause. Any third party referred to in this paragraph (c) may enjoy the benefit and enforce the terms of this paragraph in accordance with the provisions of the Contracts (Rights of Third Parties) Act 1999.

(d)

The Agent will not be liable for any delay (or any related consequences) in crediting an account with an amount required under the Finance Documents to be paid by it if it has taken all necessary steps as soon as reasonably practicable to comply with the regulations or operating procedures of any recognised clearing or settlement system used by it for that purpose.

(e)

Nothing in this Agreement shall oblige the Agent, the Security Trustee or the Arranger to carry out any “know your customer” or other checks in relation to any person on behalf of any Lender and each Lender confirms to the Agent, the Security Trustee and the Arranger that it is solely responsible for any such checks it is required to carry out and that it may not rely on any statement in relation to such checks made by the Agent, the Security Trustee or the Arranger.

26.10

Lenders’ indemnity to the Agent and the Security Trustee

Each Lender shall (in proportion to its share of the Total Commitments or, if the Total Commitments are then zero, to its share of the Total Commitments immediately prior to their reduction to zero) indemnify the Agent and the Security Trustee, within three Business Days of demand, against any cost, loss or liability incurred by the Agent of the Security Trustee (otherwise than by reason of its gross negligence or wilful misconduct) in acting as Agent or, as the case may be, the Security Trustee under the Finance Documents (unless it has been reimbursed by an Obligor pursuant to a Finance Document).

26.11

Resignation of the Agent

(a)

The Agent may resign and appoint one of its Affiliates acting through an office in the United Kingdom as successor by giving notice to the other Finance Parties and the Borrower.

(b)

Alternatively the Agent may resign by giving notice to the other Finance Parties and the Borrower, in which case the Majority Lenders (after consultation with the Borrower) may appoint a successor Agent.

(c)

If the Majority Lenders have not appointed a successor Agent in accordance with paragraph (b) above within 30 days after notice of resignation was given, the Agent (after consultation with the Borrower) may appoint a successor Agent (acting through an office in the United Kingdom).

(d)

The retiring Agent shall, at its own cost, make available to its successor such documents and records and provide such assistance as its successor Agent may reasonably request for the purposes of performing its function as Agent under the Finance Documents.

(e)

The resignation notice of the Agent shall only take effect upon the appointment of a successor.

(f)

Upon the appointment of a successor, the retiring Agent shall be discharged from any further obligation in respect of the Finance Documents but shall remain entitled to the benefit of this Clause 26. Its successor and each of the other Parties shall have the same rights and obligations amongst themselves as they would have had if such successor had been an original Party.

(g)

After consultation with the Borrower, the Majority Lenders may, by notice to the Agent require it to resign in accordance with paragraph (b) above. In this event, the Agent shall resign in accordance with paragraph (b) above.

26.12

Confidentiality

(a)

The Agent (in acting as agent for the Lenders) and the Security Trustee (in acting as the security trustee for the Finance Parties) shall be regarded as acting through its agency division which shall be treated as a separate entity from any other of its divisions or departments.

(b)

If information is received by another division or department of the Agent or, as the case may be, Security Trustee, it may be treated as confidential to that division or department and the Agent or, as the case may be, Security Trustee shall not be deemed to have notice of it.

26.13

Relationship with the Lenders

(a)

The Agent may treat each Lender as a Lender, entitled to payments under this Agreement and acting through its Facility Office unless it has received not less than five Business Days’ prior notice from that Lender to the contrary in accordance with the terms of this Agreement.

(b)

Each Lender shall supply the Agent with any information required by the Agent in order to calculate the Mandatory Cost in accordance with Schedule 5 (Mandatory Cost Formulae).

26.14

Credit appraisal by the Lenders

Without affecting the responsibility of any Obligor for information supplied by it or on its behalf in connection with any Finance Document, each Lender and each Hedging Counterparty confirms to the Agent, the Security Trustee and the Arranger that it has been, and will continue to be, solely responsible for making its own independent appraisal and investigation of all risks arising under or in connection with any Finance Document including but not limited to:

(a)

the financial condition, status and nature of each member of the Group, each Trustee and each Nominee;

(b)

the legality, validity, effectiveness, adequacy or enforceability of any Finance Document and any other agreement, arrangement or document entered into, made or executed in anticipation of, under or in connection with any Finance Document;

(c)

whether that Lender has recourse, and the nature and extent of that recourse, against any Party or any of its respective assets under or in connection with any Finance Document, the transactions contemplated by the Finance Documents or any other agreement, arrangement or document entered into, made or executed in anticipation of, under or in connection with any Finance Document; and

(d)

the adequacy, accuracy and/or completeness of any information provided by the Agent, the Security Trustee, any Party or by any other person under or in connection with any Finance Document, the transactions contemplated by the Finance Documents or any other agreement, arrangement or document entered into, made or executed in anticipation of, under or in connection with any Finance Document.

26.15

Reference Banks

If a Reference Bank (or, if a Reference Bank is not a Lender, the Lender of which it is an Affiliate) ceases to be a Lender, the Agent shall (in consultation with the Borrower) appoint another Lender or an Affiliate of a Lender to replace that Reference Bank.

26.16

Deduction from amounts due and payable

If any Party owes an amount to the Agent or the Security Trustee under the Finance Documents the Agent or the Security Trustee (as the case may be) may, after giving notice to that Party, deduct an amount not exceeding that amount from any payment to that Party which the Agent or the Security Trustee would otherwise be obliged to make under the Finance Documents and apply the amount deducted in or towards satisfaction of the amount owed. For the purposes of the Finance Documents that Party shall be regarded as having received any amount so deducted. ...

31.

NOTICES

31.1

Communication in Writing

Any communication to be made under or in connection with the Finance Documents shall be made in writing and, unless otherwise stated, may be made by fax or letter.

31.2

Addresses

The address or fax number (and the department or officer, if any, for whose attention the communication is to be made) of each Party for any communication or document to be made or delivered under or in connection with the Finance Documents is: …

(c)

in the case of the Agent, that identified with its name below,

To: For the attention of the Head of Portfolio Management

Real Estate Finance

5^th Floor

135 Bishopsgate

London EC2M 3UR

or any substitute address or fax number or department or officer as the Party may notify to the Agent (or the Agent may notify to the other Parties, if a change is made by the Agent) by not less than five Business Days’ notice; and…

31.3

Delivery …

(b)

Any communication or document to be made or delivered to the Agent and/or the Security Trustee will be effective only when actually received by the Agent and/or the Security Trustee and then only if it is expressly marked for the attention of the department or officer identified with the Agent’s and/or the Security Trustee’s signature below (or any substitute department or officer as the Agent or the Security Trustee shall specify for this purpose). …”

Mr Beltrami QC for RBS emphasised a number of these provisions, and in particular clause 26(2)(e), in submitting that the role of Agent under the JMFA is very limited, and involves little or no decision-making on the part of the Agent independent of the Lenders and any instructions given by them. He pointed out that clause 26 is modelled on the standard form provision governing the role of the Agent and the Arranger in the Recommended Form precedents for financing agreements issued by the Loan Markets Association (“LMA”) in October 1999, with endorsement by the LMA, the British Bankers Association and the UK Association of Corporate Treasurers. Leading commentaries on syndicated lending describe the role of Agent as being administrative in nature: see e.g. L. Gullifer and J. Payne, Corporate Finance Law: Principles and Policy (2011), pp. 364-365 (the agent bank “is largely an administrative position” which can be compared with that of a trustee in a bond issue, “in that it is the person who carries out functions on behalf of the lenders”; however, “In fact there is a considerable difference, in that the agent is seen as mainly a functionary which deals with specific administrative tasks”). Tony Rhodes (ed), Syndicated Lending: Practice and Documentation (4^th ed.), in its commentary on the equivalent of clause 26 in the LMA precedent, includes the following:

“In view of difficulties experienced by agents over the years broad exculpatory statements are written into the agency clause, relieving the agent for losses incurred by the lenders as a result of their participations. The agent should generally only be required to perform, in a reasonable manner, those duties specifically delegated to it within the loan agreement, and should not be responsible to any syndicate member unless it fails to perform such functions as a result of gross negligence or misconduct. Similarly, there should be a confirmation from the lenders to the agent … that each lender has made its own independent investigation of the financial condition of a borrower and has not relied upon information supplied by the agent …. In essence, the agent performs exclusively mechanical and operational function, with the limits of its authority defined by the lending syndicate.”

Mr Beltrami sought to support the understanding of the members of the PV Team, who thought (on the basis of guidance given by a senior manager in RBS) that, in their capacity as Agent, they merely had to act as a postal service to transmit documents or communications from Dunedin for the B1 Lenders, and clearly labelled as such, to those Lenders.

In my view, Mr Beltrami’s submission in this regard was too extreme. Whilst it is relevant to the interpretation of the JMFA that certain of its provisions are modelled on those of the LMA precedent, and I accept that the standard commentaries on the syndicated loan market and the LMA precedents reflect the general understanding in the market about the role of the Agent under a set of financing agreements modelled on the LMA precedents, the commentaries do not go so far as to support this extreme position. In particular, Syndicated Lending: Practice and Documentation contemplates that an Agent may be assigned duties which require it to act in a reasonable manner, and the fact that the model for clause 26 includes exemption clauses contemplates that an Agent may have wider duties imposed on it than simply to act as a postal service, in respect of which such exemption from liability may be required. In fact, in line with the statement in Syndicated Lending: Practice and Documentation, the JMFA includes a number of provisions which appear to call for the exercise of some level of judgment by the Agent. I give some examples in para. [31] below. Certain provisions expressly provide for the Agent to give approval for various things (without referring to the instructions of the Lenders) while others provide for the Agent to give approval, but acting on the instructions of the Lenders (I give some examples of these in para. [32] below.

Two examples of provisions in the JMFA which provide for the Agent to give approval or consent for certain things are clauses 22.14 and 22.18, as follows:

“22.14

Asset Manager, and Managing Agents

(a)

No Obligor shall and each Obligor shall procure that none of the Trustees or the Nominees shall replace the Asset Manager or any Managing Agent, without the prior written consent of, and on terms approved by, the Agent such consent not to be unreasonably withheld or delayed.

(b)

No Obligor shall and each Obligor shall procure that none of the Trustees or the Nominees shall amend the terms of any Asset Management Agreement or the Property Management Agreement without the prior written consent of the Agent, such consent not to be unreasonably withheld.

(c)

If a Managing Agent is in default in its obligations under the relevant Property Management Agreement to an extent entitling an Obligor or any of the Trustees to rescind or terminate that contract, then, if the Agent so requires, the relevant Obligor will and will procure that the relevant Trustees and Nominees will promptly use all reasonable endeavours to terminate that contract and appoint, within 3 months of such rescission or termination, a new managing agent approved, as to identity and terms of appointment, by the Agent. …

22.18

Insurance

(a)

Each Obligor shall effect and maintain, or procure that there will be effected and maintained at all times with one or more insurers having a Requisite Rating or with an insurer approved by the Agent in its sole discretion:

(i)

insurance in respect of each Property, trade and other fixtures and fixed plant and machinery forming part of its Property against loss or damage by fire, storm, tempest, flood, earthquake, lightning, explosion, impact, aircraft (other than hostile aircraft) and other aerial devices and articles dropped from them, riot, civil commotion and malicious damage, terrorism (to the extent available on the insurance market and in an amount agreed by the Agent (acting reasonably)), bursting or overflowing of water tanks, apparatus or pipes and such other risks and contingencies as are insured in accordance with sound commercial practice to the full reinstatement value thereof with sufficient provision also being made for the cost of clearing the site and architects’, engineers’, surveyors’ and other professional fees incidental thereto (together with provision for forward inflation) (“Material Damage Insurance”); …

(b)

The Agent consents to the Obligors effecting and maintaining insurance as at the date of this Agreement with The Royal & Sun Alliance Insurance plc (“RSA”). If at any time, RSA falls below the financial strength rating of Baa1 from Moodys, A- from S&P and BBB+ from Fitch, the Borrower will, upon being notified by the insurance broker, notify the Agent and procure that within 50 days of that rating downgrade, or such longer period as determined by the Agent in its sole discretion from time to time, RSA is replaced as the insurer by an insurer having the Requisite Rating and effects and maintains insurance with such person in accordance with this Clause 22.18 (Insurance) unless the Rating Agency consents in writing to RSA remaining as the insurer. …

(d)

Each Obligor shall use all reasonable endeavours to procure that the Agent receives any information in connection with the Insurance Policies, and copies of the Insurance Policies, as the Agent may reasonably require and shall notify the Agent of renewals made and variations or cancellations of policies made or, to the knowledge of that Obligor, threatened or pending. …

(g)

Without prejudice to an Obligor’s right to insure in accordance with this Clause, if an Obligor fails to comply with this Clause 22.18, the Agent or the Security Trustee may, at the expense of that Obligor, effect or renew any Insurance Policies on behalf of the Security Trustee (and not in any way for the benefit of the Obligor concerned) and generally do such things as the Agent may reasonably consider necessary or desirable to prevent or remedy any breach of this Clause 22.18. The monies expended by the Agent or the Security Trustee on so effecting or renewing any such insurance shall be reimbursed by the Obligors to the Agent or the Security Trustee. …

(i)

The Borrower must promptly notify the Agent upon becoming aware that any insurance company or underwriter ceases to have a Requisite Rating. If any insurance company or underwriter ceases to have a Requisite Rating, the Borrower must put in place replacement insurances in accordance with this Clause 22.18 with an insurance company or underwriter which does have a Requisite Rating and which is otherwise acceptable to the Agent by the earlier of (i) the date of expiry of the relevant policy and (ii) the date falling 30 days after the notification by the Borrower to the Agent.”

Two examples of the contrasting type of provision requiring the Agent to give consent, but acting only on the instructions of the Majority Lenders, are clauses 22.5 and 22.11, as follows:

“22.5

Corporate Action

(a)

The Borrower shall not without the prior written consent of the Agent (acting on the instructions of the Majority Lenders):

(i)

enter into any amalgamation, demerger, merger or corporate reconstruction: …

(b)

No other Obligor shall, and each Obligor shall ensure that no Chargor shall, without the prior written consent of the Agent (acting on the instructions of the Majority Lenders):

(i)

enter into any amalgamation, demerger, merger or corporate reconstruction; …

22.11

Occupational Leases

(a)

Except in respect of any Occupational Lease which has a rental value of less than £50,000 per annum, or such other amount as the Agent (acting on the instructions of the Majority Lenders acting reasonably) and the Borrower may from time to time agree in writing, no Obligor shall and each Obligor shall procure that none of the Trustees or the Nominees shall:

(i)

make any amendments to the Occupational Leases which: …

(ii)

enter into or agree to enter into any new Occupational Lease, terminate or agree to terminate any Occupational Lease or consent to or permit an assignment or assignation of an Occupational Lease: …”

The terms of provisions such as those set out at para. [31] above and the contrast in drafting revealed by comparing provisions such as those set out at para. [32] above indicate that it is contemplated that at least in some circumstances the Agent is expected to exercise its own judgment in working under the terms of the JMFA.

In my view, clause 26.2(e) of the JMFA (stating that the duties of the Agent under the Finance Documents – i.e. including both the JMFA and the Inter-Creditor Deed - are “solely mechanical and administrative in nature”) has to be read subject to the specific provisions in the relevant agreements which impose duties or confer discretions on the Agent. This is, I think, the only practical way to make sense of the agreements as a whole. It is appropriate to read clause 26.2(e) as qualified in this way, particularly since it is a standard or boiler-plate provision intended for use in agreements in which specific duties, deliberately fashioned by the parties with reference to the particular commercial context in which the agreements are intended to operate, may be imposed on the Agent. Such a reading of the JMFA does not deprive clause 26.2(e) of meaning or effect: the clause mandates a reading of the finance agreements which minimises so far as is possible, consistently with the express language and practical workability of the agreements and the arrangements to which they are intended to give effect, the substantive content of the duties on the Agent.

In another part of his submissions, Mr Beltrami accepted that the Agent is indeed expected to exercise its own judgment in various respects when working under the terms of the JMFA, and indeed emphasised the responsibility of the Agent under the JMFA to take action in some circumstances. He did this as part of his answer to the argument for the Claimants that the Inter-Creditor Deed included an implied term relevant to their Event of Default Claim: see below. Mr Beltrami argued that under clause 26.7(d) of the JMFA the Agent has a discretion to act as it considers to be in the best interest of the Lenders and an implied duty to exercise that discretion in accordance with the principles stated by the Court of Appeal in Socimer International Bank Ltd v Standard Bank London Ltd [2008] EWCA Civ 116; [2008] Bus LR 1304 (“Socimer”) at [60]-[66]. In his judgment at [66], having reviewed relevant authorities concerning the control of the exercise of a discretion conferred on a party under a contract, Rix LJ said:

“It is plain from these authorities that a decision-maker’s discretion will be limited, as a matter of necessary implication, by concepts of honesty, good faith, and genuineness, and the need for the absence of arbitrariness, capriciousness, perversity and irrationality. The concern is that the discretion should not be abused. Reasonableness and unreasonableness are also concepts deployed in this context, but only in a sense analogous to Wednesbury unreasonableness, not in the sense in which that expression is used when speaking of the duty to take reasonable care, or when otherwise deploying entirely objective criteria …”

I also consider that, with respect to any issue of provision of information by the Agent to a Lender, a similar analysis can be applied by reference to Socimer and the discretion contained in clause 26.6(e) of the JMFA (the Agent “may disclose to any other Party any information it reasonably believes its has received as agent under this Agreement”). It leads to the same practical result.

In my judgment, this is the correct analysis to adopt in relation to the obligation of RBS as Agent under clause 26.7(d) (and also clause 26(6)(e)) of the JMFA. I would add that the relevant standard of what would qualify as arbitrary, capricious, perverse or irrational will be conditioned by the scheme of the contract in which the relevant contractual discretion arises and the commercial purposes intended to be served by that contract. In the context of the JMFA, a (if not the) principal role of the Agent is to facilitate the B1 Lenders in the exercise of their rights and powers under the JMFA, and what it would be rational or irrational for the Agent to do has to be judged in the light of that.

This analysis is particularly important when assessing the Claimants’ arguments for implication of terms relevant to the Event of Default Claim. To foreshadow the discussion of that claim below, it is my view that if a situation arose in which the Agent under the JMFA was told by the Agent for another lending tier that an Event of Default had occurred, the JMFA Agent would very likely have an obligation under the Socimer implied term to pass that information on to the B1 Lenders so that they could consider what to do, and in particular whether to take action available to them under the JMFA where an Event of Default has occurred. It would very likely be capricious or irrational for the JMFA Agent not to pass such information on to the JMFA Lenders. In other words, the scope of the discretion for the Agent under that implied term would, in that situation, be very narrow indeed, and would probably only allow for one possible course of conduct: absent exceptional circumstances, the Agent would be obliged to pass that information on to the JMFA Lenders. The Agent could not simply sit on such information and do nothing. It is most unlikely that in such a situation the Agent could legitimately refer to interests either of itself or of third parties which could rationally justify it doing that.

The Claimants did not plead a case based on clause 26(7)(d) of the JMFA in conjunction with the Socimer implied term. The possibility that RBS as Agent under the JMFA might owe a duty under that provision to pass on information about an Event of Default was canvassed with Counsel during their opening statements. Mr Tregear QC for the Claimants made it clear that his clients did not put their case in that way. Accordingly, questions potentially relevant to any such argument were not explored in the evidence. The relevance of the analysis on this issue is purely for the purpose of assessing whether the alleged implied terms on which the Claimants did seek to rely can properly be identified in either the JMFA or the Inter-Creditor Deed. In the event, I consider that the existence of clause 26.7(d) of the JMFA (and the similar relevant discretion contained in clause 26.6(e)) and analysis of its scope and application in light of Socimer is a powerful indication that it would not be appropriate to identify the additional implied terms for which the Claimants contended.

Clause 1.6 of the JMFA provides:

“This Agreement is subject to the Intercreditor Deed. In the event of any inconsistency between this Agreement and the Intercreditor Deed, the Intercreditor Deed will prevail.”

There is a mirror provision in clause 1.5 of the Inter-Creditor Deed, which states:

“To the extent that this Deed conflicts with any of the terms of the Finance Documents, the parties agree that, as between themselves, the terms of this Deed shall prevail.”

The effect of these provisions is that if a conflict is identified between the terms of the JMFA, as properly construed in accordance with ordinary principles of interpretation of contracts, and the terms of the Inter-Creditor Deed, as properly construed in accordance with those principles, the terms of the Inter-Creditor Deed prevail. The qualification I have mentioned is important. These provisions do not mean that, when one construes the Inter-Creditor Deed, one ignores the terms of the JMFA. The JMFA and the Inter-Creditor Deed came into existence as part of a complex and carefully drafted set of interlocking agreements intended to create a unified finance structure for the whole transaction. Each of the JMFA and the Inter-Creditor Deed is relevant to the interpretation of the other, in accordance with ordinary principles of interpretation, as part of the factual and contractual matrix in which that other came into existence.

The Inter-Creditor Deed included the following definitions:

““Agent” means the Super Senior Agent, the Senior Agent, the Mezzanine Agent, the Junior Mezzanine Agent and the Junior Subordinated Mezzanine Agent (including that person when acting in the capacity of Instructing Agent) and where this Deed refers to “an Agent” or “the relevant Agent” that reference shall be construed as a reference to the Super Senior Agent in relation to matters affecting the Super Senior Lenders, to the Senior Agent in relation to matters affecting the Senior Lenders, to the Mezzanine Agent in relation to matters affecting the Mezzanine Lenders, to the Junior Mezzanine Agent in relation to matters affecting the Junior Mezzanine Lenders and to the Junior Subordinated Mezzanine Agent in relation to matters affecting the Junior Subordinated Mezzanine Lenders. …

“Default” means an Event of Default or any event or circumstance in Clause 23 (Events of Default) of the Super Senior Facility Agreement or the equivalent clause under any other Facility Agreement, as applicable, which would (with the expiry of a grace period, the giving of notice, the making of any determination under the Finance Documents or any combination of any of the foregoing) be an Event of Default. …

“Event of Default” means any event or circumstance specified as such in Clause 23 (Event of Default) of the Super Senior Facility Agreement or the equivalent clause under any other Facility Agreement, as applicable. …

“Insolvency Default” means an Event of Default under Clause 23.5 (Insolvency), 23.6 (Insolvency Proceedings) or 23.7 (Creditors’ Process) of the Super Senior Facility Agreement or the equivalent clauses under any other Facility Agreement, as applicable. …

“Instructing Agent” means the Super Senior Agent until the Super Senior Discharge Date, the Senior Agent until the Senior Discharge Date, the Mezzanine Agent until the Mezzanine Discharge Date, the Junior Mezzanine Agent until the Junior Mezzanine Discharge Date, and thereafter the Junior Subordinated Mezzanine Agent…”

The Inter-Creditor Deed included the following provisions:

“6.7

Notification of default

Each Agent shall promptly notify each other Agent on becoming aware of any Default. Any Creditor shall promptly on becoming aware of any Default notify its Agent. …

10.

ENFORCEMENT ACTION

10.1

No enforcement

(a)

Unless otherwise expressly provided in this Deed, no Creditor may take, or request or give any instruction to any Agent of the Security Trustee to take, any Enforcement Action. …

(c)

On and at any time after the occurrence of an Event of Default which is continuing and subject to paragraph (e) below, the Instructing Agent may (and shall if so directed by the Controlling Lenders) take, or request or give instructions to the Security Trustee to take, Enforcement Action.

(d)

The Security Trustee shall take instructions in relation to any Enforcement Action from the Instructing Agent, acting on the instructions of the Controlling Lenders or in accordance with Clause 10.2 (Enforcement rights) as applicable.

(e)

The Controlling Lenders may not take, or request or give any instruction to the Security Trustee to take, any Enforcement Action in respect of:

(i)

an Event of Default that is a breach of a Financial Ratio in respect of a Loan that is a Junior Ranking Loan as regards the Loan that is then due and owing to the Controlling Lenders or a failure to pay a sum owing to a Junior Ranking Lender, in each case without the consent of those Junior Ranking Lenders.

(ii)

any default in respect of the Overdraft Loan, without the consent of the Majority Senior Lenders and the Overdraft Lender.

10.2

Enforcement rights

(a)

If the Instructing Agent (on behalf of the Controlling Lenders) takes any Enforcement Action in respect of any Loan of the kind referred to in paragraphs (a) – (c) of the definition of Enforcement Action, the other Agents may, or may require the Instructing Agent to take the corresponding action in respect of the other Loans.

(b)

The Majority Junior Ranking Lenders in respect of the Senior Loan, the Mezzanine Loan or the Junior Mezzanine Loan (the “relevant Junior Loan”) may require the Instructing Agent or the Security Trustee (as appropriate) to take Enforcement Action if:

(i)

an Event of Default (under the Facility Agreement relating to the relevant Junior Loan) is continuing and has been continuing for 120 days or more and the Market Value of the Properties is such that in the opinion of the Security Trustee (acting reasonably) the net realisation proceeds of the assets subject to the Security constituted by the Security Documents would produce an amount equal to at least 120% of all of the Secured Debt that ranks in priority to the relevant Junior Loan; or

(ii)

any Senior Ranking Loan has been accelerated under the relevant Facility Agreement,

and such Enforcement Action shall be conducted in accordance with the provisions of Clause 10.3 (Conduct of enforcement). …

10.3

Pre-emption

(a)

Subject to paragraph (b) below, if, following the taking of Enforcement Action, the Security Trustee proposes to, or the Security Trustee actually becomes aware that a Receiver appointed by the Security Trustee proposes to, dispose of a Property, the Security Trustee shall give notice of that fact to each Agent in respect of the Senior Loan, the Mezzanine Loan, the Junior Mezzanine Loan or the Junior Subordinated Mezzanine Loan and of the proposed terms of disposal. On receipt of any such notice, an Agent may, within 5 Business Days of receipt notify the Security Trustee that one or more Senior Lenders, Mezzanine Lenders, Junior Mezzanine Lenders or the Junior Subordinated Mezzanine Lenders (as the case may be) wishes to purchase the Property on the same terms. …

10.4

Conduct of enforcement

(a)

If any Enforcement Action is taken in accordance with this Deed, each Agent will provide details of all related particulars and correspondence to each other Agent.

(b)

An Agent and the Security Trustee will, subject to the terms of the Finance Documents and as otherwise provided in this Deed, conduct all Enforcement Action in accordance with the instructions of the Controlling Lenders.

(c)

The Majority Junior Ranking Lenders in respect of a Loan, other than the Junior Subordinated Mezzanine Loan (a “relevant Junior Loan”) may require the Security Trustee to dispose of any real property which is subject to the Security constituted by the Security Documents if:

(i)

Enforcement Action has been taken and is continuing; and

(ii)

in the opinion of the Security Trustee, acting reasonably, the Market Value of the Properties is such that the net proceeds of realisation of the assets subject to the Security constituted by the Security Documents would produce an amount equal to at least 100% of all of the Secured Debt that ranks in priority to the relevant Junior Loan. …

13.

CURE PAYMENTS

13.1

Right to make Cure Payments

Subject to the terms of this Deed, if a Cure Payment Default has occurred and is continuing, a Senior Lender, Mezzanine Lender, a Junior Mezzanine Lender and/or Junior Subordinated Mezzanine Lender may (but is not obliged to), within the relevant Grace Period, make a Cure Payment in respect of the Cure Payment Default. The Instructing Agent will give notice to the other Agents that a Cure Payment Default has occurred. All or any of the Senior Lenders, the Mezzanine Lenders, the Junior Mezzanine Lenders and the Junior Subordinated Mezzanine Lenders may then submit a notice to the Instructing Agent confirming that they wish to make a Cure Payment. …

14.

PURCHASE OPTION

14.1

Purchase option

(a)

If a Purchase Event is continuing, the Instructing Agent shall give each other Agent prompt notice thereof (a “Purchase Event Notice”) and, subject to paragraph (b) below, any Junior Ranking Lender may elect to purchase all of the Loans that are Senior Ranking Loans in relation to the Loan owed to that Junior Ranking Lender (such Loans, the “relevant Senior Ranking Loans” and the Lenders in respect of such Loans, the “relevant Senior Ranking Lenders”) by serving an irrevocable notice while that Purchase Event is continuing. …”

For RBS, I heard evidence of fact from Mr Elliott (the employee within the PV Team who was given primary responsibility for carrying out the functions of Agent under the JMFA), Alison Fyfe (“Miss Fyfe”, who was the Senior Director of the PV Team at the relevant time with responsibility for the Dunedin transaction), Hazel McIntyre (“Mrs McIntyre”, who was a Director within the PV Team at the relevant time until October 2007 with responsibility for reviewing and analysing financial models and cashflows provided by Dunedin), James Stevens (“Mr Stevens”, who until June 2008 was a Managing Director of Real Estate Finance for RBS with overall charge of the PV Team), Derek Sach (“Mr Sach”, who at the relevant time was Head of RBS’s Global Restructuring Group and who chaired RBS’s group Equity Investment Committee, which reviewed the Dunedin transaction in October 2007), Alasdair Deignon (“Mr Deignon”, who worked within RBS’s Edinburgh Corporate Office at the relevant time with responsibility for RBS’s participation in the financing structure as Senior Lender and as Agent for the Senior lending tier), Ian Brett (“Mr Brett”, who worked in RBS’s CMBS Loans Servicing Unit based in London and had the responsibility of acting as the Servicer for the Super Senior lending), Alasdair Garnham (“Mr Garnham”, who in 2008 worked on RBS’s Real Estate Finance Syndicate Desk with knowledge of the market for syndicated loans in relation to real estate transactions) and Peter Ballard (“Mr Ballard”, who in 2008 was the Head of RBS’s Specialised Lending Services unit, responsible for dealing with transactions which had run into difficulty and where there was a risk of default by the borrower; Mr Ballard was asked to review the Dunedin transaction, among others, in May 2008). I found all these witnesses to be truthful and straightforward.

For the Claimants, I heard evidence of fact from Lee Galloway (“Mr Galloway”, who at the relevant time was the Senior Credit Analyst in CPIM’s Credit and Research Team with responsibility for monitoring the Claimants’ participation in the financing of the Dunedin transaction), Richard Saunders (“Mr Saunders”, who was part of the funding team in CPIM responsible for raising debt financing for the various funds managed by CPIM) and Robert Kramer (“Mr Kramer”, who at the relevant time was President of Cambridge Place Investment Management Inc. in the USA, part of the CPIM group, and was Head of Investments at CPIM with responsibility for managing and overseeing the selection and monitoring of investments for the group). Mr Saunders and Mr Galloway no longer work for CPIM. I found them to be truthful and straightforward as witnesses. Mr Kramer also was a truthful witness, but he had no involvement in events on the ground at the relevant time after the Claimants had purchased the B1 loans and was called, rather, to give evidence about what CPIM and the Claimants would have done had particular items of information or documents been provided to them. In my assessment, Mr Kramer’s evidence in relation to these matters involved a considerable degree of reconstruction and wishful thinking reflecting the fact that, with hindsight and knowledge of the way in which the commercial real estate market went into steep decline from the end of 2007, the B1 loans proved to be a disastrous investment. Points that he made about the financial position of the Claimants and the pressures he said they were subject to in 2007 and 2008 which would have led them, he claimed, to seek to sell the B1 loans if they had had further information about the Dunedin transaction were not supported by clear references in contemporaneous documents.

The Claimants also called senior directors of Dunedin as witnesses, Roun Barry (“Mr Barry”, the Managing Director of Dunedin) and Albie Fullerton (“Mr Fullerton”, Dunedin’s Finance Director). Mr Fullerton’s witness statement was admitted without challenge. I found Mr Barry to be an honest and credible witness.

In assessing the factual evidence, I made due allowance for the fact that the relevant events had all happened several years ago, and I accordingly paid particular regard to the picture which emerged from the contemporaneous documents.

Each side called expert evidence to deal with the market for B loans in the latter part of 2007 and 2008 (David Merchant for the Claimants; Morgan Garfield for RBS) and to deal with the prospects of restructuring the financing for the Industrious portfolio in that period (Gordon Pearce for the Claimants; Mark Shaw for RBS). All the experts did their best to assist the court, although in my assessment Mr Pearce was rather argumentative and displayed a partisan approach which tended to diminish the force and value of his evidence.

All the experts had good relevant experience. I was particularly impressed by the experience of Mr Garfield on the state of the market for B loans at the relevant time. He had worked as head of UK real estate lending for Deutsche Bank until the end of January 2008, which role involved him in actively seeking to sell B loans in relation to real estate transactions into the market at the time; he then set up his own business seeking to manage investments in real estate lending including B loans, which involved him in actively looking for investment opportunities as a buyer in the market. Accordingly, he had good practical experience of the market at the relevant time from both a buyer’s and a seller’s perspective.

I was also impressed by the cogency and even-handedness of Mr Garfield’s evidence. Having said this, there was, in fact, little to differentiate the basic picture of the market given by Mr Merchant and Mr Garfield.

As between Mr Pearce and Mr Shaw, I found Mr Shaw’s evidence to be particularly clear, thorough and cogent.

As explained above, RBS established the finance structure for Dunedin’s Industrious portfolio and initially provided the whole of the loan finance for it in early October 2006. The transaction depended on the business thesis that Dunedin would be more effective managers of the property portfolios they had acquired and incorporated into the unified Industrious portfolio than their previous owners, so as to improve the income stream from the portfolio over time. That would be necessary if the loans in the financing structure were to be serviced properly until maturity.

That business thesis and the significance of Dunedin achieving an improvement in rental income were evident from the Information Memorandum and materials provided by RBS when syndicating the CMBS notes and the mezzanine A and B1 loans. Mr Galloway, in a paper dated 11 December 2006 for CPIM’s Credit Committee in which he recommended investment by the Claimants in the B1 loans, noted that the current annual passing rent was £39.8 million and that he believed that the cashflows would be stable and would increase as Dunedin started to execute its business plan.

The PV Team was designated as the Agent under the JMFA and in relation to the mezzanine A lending at a very late stage before the finance agreements were finalised and signed. It was assigned those roles by a senior manager in RBS’s Real Estate Finance office in London, Mr Eighteen. This was probably done on the basis that the PV Team were already to have responsibility for managing RBS’s equity (loan note) and Junior Subordinated Mezzanine (B2) participation in the transaction and could easily, in Mr Eighteen’s view, take on in addition the limited responsibilities as Agent in relation to the A and B1 lending.

None of the PV Team had had any experience of acting in the role of Agent in respect of lending by third party (external) lenders in a multi-tiered finance structure such as that put in place for the Industrious portfolio. Mr Eighteen told them that the role involved essentially acting as a post box for documents to be sent by the borrower to the lenders and was simply administrative and not time consuming. Mr Elliott was assigned the primary responsibility within the team to act as the Agent for the A and B1 lenders. Neither he nor Miss Fyfe read the JMFA or other finance agreements to check on the detail of the PV Team’s responsibilities and obligations as Agent. Mr Elliott understood that his task as Agent was simply to receive documents from Dunedin designated for onward transaction to the external lenders, and send them on as requested. As the review of the terms of the JMFA above demonstrates, this was an excessively narrow understanding of the role of Agent.

Mr Tregear for the Claimants understandably emphasised this aspect of the case. However, the question whether RBS, acting by the PV Team, in fact breached any of its obligations as Agent under the JMFA or the Inter-Creditor Deed depends upon analysis of the terms of those agreements. As set out below, I have come to the conclusion that it did not. It matters not that this may be said to have been more by luck than by judgment.

For the most part, the flow of information from Dunedin to the PV Team (as Agent) to CPIM for the Claimants proceeded without incident. There was a regular flow of requests by Dunedin seeking approval from the lenders for its routine turnover of property transactions, granting leases to new tenants and so forth. In addition, as required by the JMFA, each quarter Dunedin sent the PV Team and the PV Team (as Agent) forwarded to the B1 lenders a pack of certificates in relation to the various tiers of lending regarding various items of information including the Net Rental Income and Actual ICR in the period to the certificate, the Projected Net Rental Income and Projected ICR for the year following it, the current LTV ratio (taken by reference to the most recent valuation report) and certification by the Dunedin management whether any Event of Default had occurred (“the compliance certificates”). The compliance certificates were in a form stipulated by the various lending agreements.

The compliance certificates which came through to Mr Galloway at CPIM, when compared to the original passing rent figure for the Industrious portfolio, indicated that, contrary to the business thesis in the Information Memorandum, Dunedin was falling behind in the generation of income from the portfolio in 2007, rather than increasing it. In the compliance certificate dated 22 June 2007 for the B1 lending, the Actual ICR was given as 1.15, the Projected Net Rental Income was £40,047,960 and the Projected ICR was given as 1.02. In the equivalent certificate dated 24 September 2007, the corresponding figures were 1.14, £37,496,977 (that is, significantly down on the original annual passing rent of £39.8 million) and 1.01. In the equivalent certificate dated 19 December 2007, the corresponding figures were 1.16, £37,745,902 and 1.09. In the equivalent certificate dated 20 March 2008, the figures were 1.12, £38,365,258 and 1.00. Each certificate contained a statement by Dunedin that “No Default (which has not been previously notified to the Agent) has occurred or is continuing”.

It is likely that Mr Galloway studied the compliance certificates as they came in. Although the definition of Net Rental Income in the JMFA is technical and can be lower than the actual total income received in respect of the portfolio, it is a concept focused on the most reliable form of income and gave a reasonably accurate general guide to the performance of Dunedin in generating income from the portfolio. Mr Galloway appreciated from his examination of the compliance certificates that, in broad terms, Dunedin had fallen behind original expectations that it would increase its income from the portfolio. This did not cause him to raise this as a matter for concern internally within CPIM, nor did it cause him to ask for more information from RBS or Dunedin. He was relaxed about a certain degree of slippage from the original business plan expectations for increasing the income from the portfolio.

Clause 19.4 of the JMFA also required Dunedin to send to the Agent for circulation to the Lenders a quarterly report regarding the operation of the Industrious portfolio. It was not entirely clear from the evidence how many of these reports reached CPIM. Mr Galloway was reasonably firm in his evidence that only one such report came through to him, and that it was likely to have been the report for the position as at September 2007 (which probably reached him in about late October or early November 2007). I accept Mr Galloway’s evidence about this. He was relaxed about the fact that the quarterly reports for other periods did not reach him and made no complaint.

The September 2007 quarterly report showed that at the third quarter of 2007 the total gross income for the portfolio was running at £39,091,000 p.a. (again, down from the original income of £39.8 million). This was a further indication of which Mr Galloway was aware that there had been a degree of slippage from Dunedin’s original business plan, putting pressure on Dunedin’s cash flow expectations underlying the viability of the finance structure. Mr Galloway continued to be relaxed about this. He did not raise it internally within CPIM as a matter of concern requiring the attention of senior management or CPIM’s credit and investment committees.

On 5 December 2007, the PV Team passed to Mr Galloway an updated valuation of the portfolio as at 30 September 2007 prepared by CBRE. This showed overall current income running at £38,644,658 p.a., a yet further indication to Mr Galloway of slippage against Dunedin’s original business plan. As before, Mr Galloway evinced no concern about this aspect of the transaction. By contrast, in an email dated 6 December 2007 to the PV Team he did raise concerns about the implications of the new valuation as indicating a possible breach of the LTV covenants. By around the end of the year Mr Galloway expected that there would be a breach of the LTV covenants at some stage.

Dunedin found that getting to grips with the management of the new combined Industrious portfolio was more problematic than it had expected at the outset, and at an early stage in 2007 it fell behind its original business plan expectations for improving the income stream from the portfolio. The difficulties became apparent from about June 2007. The basic picture of slippage against the original actual income figure and against the original business plan expectations was disclosed by the figures in the compliance certificates, the September 2007 quarterly report and the CBRE valuation.

The slippage was not major in absolute terms, but it did have a significant effect upon the operation of the financing structure. If not speedily corrected, it would mean that the cash flow from the portfolio would fall below what was required to meet interest payments until maturity. If that happened, an Event of Default would occur, triggering Lenders’ rights at various layers in the financing structure to accelerate the debt and exercise rights to enforce against the security given by Dunedin.

In the early part of 2007, Dunedin became dissatisfied with the financing structure based on CMBS notes issued in the public market, which it found limited its freedom of manoeuvre in the property market beyond what it had been used to in its previous joint venture transactions with RBS. Dunedin and RBS briefly discussed a proposal (dubbed “Project Highland”) to sell the entire Industrious portfolio. That was swiftly abandoned, because the returns which Dunedin thought could be achieved were not in accordance with its hopes of profit from the Industrious transaction. In its place, from about the end of June 2007 Dunedin and RBS began to discuss another proposal (dubbed “Project Harley”), according to which Dunedin would sell part of the Industrious portfolio which did not fit well with the Industrious branding but continue to hold the remainder of the portfolio – referred to as “the core portfolio” - as financed (subject to payment back of part of the lending out of the proceeds of sale of the disposals) by the existing finance structure.

Under cover of an email dated 3 July 2007 from Mr Barry to Mrs McIntyre and Mr Elliott, Mr Barry sent them a draft business plan and a cashflow for Project Harley, which he put forward “as a basis for further discussion”. These documents recalibrated the original business plan and cashflow put forward by Dunedin in relation to the creation of the finance structure, to take account of Dunedin’s “now detailed knowledge of the portfolio”. The draft business plan stated that the cashflow showed that the relevant covenants up to the mezzanine B1 lending were met, with some headroom; and noted that while the interest on the mezzanine B2 lending could be paid, “it may be prudent to allow for some further roll up to build more headroom”.

Mrs McIntyre analysed the cashflow and quickly spotted a mistake which Mr Barry had made in it. Mr Barry’s cashflow mis-stated the cash position by failing to factor in certain interest payments which had to be made. Mrs McIntyre corrected the error in a cashflow which she produced and sent back to Mr Barry under cover of an email dated 5 July 2007. This showed Dunedin’s cumulative working capital after interest diminishing steeply until March 2010 and turning negative in quarter April/June 2010 and its cumulative cash position (including utilising its working capital facility) turning negative from quarter April/June 2008 with a steadily increasing deficit rising to more than £11 million by quarter April/June 2011. Mrs McIntyre highlighted the issues in her email as being “relatively minor breaches of ICR covenant in the early periods” and, more seriously, that

“For the Mezz B1 facility, the issue is not one of covenant compliance but the ability to meet the interest payments as they fall due. My analysis … suggests that there would be difficulty in generating the cash to meet these payments in full. For the Mezz B2 facility, my model shows that interest could not be met at all.”

Mr Barry replied by email dated 6 July 2007 to acknowledge that he had made an error by omitting to show the cumulative cash position after payment of interest on the B1 lending. He promised to revert after doing more work on the Project Harley proposal.

Under cover of a further email the same day, Mr Barry sent Mrs McIntyre a revised cashflow commencing with quarter July/September 2007 which corrected his previous error and made certain other assumptions about the properties to be disposed of as not forming part of the core portfolio (“the July cashflow”). The July cashflow showed compliance with ICR covenants and payment of interest on due dates until maturity, but only on the footing that the entirety of the interest due on the B2 lending should now be rolled up until maturity (at which point it would all be paid out of the money from the sale or re-financing of the portfolio). In his email, Mr Barry drew Mrs McIntyre’s attention to this change and noted, “Clearly if the cash position improves in the future then payment can be made. And of course we will need a change to the covenants from RBS for this.” At this stage, Mr Barry assumed that since the proposal was simply to roll up interest due to RBS at the B2 lending tier (i.e. below the other lending tiers in the financing structure), this part of his proposal would only require the agreement of RBS.

In the email, Mr Barry stated:

“I believe the cash flow is conservative … as we are extremely mindful that this is the one and only opportunity we have to get this right. Accordingly we have always erred on the side of caution, based on our experience of the last year or so where there have been a number of disappointments … In summary I think this is a conservative, if not worst case, position, with good potential on the upside.”

He indicated that he was working through a separate financing proposal for the excluded properties in the Industrious portfolio which it was proposed should be detached from the core portfolio (the July cashflow simply showed proceeds of sale at the start of the cashflow period of about £58.7 million). He asked Mrs McIntyre for her thoughts about his proposals and suggested a conference call.

Mr Barry and Mrs McIntyre in their evidence both agreed that they understood that Mr Barry’s email attaching the July cashflow represented an approach by Dunedin to the PV Team asking for the B2 interest to be rolled up in full until maturity and was the beginning of a negotiation between them on that proposal by Dunedin. This was the understanding of Mr Elliott and Miss Fyfe as well. Mr Barry met Mr Elliott and Ms McIntyre on 11 July 2007 to discuss the proposal.

On 13 July 2007 Mrs McIntyre sent an email to Mr Stevens and Miss Fyfe to update them on the position. It referred to a slightly modified version of the July cashflow sent on 10 July which again showed the B2 interest being rolled up in full until maturity. Every cashflow sent by Dunedin to RBS after the July cashflow showed the same roll up of B2 interest. The July cashflow, as modified, was described as “a nil growth model” which Mr Barry believed to be “based on very conservative assumptions”. Mrs McIntyre and Mr Elliott had asked him to prepare a business plan cashflow reflecting what Mr Barry believed to be the realistic case, i.e. incorporating some modest rental growth.

As regards the mezzanine B1 lending, Mrs McIntyre noted that on the conservative modified version of the July cashflow an issue remained that there might not be sufficient cash flow to service the interest payments, and stated that RBS would have to take a view on what to do once it saw the realistic case cashflow which Mr Barry had been asked to prepare. As regards the B2 mezzanine lending, she noted that on the same nil growth cash flow, the B2 facility could “not be serviced at all and all interest would require to be rolled up.”

Mrs McIntyre also referred to Dunedin’s proposal in relation to the properties to be detached from the core of the Industrious portfolio (“the excluded properties”), and noted that Mr Barry was having difficulty in putting together a viable or attractive funding structure for these. She noted that Mr Barry appreciated that asking RBS for new money to help fund the excluded properties as a separate portfolio would be difficult, and continued, “I think no matter what we are going to have to accept that [the excluded properties] portfolio is going to be a bit of a basket case.” It was clear that adding the excluded properties back with the core portfolio would not save the finance structure from the need for the B2 interest to be rolled up in full until maturity.

In early August 2007, Mr Barry sent a further cashflow based on what he regarded as more realistic and aggressive assumptions for the portfolio, and adjusting the extent of sale of excluded properties (the proceeds of sale for these now being shown as repayments of lending of about £17.35 million at the commencement of the cashflow and a further £60 million in the April/June 08 quarter). This cashflow again depended upon the rolling up of B2 interest in full until maturity.

The idea of a sale of excluded properties continued to be problematic, and Mr Barry continued to review different options, including working up a business plan and cashflow based on retention of the complete Industrious portfolio. On 15 August 2007 he emailed Miss Fyfe to say that the re-financing exercise had meant that Dunedin had brought forward its annual budgeting process a few months, and suggesting that the annual budget and the revised business plan should be produced together in September, at which point the PV Team could also use the materials to go to the relevant credit committee within RBS with whatever changes were agreed.

On about 17 August 2007, Mrs McIntyre spoke by telephone to Euan Cluness of Dickson Minto, solicitors acting for RBS, to seek advice about how a proposal to roll up the full B2 interest could be put into effect. By email of that date, Mr Cluness set out his advice, which was to the effect that by virtue of the Inter-Creditor Deed the consent of all the various lenders for the rolling up of B2 interest would be required – it would not be sufficient that RBS acting by the PV Team in relation to the B2 lending would agree to roll up the B2 interest due to it. Mr Cluness noted that, since RBS would be deferring interest which it was due to receive at the B2 level, he presumed that obtaining the consent of lenders higher up the lending stack “would not be particularly difficult to obtain”. This was also the belief of the Dunedin management and everyone in the PV Team.

Since the rolling up of the B2 interest which was due to be paid under the existing finance arrangements would involve postponing payments to RBS of a total of about £14 million up to maturity, which in effect involved RBS agreeing to increase the lending facilities in place for Dunedin, the credit protocols operating within RBS required approval to be given for this proposal by RBS’s Equity Investment Committee (“EIC”, headed for this purpose by Mr Sach) and then its General Credit Committee (“GCC”). The PV Team decided that the best way forward would be to ensure that the approvals of those internal committees were in place for the rolling up of B2 interest before approaching other lenders for their consent to the proposal. This was, in my view, an understandable and sensible choice, even though it would mean a considerable delay before other lenders could be approached (by virtue of the rather rigid timetable according to which EIC and GCC meetings were scheduled), because it would be far easier for the PV Team to approach other lenders for their consent on the basis that the proposal was already fully signed off and agreed within RBS, rather than being still up in the air and uncertain.

Dunedin continued to work up its revised business plan for 2008 and beyond, in the context of development of its proposal that the entirety of the B2 interest should be rolled up until maturity. Valuers instructed by Dunedin (CBRE) also carried out a review of the value of the portfolio. As Dunedin worked on what could be regarded as a more realistic set of assumptions, Mr Barry reported to Miss Fyfe and Mrs McIntyre that the cashflow figures looked more comfortable. By mid-September 2007 another issue had begun to emerge: the Government was proposing to change the local business rates regime so that rates would now begin to be charged on vacant commercial premises. To the extent that Dunedin was not able to let out the properties in the portfolio it could be vulnerable to such a change, which could affect its cash flow (since paying rates would be a further drain on Dunedin’s cash resources). However, Dunedin’s assessment was that, provided the grace period before rates became chargeable remained 6 months as the Government proposed, the financial implications for the portfolio would be small, since Dunedin believed it should be able to re-let most empty properties within such a period.

On 4 October 2007 Mr Barry emailed Mr Elliott and Miss Fyfe the final version of Dunedin’s new business plan – the Business Plan in issue in these proceedings. It was headed, “Business Plan for Annual Review”. It contained a review of the first year of the Industrious transaction, noting that Dunedin had achieved good rental growth on the transactions it had done and assessing that experience bore out Dunedin’s contention at the time of acquisition that the portfolios which constituted the Industrious portfolio had been “severely under managed” under previous ownership. This indicated that the basic business thesis on which the Industrious transaction was founded (that Dunedin was capable of improving the performance of the portfolio by more effective management of it) was being borne out by experience. However, the Business Plan also stated that despite this progress, Dunedin had not met its original business plan Net Rental Income numbers, due to loss of certain large tenants and problems with tenant retentions due to poor previous management and letting vacant units. Nonetheless, Dunedin maintained that it had made “very good progress” over the year to reduce the vacancy rate and its plan was to re-double its efforts to do that. As part of that effort, Dunedin identified a need for significant capital expenditure (“capex”) to maintain the portfolio to a high standard, to attract and retain tenants. The conclusion remained very positive about the prospects for the Industrious transaction. It included the following:

“Since taking control of the various portfolios we have been able to establish significant momentum in securing the business plan objectives. As described above, however, we did suffer some early setbacks that have meant that in the last year we have not met all our original business plan numbers. This does require approval to roll up all B2 Mezzanine interest until the end of the project.

However, this does not detract from the fundamental belief that Industrious still offers a unique opportunity. The Industrious name is a well recognised and respected brand that under our ownership is improving as we actively manage the opportunities in the portfolio. …”

On 16 October 2007 Mr Barry emailed Miss Fyfe the October cashflow, which was Dunedin’s final cashflow from quarter October/December 2007 to maturity to accompany the Business Plan. In line with the Business Plan, the October cashflow showed B2 interest being rolled up in its entirety to maturity. This obviously made a significant contribution to Dunedin’s forecast cash position until maturity, since it meant it would be saved about £700,000 a quarter which would otherwise have had to be paid to RBS in respect of B2 interest. The October cashflow showed all other interest, from the mezzanine B1 lending upwards, being paid in full with a reasonably healthy positive surplus cash figure through the entire period until maturity. The October cashflow also contained a calculation of RBS’s profit and IRR (internal rate of return) in relation to its equity/loan note participation in the lending structure. This calculation was commercially sensitive, for the eyes of RBS and Dunedin alone.

If the October cashflow had not allowed for rolling up the entirety of the B2 interest, the adjusted figures would have shown that Dunedin had insufficient cash to pay the full interest amounts due for quarter April/June 08 and that it had a negative cumulative cash figure of £1,128,650 in that quarter. That negative cumulative cash figure would have deteriorated steadily until reaching £9,523,644 at maturity. Even if Dunedin decided not to spend anything on capex (not a viable assumption, since capex was thought to be important to retain and attract tenants), the reduction in expenditure would not have saved the transaction but would only have postponed the point at which Dunedin had insufficient cash to meet its interest payment obligations until quarter October-December 08. This illustrates the importance of the proposal that the B2 interest be rolled up for the future continued viability of the finance structure.

The PV Team passed the Business Plan and October cashflow onwards within RBS to Mr Brett and Mr Deignon, representing the Senior and Super Senior tranches of the lending, and also provided the October cashflow and a detailed précis of the Business Plan to the EIC and GCC as part of the PV Team’s application for credit approval for rolling up the entirety of the B2 interest. However, it did not pass them to the mezzanine A and B1 lenders, including the Claimants. This omission is the basis for the Business Plan claim by the Claimants in these proceedings.

Based on the Business Plan and the October cashflow, the PV Team produced a report dated 24 October 2007 for the EIC and the GCC recommending that they give credit approval to roll up the B2 interest. It included as appendices the October cashflow, the updated valuation of the portfolio and industrial rent growth forecasts provided by CBRE. The report was positive about the quality of Dunedin’s management, the progress Dunedin had made with operating the portfolio and the prospects for the Industrious transaction. It noted that rental growth levels were ahead of expectation (averaging 5.2% against a UK industrial average of 1.4% in the previous 12 months), but that this progress had “taken longer to achieve than anticipated and Dunedin are some 5% behind where they expected to be in terms of their annualised gross income line.” The report included the following update on the valuation of the portfolio, summary of the proposal to roll up the B2 interest and recommendation:

“Update on Valuation

The assets in this portfolio have now been owned for between 12 and 30 months. Income returns have increased by £2.00m in real terms. Post purchase yields tightened but since the summer these have softened again reflecting the general market trend. CBRE have carried out a valuation for Dunedin and have advised a current value of £637.38m (against an adjusted entry valuation of £643.2m). This reflects a net initial yield of 5.68% and an equivalent yield of 6.62%. Whilst this is a reduction on the numbers reported at the end of Q2 it illustrates that Dunedin have maintained entry level values by bettering the income stream from the portfolio.”

“Proposed Change

In light of this slower than anticipated increase in rental income and the resultant reassessment of the business plan, REF [RBS’s Real Estate Finance department, which included the PV Team] are requesting the ability to roll up Mezz B2 interest which was due to be part paid from Q1 2008. The B2 strip is effectively preferred equity and therefore the proposed rollup is really a postponement of the REF dividend. This will require an increase of £13m to the approved B2 interest roll up limit if we are to roll up for the remainder of the term. It is expected however that Dunedin will part pay if the future cash flow allows and so our request represents a potential worst case position. Whilst this is a departure from the original structure the updated cashflow projections based on the revised business plan confirms that REF returns will still meet the target 14.5 % IRR, equating to some £51.5m, by the end of the 5 year term.

We are comfortable with this proposal on the basis that our target IRR is maintained and Dunedin will pay if they can since the cost of any additional rollup will effectively erode their profit share due to the priority return mechanism that is already in place for the benefit of Bank.

Recommendation

REF is supportive of this request and we are satisfied that the overall deal remains a fundamentally sound one. The portfolio is well spread in terms of tenant & geographic risk where quality and value is improving, and will continue to improve with the benefit of Dunedin’s pro-active and customer focused approach. The revised cashflow projections illustrate that on the base case where rental growth is conservative, REF will still attain our target IRR.

The Dunedin team are hugely experienced and trusted customers. They have a track record of successful asset management and have proven time and time again that they can extract value by spotting opportunities and trends in the market. We believe that they will continue to be successful with Industrious. …”

The same message was repeated in another report for the EIC, this time by Mr Deignon. He too drew attention to the way in which the rental growth achieved by Dunedin had outperformed the market average, and noted “More importantly, performance over the last quarter has been very strong such that Dunedin is confident of out performing the revised business plan …”.

These RBS reports accurately reflected what had happened with the performance of the Industrious portfolio over the year, as confirmed by the evidence of Mr Barry. The problems faced by the Dunedin management had been somewhat greater than originally anticipated in October 2006, with the result that there had been a delay in them realising the improved income performance they hoped to achieve. But by October 2007 Dunedin was starting to achieve the income growth that it had always been confident it could achieve, and it was positive (as were those reviewing the transaction within RBS) that this strong performance would continue. Rolling up the B2 interest would provide Dunedin with head-room on its cash flow, essentially to accommodate the somewhat slower start than had been anticipated for the underlying business thesis for the Industrious transaction to come to fruition. But Dunedin and RBS remained confident about the validity of the business thesis, and (notwithstanding the problems that had been experienced) Dunedin’s performance in managing the portfolio reinforced the validity of that thesis.

At a meeting of the EIC on 29 October 2007, chaired by Mr Sach, the EIC reviewed the PV Team’s request to roll up the B2 interest and, after a short discussion, gave its approval. It did not find anything unusual or remarkable about the proposal.

At a meeting of the GCC on 13 December 2007, the GCC reviewed the request to roll up the B2 interest and likewise, after a short discussion, gave its approval.

Armed with these internal RBS credit approvals for rolling up the B2 interest, in late 2007 Mr Elliott approached the mezzanine A and B1 lenders for their consent to the rolling up proposal, as required by the Inter-Creditor Deed.

By this time, the commercial real estate market was cooling rapidly. There was a growing strand of thinking that the market was overvalued and due for a correction. Views about the outlook for the real estate market had a strong influence on the marketability of mezzanine B loans.

Mr Merchant and Mr Garfield agreed that in July 2007 investors were still fundamentally positive; the CMBS new issue market was still open and the real estate finance market was still reasonably robust; there was a large universe of B loan buyers including banks, insurance companies, institutional investors and alternative asset managers; the market was functioning well, despite the beginnings of disruption to some European markets from sub-prime lending problems in the USA; and while there was very little secondary trading of B loans, demand for primary loan syndications was strong. By September/October 2007, the market was changing: the CMBS new issue market was closed (although with that exception the real estate finance market was still reasonably robust); there was still reasonable demand for B loans, but investors were beginning to draw a distinction between deals perceived as solid, performing transactions and difficult credits; investor appetite for the latter was declining by September 2007; there was a general assumption in the market that the market dislocation being experienced by this time was a liquidity issue which would not translate into material asset value decline; buyers of B loans were still making the assumption that those loans would be repaid in full at or before maturity; and the same range of buyers were in the market, with the exception of those (primarily hedge fund buyers) who relied on borrowing and whose access to the capital markets had been undermined. By January/February 2008, the market had turned. Market sentiment had become more negative; there had been a decline in the number of participating investors from September 2007 onwards; conventional investors remained present but were less active and fewer in number; the distressed investor community had not yet emerged as an active or established group, although there were occasional opportunistic investors; real estate and asset values were coming under pressure and there was growing concern about LTV covenant defaults; there was still a market for performing credit, but investors were becoming more cautious about the quality of transactions.

By email dated 27 December 2007 from Mr Elliott to Mr Galloway, Mr Elliott sought the Claimants’ consent for the rolling up of B2 interest. He wrote:

“It has been agreed between Dunedin and RBS that the Junior Subordinated Mezzanine Facility (“the Facility”) originally dated 5 October 2006 entered into between Dunedin Capital Fund (“Dunedin”) and Royal Bank of Scotland plc (“RBS”) variously as Arranger, Security Trustee, Hedging Counterparty and Lender be varied so that all interest payable is permitted to roll up until the end of the Facility, rather than being partly paid in the manner and at the intervals defined in the Facility. The definitions of “cash pay interest” and “roll up interest” have therefore been amended in a Supplemental Agreement, a copy of which is attached herewith. The Agreement permits interest to roll up but also permits the payment of interest where there is available cash to service this. It has also been agreed that the Revolving Advance Facility between Dunedin and RBS originally dated 5 October 2006, will be varied to extend the availability.

I am writing to seek your consent to these amendments which have been agreed to allow Dunedin more flexibility in managing the portfolio. All other aspects remain as before and this will not affect Interest Cover Ratios or other covenants. …”

On 31 December 2007, Mr Galloway replied by email to say:

“Our initial thought is that we are not keen on seeing a lot of additional debt build up in the structure below us.

The Junior Mezz ICR at Dec 07 was 1.16x. I am keen to get a better idea of how surplus cash will be used, if not for debt service below us, and how these changes would give Dunedin “more flexibility to manage the portfolio”? …”

Mr Elliott responded by email dated 8 January 2008, as follows:

“The principle of allowing Dunedin to roll up rather than pay all interest – as opposed to the original principle of interest being part paid – was agreed on the basis that cash released is used entirely for the benefit of the portfolio. For the avoidance of doubt there is no leakage. Dunedin’s first instinct will be to pay interest as and when they can, on the basis that this reduces their overall indebtedness and improves their returns. However, the nature of the properties in the portfolio is such that some require capital expenditure – or more correctly would benefit from capital expenditure – in order to enhance letting prospects and rental values. In some cases some capital expenditure or some additional rent free allowance can secure the dual effect of enhanced rental value plus a longer lease length and therefore greater income secure and capital value.

The fundamental point of allowing Dunedin the flexibility they and we are seeking is to allow them the ability to use some cash surpluses for the direct benefit of the physical assets and the financial well being of the portfolio. You will recall from the initial prospectus and presentations that Dunedin are highly experienced and very successful asset managers of property. They are well placed, being “hands on” and in direct contact with the tenants and prospective tenants, to use their skill and judgement and assess whether some use of capital within the project can secure additional value and returns. At some times and in some cases their judgement and ours is that it is a better use of cash surpluses to expend capital directly on the portfolio rather than pay interest. The emphasis is to allow them the ability and flexibility to do so – in practice it is likely they will continue to operate on the basis that they pay interest when they can. You will be aware that for the larger lettings and material changes Dunedin seek our consent and we seek yours. They also need to justify capital expenditure and demonstrate effective management and use of capital expenditure. I hope that over the period of your own involvement you have been able to gain some sort of “feel” for the value add that Dunedin bring in terms of the consents we have sought from you.

I should add the RBS as senior lender and security trustee, in effect the senior and super senior lender, is entirely happy with the proposals. The “risks” in non payment of interest lie mostly with the holder of the lowest ranking and non paying mezzanine – which is ourselves.”

Mr Galloway’s reaction to this, as reflected in an email he sent the same day to Mr Saunders, was that this was a good response and as expected, and that he was basically happy with the proposal. He emailed Mr Elliott the same day to say:

“Thanks for your response.

We are happy to consent to this change and we send over the signed email.

One question from your response. In the current environment, do Dunedin see a need to spend more capex and/or offer larger rent frees to secure lettings or is this request of a more general nature for the moment?”

Mr Elliott responded to this question with a further email, also dated 8 January 2008, as follows:

“Thank you for that. The capital expenditure is not a response to the current market conditions, more a response to previous years of neglect. Dunedin have always sought to grant longer rent frees to secure longer lease terms, with a view to enhancing yield profiles. For some of the larger units it may be the case that extra incentives are sought by tenants who perceive themselves to be in a position of strength.”

Mr Galloway, for CPIM and the Claimants, was satisfied with these explanations and he and Mr Saunders signed a copy of Mr Elliott’s email of 27 December to indicate consent to the proposal.

It is the statements made by Mr Elliott in his emails to Mr Galloway of 27 December 2007 and 8 January 2008 which are the basis for the Claimants’ negligent mis-statement claim. Mr Tregear submits that Mr Elliott negligently gave a misleading picture of the reason for the proposal to roll up the B2 interest, giving the impression that the cash saved by not having to pay the B2 interest was being saved in order to be spent on capex to enhance the quality, value and attractiveness of the portfolio to tenants, rather than explaining that rolling up the B2 interest was essential in order to save the financing transaction from running out of cash by about mid-2008.

Mr Elliott’s request to the other mezzanine lenders to give their consent to the rolling up of the B2 interest ran into difficulties with Marathon, the owner of part of the mezzanine A lending. Mr Braidley of Marathon replied to Mr Elliott’s request of 27 December 2007 by email dated 16 January 2008, as follows:

“We have given the request lengthy consideration and we do not consent to the proposed changes to the junior sub mezzanine facility and an extension to the revolving credit facility.

In the current market, we do not believe that it is appropriate to materially increase leverage and we have serious concerns that both alterations will materially increase overall leverage on the portfolio. This increased leverage will we feel increase refinance risk at the end of the loan term. Whilst we acknowledge that the increased debt will be subordinate to us, our concern is that a refinance or sale of the portfolio would be complicated and delayed by the level of debt existing at the time. This could potentially impact on the timeliness of our receipt of principal proceeds and even the full amount of our principal.

The ability to roll up interest for the full term of the loan, compared to the first two years also leads us to question the performance of the portfolio over the medium term. If there is unlikely to be sufficient rental income to service all of the debt going forward, then we question whether it is prudent to allow increased leverage through interest roll up as opposed to paying down the debt through asset sales or the injection of additional equity – particularly in the current credit and economic environment. …”

In an effort to persuade Marathon to give its consent, in emails on 16 January 2008 Mr Elliott complained to Marathon that it was being unreasonable and that its position in the financing structure was in fact well protected. He emphasised that Dunedin’s latest forecasts (i.e. the October cashflow), which reflected Dunedin’s practical experience as owner of the portfolio, showed that it was ahead of the original cashflow from October 2006 by maturity. He also questioned whether rolling up of B2 interest amounting to £14 million could really be regarded as material so far as concerned Marathon’s position in the financing structure.

Mr Braidley remained unmoved. He replied the same day to say:

“We are looking further at our decision in the light of your comments.

We understand that looking at our position in isolation indicates we are well protected from an exit yield perspective. However from an LTV perspective, given current market conditions, we are rather less well covered. We appreciate the experience and skills of Dunedin as an asset manager and are looking closely at their performance over the past 12 months in terms of changes to the rental income over the period. We understand that they want to maintain and improved the quality of the portfolio and that this will require capex. However, this capex should not be at the expense of paying loan interest. We appreciate that at the start of the loan, whilst Dunedin were getting their arms around the assets, some deferral feature probably was preferable from their perspective, so they could focus on stabilising occupancy across the portfolio, using capex as necessary. However, we felt this would be a temporary arrangement as envisaged within the loan agreement and act as an incentive to Dunedin to actively manage the portfolio in its early years of ownership to maximise rental income. The current proposals remove this explicit incentive.

Our key concern centres around the quantum of debt that will need to be refinanced at loan maturity, relative to the leverage that is currently available within the market. Using the DTZ values, total debt to be refinanced could be as high as 96% LTV; using current values, this would be higher – probably in excess of 100%. If refinance was not an option, then the security trustee would have (under instruction) to enforce security. Should the holders of the debt subordinate to us choose to, they could potentially frustrate this process, adding time and expense to the enforcement. Ultimately we are concerned that this could lead to us not receiving our full principal, or receiving it some time after loan maturity.

As a part of our further considerations, could we see the latest version of the business plan, which I assume will (amongst other things) set out rental income and capex over the remaining term of the loan. …”

Mr Elliott sent Marathon the Business Plan and October cashflow (minus the calculation of RBS’s profit from equity), together with other information about how the portfolio was performing. Marathon remained unpersuaded and adhered to its position that it would not give its consent for the rolling up of the B2 interest. In emails dated 23 and 25 January 2008, Mr Braidley reiterated Marathon’s basic concern that in light of the current state of the property market and the wider economy, for which the outlook was worsening, it was not appropriate to increase the leverage on the transaction; in Marathon’s view, the increased debt amount at loan maturity represented by the rolled up B2 interest would make refinancing the portfolio more difficult and increase the risk of loan loss; Marathon was also concerned that as the debt increased, Dunedin’s equity and thus incentive to manage the portfolio through difficult times could be reduced; if there was a substantial decline in the market value of the portfolio, the losses could impact upon the mezzanine debt.

The result was that RBS did not have all the consents it needed in order to be able to implement the B2 interest roll up proposal. B2 interest continued to be paid while Dunedin still had the cash to meet it. Interest was paid on all loans on 22 January 2008. Dunedin had to adjust its business plan to try to make greater savings to manage servicing all the loans going forward. By mid-February 2008, the expectation of Dunedin and RBS remained that there was sufficient cash flow to service all the loans on the next interest payment date in April 2008, so that there was no urgent likelihood of a default.

Meanwhile, a general deterioration in market values for commercial and industrial properties was taking place. Already by about December 2007 Mr Galloway and others thought that there was a good chance that at the time of the next scheduled valuation of the Industrious portfolio in about September 2008 a breach of the LTV covenants would arise. This became the general perception when on 6 March 2008 the ratings agency, Fitch, issued a performance report on the Epic CMBS loan notes. It referred to declining property values; noted that the LTV default triggers in the financing structure were tightly set; that the trigger test had only just been passed in October 2007; and stated that the rising LTV was largely a result of the declining portfolio value and that “As the market continues its downturn the transaction’s value is likely to decline further and a breach of its default trigger is imminent.” Fitch was looking for Dunedin to sell property to reduce the debt.

By mid-March 2008, the PV Team was becoming increasingly nervous about the viability of the financing structure, particularly because of the vulnerability of the LTV covenants to general changes in the market.

Nonetheless, despite the deterioration in the LTV position, at this stage Mr Galloway remained satisfied with the position. He reported internally that Dunedin had “steady performance”.

The problem became more imminent still when in May 2008 Dunedin’s auditors, Deloitte, insisted that, in order to sign off its accounts for the year ending 31 December 2007 (due to be issued at the end of June 2007), they required a valuation of the portfolio as at 31 December 2007 with an update as at 30 June 2008 (presumably, to allow for possible post balance sheet adjustments). In view of a deterioration in market values, they were not prepared to assume that the CBRE valuation prepared in October 2007 could simply be rolled forward to the end of the year. As noted in an internal RBS briefing note by Miss Fyfe dated 30 May 2008, this requirement meant that Dunedin was likely to breach its loan covenants at the end of June 2008, rather than in September, either because it produced qualified accounts or because the updated valuations, based on current market valuations, would show a breach of the LTV covenants.

The problems with the decline in the market value of the portfolio, a worsening outlook for the economy and commercial and industrial property and the strain upon Dunedin’s cash flow resulting from its not being allowed to roll up the B2 interest all began to interact. Where there is a decline in market values, one option is for lenders to seek to ride out the decline for a period (even if there is a breach of LTV covenants) in the hope that values will increase again later; but that may only be viable if there is strong cash flow to enable the borrower to ride out the dip while its loans continue to be serviced. Dunedin, however, was caught by a combination of deteriorating market value of its portfolio and a straitened cash flow. Furthermore, the improvement in its rental performance in the latter part of the 2007 was not being sustained. As it proved harder to retain and attract tenants, vacancy rates increased and as a further result Dunedin became more vulnerable to the change in the imposition of rates on vacant commercial properties. Epic’s quarterly report to note-holders for the interest period to 21 January 2008, circulated in about mid-March 2008, stated that vacancy rates had recently “jumped”, albeit Dunedin expected to improve them in coming months. With the worsening economic outlook, however, the vacancy rates did not improve.

Moreover, the willingness of senior lenders to ride out a dip in values and breach of a LTV covenant is likely to be affected by their assessment of how their position will best be protected. In the Industrious transaction, the LTV ratio was set high to begin with, and as commercial property market values fell, lenders up the lending stack would have become increasingly nervous about the possibility that their security cover could become insufficient to protect them fully in respect of the extent of their loans, and that the extent of any exposure would increase over time as the market continued to fall. Marathon’s reasons for refusing to agree to the rolling up of the B2 interest in January 2008 are indicative of this nervousness, by contrast with the Claimants’ relaxed attitude. As property values continued to deteriorate in 2008, the nervousness of senior lenders would have increased. This made it increasingly likely that, if there were a breach of the LTV covenants or any problem with the availability of cash to service the finance structure leading to a default, the senior lenders would be likely to exercise their enforcement rights under the structure, accelerate the loans and call in their security.

In her briefing note of 30 May 2008, Miss Fyfe sought to shift the mezzanine Agency role from the PV Team elsewhere within RBS. She recognised that the PV Team was not well equipped to fulfil this role, with which she had never been comfortable; she was also concerned that with an impending breach of the LTV covenants, there was the possibility of a conflict of interest between the PV Team in its capacity representing RBS’s equity interest in the Industrious transaction and in its capacity as Agent for the third party mezzanine lenders (she returned to her request to shift the Agency role elsewhere within RBS a number of times in the following days, and eventually with effect from 20 June 2008 the Agency role was moved to RBS’s Real Estate Finance Department at its offices in London, i.e. the department of RBS which had originally been named as Agent in the various mezzanine facility agreements). In the briefing note, Miss Fyfe noted that with falling property values, although the true extent of the fall was not yet known, it was likely that the mezzanine B1 lenders were not fully secured. She also noted that the PV Team had recommended that Dunedin seek expert third party advice to assist it with possible restructuring of the Industrious transaction to maintain its viability; that if Dunedin were to keep the deal alive in light of the impending breach it would have to suggest a course of action to the Super Senior Lenders represented by Mr Brett that would either cure the LTV covenant breach or give them sufficient comfort to agree to waive the breach; that a cure would require an injection (on her estimate) of £91 million of new money, and that it was unlikely that Dunedin, RBS or any third party would be willing to provide this; and that the waiver option might be more realistic, requiring a package of concessions to the Super Senior Lenders which would have to be negotiated.

At about this time, Mr Ballard of RBS’s Specialised Lending Services commenced a review of a number of property transactions in which RBS was involved, including the Industrious transaction. Miss Fyfe updated her briefing note for him, as at 3 June 2008, and they had a meeting. Mr Ballard’s view was that, with falling property values, the PV Team’s equity and mezzanine B2 interests were already “out of the money” (i.e. unsecured and potentially irrecoverable), and that it was likely that there would be an impact on the Super Senior debt. Therefore, Specialised Lending Services did not assume management of the transaction at this stage, but waited to act as provider of services for the Super Senior Lenders in due course. As Mr Ballard explained in his evidence, if Dunedin breached its LTV covenants in relation to the Super Senior lending, the Epic noteholders could effectively take control of the transaction, including by switching cash flow in their favour and enforcing the security to protect themselves.

On 17 June 2008, Mr Galloway and others from CPIM had a meeting with Mr Barry of Dunedin, at which he told CPIM about Deloitte’s requirement for an updated valuation of the Industrious portfolio. Mr Galloway reported on the meeting to Mr Kramer and others. He noted that it was clear the LTV triggers would be breached, on Dunedin’s expectation that the portfolio would be found to have dropped 15% in value. He did, however, observe that “On the positive front, the ICR has been stable and is higher at 1.3x.” This is consistent with the previous pattern of behaviour by Mr Galloway, which was to be relaxed about Dunedin’s cash flow position. By far the greater concern for CPIM and for everyone else at this stage was the impact of falling market values on the LTV ratio. On 20 June 2008, CPIM made a provision in relation to the Claimant funds in respect of the expected decline in market value.

On about 4 July 2008, the valuers, CBRE, produced their revised valuation report in respect of the portfolio as at 30 June 2008. They now valued the portfolio at £521,385,000. This was worse than Dunedin, RBS and CPIM had been expecting. The valuation was promptly distributed to lenders. Mr Galloway’s reaction, as expressed in an email to Mr Saunders, was “…WOW … This has the effect of totally wiping out RBS Mezz [i.e. the B2 loans], CPIM Mezz [i.e. the B1 loans], Marathon and Cheshire mezz [i.e. the A loans] and half of the Senior facility. CMBS LTV increases from 74% to 91%!!”.

There was no prospect of a cure of the breach of the LTV covenant for the Super Senior lending, so on 9 July 2008 Mr Brett for the Super Senior Lenders transferred the handling of the transaction to RBS’s Special Lending Services department. The Super Senior Lenders were now in control of the transaction, and had the right to enforce against the security given by Dunedin.

Meanwhile, Dunedin had engaged expert advisers at considerable expense to assist it in putting together an emergency revised business plan with a view to trying to persuade the Super Senior Lenders to waive the LTV covenant breach. The revised business plan noted that Dunedin had succeeded in increasing the gross annual rent in the year to 30 June 2008 by 3.8% as compared with the previous year.

Dunedin’s efforts to construct a restructured transaction proved unsuccessful. By mid-July 2008 Dunedin’s management concluded that they had to give notice of a possible Event of Default in the form of Dunedin being unable to pay its debt obligations as they fell due, and by letters dated 15 July 2008 gave notice to that effect to the Agents for the various layers of lenders, saying that Dunedin believed that there might be insufficient funds to pay all the interest due under the Junior Term Loan Facility Agreements.

On about 18 July 2008, Dunedin circulated a short term cashflow which showed the significant deterioration in its cash position.

Dunedin convened a meeting of its creditors on 25 July 2008. At this meeting, the Dunedin management referred to Dunedin’s Business Plan of October 2007, including the October cashflow, in order to explain what had happened since it was produced. Dunedin attributed the marked deterioration in its cash position by this time by comparison with the October cashflow to a set of more conservative assumptions for the prospects for the business (lower retention rates, higher void periods), rates due on vacant properties due to the change in the law (an additional cost of about £1.7 million) and corporate fees paid to advisers. Dunedin’s reconciliation of the cashflow figures showed a substantial reduction in projected rental income of £3,772,412 in the year to end of June 2009 and a substantial increase in operating costs (mainly rates on vacant properties) of £2,212,059 for the same period, amounting to a projected deterioration of £5,984,471 in net income for that period by comparison with the October cashflow. This was a very large and sudden collapse in projected annual income, which had been running at about £40 million p.a. in the October cashflow. Mr Galloway was given a copy of the October cashflow, which had previously been given to Marathon. It is noteworthy that he made no protest that the October cashflow showed a picture substantially at odds with what he understood Dunedin’s cash flow position to have been in late 2007. As he commented in an email to Mr Braidley after the meeting, his surprise was at how the actual and projected rent had fallen away quickly by comparison with the October cashflow.

On 4 August 2008, representatives of RBS’s Special Lending Services unit (representing the Super Senior lenders’ interest) had an exploratory meeting with representatives of the external mezzanine lenders, including Mr Braidley for Marathon and Mr Galloway for the Claimants. At this stage it was expected that new money would be required to keep the transaction alive (about £10 million to £15 million of new money, plus all interest below the Super Senior level being rolled up to maturity). It was reported that the PV Team and Dunedin would not provide any new money and that any re-structuring would require the consent of the CMBS noteholders (according to the relevant voting rules in the loan documentation, i.e. a 75% majority for each distinct layer within the Super Senior lending tranche).

The same day, Mr Galloway met Mr Barry to discuss the decline in performance of the Industrious portfolio and Mr Galloway’s surprise that it was not foreshadowed. On 5 August 2008 Mr Galloway emailed Mr Elliott to ask whether he had distributed the Dunedin Business Plan of October 2007. On 6 August Mr Galloway emailed Mr Elliott to complain that the request made in December 2007/January 2008 for consent to roll up the B2 interest “did not hint at the seriousness of the situation, whether real or potential at that time.”

Dunedin produced a further presentation for lenders dated 8 August 2008 which was discussed at a meeting with lenders the same day. Dunedin’s short term cash flow had been revised to take account of rising adviser fees in relation to exploring restructuring options. The cash position was now about £1.6 million worse than in the short term cash flow produced in July 2008. Fees for professional advisers had climbed steeply and were now of the order of £3.65 million and rising. Dunedin forecast that without financial assistance from the lender group, it would run out of cash by the week commencing 8 September 2008; it needed additional cash of about £3.3 million by the middle of October 2008 (making a number of assumptions, including that the B2 interest due in the period would be fully waived or rolled up). The revised cash flow to maturity of the loans showed payment of interest only on the Super Senior lending – interest in respect of all layers of lending below that was assumed to be waived. Dunedin’s proposal was that there should be waiver of existing covenant breaches and re-setting of the ICR ratio to 1.0x and the LTV ratio to 115%; outstanding principal and interest should be converted to shares to receive any surplus after payment of the Super Senior lenders at maturity; and there should be provision of additional funding of about £13 million (this had risen to about £18 million in September 2008, as Dunedin’s financial position continued its steep decline).

A review for lenders of the re-structuring options by Ernst & Young, also dated 8 August 2008, emphasised that short term liquidity was a pressing issue and was sceptical about Dunedin’s current business plan, which looked “challenging in light of current economic and property market conditions”. According to Ernst & Young, a broad range of market indicators were pointing to a period of potentially prolonged downturn in the commercial property market, which could have “a marked impact” on both the cash flow and the value of the business. They noted that there was a degree of negative sentiment regarding industrial property, and that the valuation of £521 million for the portfolio produced in June may have reduced since then, due to increasing yields and extending void periods.

Fears of continuing falls in the value of the portfolio, such as those referred to by Ernst & Young, were highly relevant to the question whether the CMBS noteholders would ever agree to the re-structuring proposals put forward by RBS and Dunedin. With the fall in value to June 2008, the lower levels of the Super Senior Lenders were already uncomfortably exposed to a possible shortfall in the security for their loans; and if there was a risk the fall in value would continue, increasing their exposure still further, it would be in their interest not to agree to re-structuring of the transaction, but rather to exercise their enforcement rights to accelerate the loans and call in their security as quickly as possible. During August and early September it became clear that the CMBS noteholders were unlikely to agree to the proposed re-structuring. Barclays Capital produced a research note dated 8 September 2008 which cast doubt on whether it would be in noteholders’ interests to extend the transaction, since it forecast that industrial property values were likely to continue to decline into 2010 (improving only modestly by maturity in 2011), thereby increasing their exposure on their loans. On the other hand, if more junior lenders wished to save the transaction, they would have to inject substantial sums of new money at a level subordinate to the Super Senior Lenders, which new money could all be lost without recovery if the transaction nonetheless faltered. Unsurprisingly, none of RBS or the junior lenders showed any appetite to do this.

By the time of a further meeting of lenders on 10 September 2008, it was clear that the CMBS noteholders would only agree to new money being injected into the transaction on a junior basis below Class F (the lowest ranking) of the noteholders. None of RBS or the junior lenders were willing to do this. As a result, Dunedin’s short term liquidity needs could not be met. A full re-structuring of the transaction proved to be out of the question.

Accordingly, due primarily to the falls in the market for commercial and industrial property and the value of the Industrious portfolio, an impasse was reached which meant that re-structuring the transaction was impossible. Dunedin had to appoint administrative receivers on 18 September 2008. The administrative receivers, from Ernst & Young, continued to explore possible re-structuring of the transaction, but could not overcome this fundamental impasse.

In a report dated 10 December 2008, the administrative receivers included this assessment in their summary of the background leading to the receivership:

“The businesses in the operating subsidiaries underperformed against the October 2006 business plan partly due to higher than expected vacant units and recent changes in legislation on non-domestic business property rates on vacant property. However, the key issue for the business was the general market driven deterioration in the valuation of the portfolio which led to significant covenant breaches under the Group’s banking facilities.”

In the event, the realisations in the receivership were substantially less even than the value of the CMBS notes. Only about £221 million was repaid to them against their exposure of £473 million. The outstanding lending by the junior lenders, including the Claimants, was not repaid at all.

By letter from CPIM to RBS as Agent under the JMFA dated 8 October 2008, CPIM registered concerns it had about the flow of information to it, including complaining that it had not been provided with a copy of the Business Plan and October cashflow from 2007 and regarding the explanation it was given in January 2008 for the request to roll up the B2 interest. However, it was only in November 2011 that it launched these proceedings.

The Event of Default claim

In my view, the email correspondence and discussions between Mr Barry and the PV Team in July 2007 (see paras. [70]ff above) did constitute an Event of Default within the scope of clause 23.5(a) of the JMFA, set out at para. [27] above, in that Dunedin (the “Chargor”), “by reason of actual or anticipated financial difficulties,” thereby commenced negotiations with one of its creditors (RBS, acting by the PV Team with respect to the B2 mezzanine lending) with a view to rescheduling part of its indebtedness. Dunedin’s proposal was to reschedule, by means of a formal variation of the existing finance agreements, its obligations to pay half the B2 interest quarter by quarter under the original facility agreed with RBS and instead to roll up that interest element to be paid only at maturity.

Although the correspondence and discussions at that time, and the specific request by Dunedin to RBS to agree to roll up the entirety of the B2 interest until maturity, were in the context of Project Harley, it was already clear to Dunedin and the PV Team that by reason of Dunedin falling significantly behind its original October 2006 business plan to improve the rental income from the Industrious portfolio it would have insufficient cash flow to service the financing structure in 2008 and that as a result Dunedin had a need to secure the rolling up of the B2 interest element to allow for full servicing of all the lending in the transaction. This was the implication from the revised cashflow sent to Mr Barry by Mrs McIntyre on 5 July 2007 pointing out an important error he had made and his acceptance of that error and his email of 6 July 2007 and accompanying July cashflow, which depended upon rolling up the B2 interest.

The fact that the cashflows at this time were predicated upon sale of part of the Industrious portfolio and the continued financing only of the remainder in no way detracts from this. The part to be sold was the weaker part of the portfolio (something of a “basket case”, as Mrs McIntyre described it) which did not fit well with the core portfolio which Dunedin wished to retain. A fortiori, if the non-core element were added back into the cash flow picture for the financing of the whole Industrious portfolio, the cash flow would be expected to be insufficient to meet Dunedin’s debt obligations and its request to roll up the B2 interest would still of necessity lie on the table. Dunedin and the PV Team understood that the request to roll up the B2 interest was seriously made in July 2007 and was not contingent upon the existence of Project Harley or any particular variant of Project Harley. This view is supported by the way in which the PV Team sought legal advice on 17 August 2007 regarding the way in which rolling up the B2 interest could be implemented, while the precise nature of Dunedin’s business plan for 2008 and the following years remained in a state of development. It is also supported by the way in which the request to roll up B2 interest remained a constant element in their discussions until the end of 2008, despite significant changes in the possible scale of sales of property as part of Project Harley or the absence of proposals to sell property as under the Business Plan and October cashflow, and attracted no further significant debate between them.

I also find that the negotiations commenced by Dunedin in July 2007 to reschedule the B2 interest by rolling it up to maturity were commenced by reason of anticipated financial difficulties, within the meaning of that phrase in clause 23.5(a). In that regard, both sides referred to Grupo Hotelero Urvasco S.A. v Carey Value Added S.L. [2013] EWHC 1039 (Comm), in which Blair J had to consider and construe a provision in a lending facility agreement with closely similar wording to clause 23.5(a): see paras. [559]-[598]. Having reviewed the parties’ rival submissions regarding the interpretation of the clause in question, at paras. [573]-[577] Blair J said this:

“573.

My view as to these contentions is as follows. As is explained in Shutter, A Practitioner's Guide to Syndicated Lending, pp. 314-316, the interests of the creditor and borrower are different in respect of this type of provision. The creditor is concerned to safeguard its position prior to the formal commencement of insolvency proceedings. The borrower's concern is not to agree a clause which imposes impractical restrictions on its ability to conduct business.

574.

A borrower in the business context may have constant dealings with respect to its indebtedness, postponing it, renegotiating it, refinancing it, and so on. For this reason, I accept GHU's proposition that the term "rescheduling" implies a degree of formality. Adopting the approach of the IMF in its External Debt Statistics: Guide for Compilers and Users, "rescheduling" refers to the formal deferment of debt-service payments and the application of new and extended maturities to the deferred amount.

575.

However, the reference to formality may be of limited assistance to GHU in this case. This is because sub-clause 21.6(d) of the BBVA Credit Agreement provides that an event of default occurs if the company begins negotiations with any creditor for the rescheduling of any of its indebtedness. It is not limited to the commencement of negotiations with creditors generally with a view to formally rescheduling the company's whole debt book. The primary protection to the borrower against the clause being given an unreasonably wide ambit is to be found in the fact that beginning negotiations for rescheduling will only constitute an event of default if it happens "by reason of actual or anticipated financial difficulties".

576.

In the context of a clause dealing in other respects with insolvency, I consider that the "difficulties" envisaged must be of a substantial nature. That aside, the true construction of such a clause must depend upon its drafting, and, in common with all questions of contractual construction, the factual matrix of the agreement in question. I have set out the English law rules above in the context of material adverse change.

577.

In the present case, part of that matrix concerns the nature of the Urvasco group's business. At the end of 2007, it owed about €2.3 billion to over forty banks, mostly Spanish banks. The business, even in a benign economic climate, required constant negotiations with financial institutions. Such negotiations would not, in my view, constitute an event of default, whether or not resulting in a formal agreement. Carey (as lender) was in any case well aware of the group's position in this respect in general terms. Carey's case, it seems to me, and the case I have to decide, is whether negotiations with particular creditors for the rescheduling of any of its indebtedness occurred, not in the ordinary course of its business, but by reason of actual or anticipated financial difficulties.”

In my view, the financial difficulties anticipated by Dunedin in July 2007 were of a substantial nature, in line with the interpretation of the provision applied by Blair J. The relevant factual matrix included the fact that the financing of the Industrious transaction was highly leveraged at the outset, with tight ICR and LTV covenants, and the ability of Dunedin to service the debt assumed in relation to that transaction was dependent on the business thesis referred to above, that it could significantly improve the income from the portfolio. The significant slippage against that thesis experienced by July 2007 meant that it was already anticipated that, absent rolling up the B2 interest, the interest on both the B2 mezzanine lending and the B1 mezzanine lending would not be paid in full and on time in 2008, which would result in Events of Default at that stage. By reason of the amount of the shortfall, the position could not be saved by reductions in capex (which would in any event undermine Dunedin’s business in other important ways, by making it harder to attract and retain the tenants who were critical to generate income from the portfolio) or other business expenses of Dunedin. In a transaction of this kind, this anticipated inability to service the debt in the finance structure could not be regarded as an ordinary or expected incident of Dunedin’s business or an insignificant aspect of its financing arrangements. If an Event of Default occurred, it could potentially jeopardise the continued viability of a transaction so dependent on optimistic assumptions regarding portfolio value and income (with a corresponding absence of a margin of comfort for error if those assumptions were falsified), as lenders’ rights to accelerate the debt and potentially take control of the transaction would be triggered and there would be a real possibility they could be exercised.

Further, although the absolute amount of the currently payable B2 interest to be rolled up (at about £14 million) was relatively small compared to the overall amount of the lending, it was a significant part (about 7%-8%) of the overall amount of the interest required to be serviced on a quarter by quarter basis from January 2008 until maturity. The inability of Dunedin to service this level of interest payments in the financing structure, which also had a corresponding effect of reducing the margin of comfort in respect of receipt of interest payments for those at the mezzanine B1 level and above, was in itself an anticipated difficulty of a substantial nature. The essence of the syndicated mezzanine lending, in particular, was that it was marketed on the basis that it could be expected to be fully performing to maturity and its commercial value was heavily dependent on expectations that this would occur. Significant erosion of the cushion of income available to meet interest due in respect of it at the level of about 7% or 8% of the entire on-going interest burden, as represented by the inability of Dunedin to pay B2 interest and B1 interest in full as it fell due unless the B2 interest was rolled up, was a substantial financial difficulty in this context. The interests of lenders were sufficiently detrimentally affected by this level of slippage from the original business plan as to make it reasonable to infer that the parties intended that such a situation should be covered by the phrase “financial difficulties” in clause 23.5(a) and so capable of triggering the acceleration and enforcement mechanisms set out in the various facility agreements (with the practical effect that lenders would then be drawn into a negotiation to see if the financial difficulty could be resolved without the need to bring those mechanisms into operation).

In my view, Dunedin’s request to RBS to agree to reschedule payment of the B2 interest by rolling it up to be paid only at maturity was well outside anything which could be said to be in the ordinary course of its business in relation to the Industrious transaction and was significantly outside what the various Lenders would have expected would be likely to occur as an ordinary incident of the transaction at the time they entered into the lending agreements in relation to it: cf Grupo Hotelero Urvasco at para. [595].

My finding that the negotiations between Dunedin and the PV Team in July 2007 constituted an Event of Default under clause 23.5(a) makes it unnecessary to consider the Claimants’ submissions regarding other potential Events of Default in great detail. As regards clause 23.6 of the JMFA (insolvency proceedings), it is sufficient to say that I was not persuaded that the negotiations constituted an Event of Default under that provision, since in my view the procedures and steps referred to in that provision connote a degree of formality (such as the taking of a vote upon a resolution to take some corporate action or the launch of legal proceedings) which was absent from the negotiations in July 2007. In any event, in his closing submissions, Mr Tregear accepted that this provision did not materially add to his submissions based on clause 23.5(a).

As regards clause 23.20 of the JMFA (material adverse effect), I do not consider that the negotiations in July 2007 or the circumstances which led to them constituted something which was “reasonably likely to have a Material Adverse Effect” according to the definition of that term in the JMFA. The definition of Material Adverse Effect (see para. [26] above) is conditioned on “the reasonable opinion of the Agent” (here, the PV Team). The PV Team were entirely relaxed about Dunedin’s proposal to roll up the B2 interest, which only directly affected their mezzanine B2 participation in the transaction. In the circumstances they had good grounds for thinking that RBS would give credit approval for this step (which the EIC and GCC duly did, without any difficulty) and that other lenders higher up the lending stack would consent without raising any problems. In July 2007, and at all times until Marathon refused consent in the increasingly doubtful market circumstances in January 2008, that is what the PV Team firmly believed would happen. If the rolling up of B2 interest were agreed, the financial modelling showed all Dunedin’s financial obligations being met without undue difficulty. Therefore, in July 2007 it could not be said that any circumstance or event occurred which was “reasonably likely” to lead the PV Team as Agent to form the opinion that it would have a material adverse effect on any of the matters listed at (a) to (c) in the definition of Material Adverse Effect. The PV Team clearly did not think that the effect of the rolling up of B2 interest would be materially adverse in relation to any of those matters.

I should also note at this point that the Claimants did not plead a case founded on any alleged Event of Default by reference to the presentation of the Business Plan and October cashflow by Dunedin to RBS in October 2007 – hence the need to focus on the position in July 2007.

Although I have found that there was an Event of Default in July 2007, there was in my judgment no breach of duty on the part of RBS acting by the PV Team in omitting to notify the Claimants that this Event of Default had occurred. I will first address the Claimants’ submissions based on RBS’s obligations under the JMFA alone, then the submissions based on its obligations under the Inter-Creditor Deed alone, and finally the submissions based on a combination of RBS’s obligations under the JMFA and the Inter-Creditor Deed.

The Claimants submitted that RBS (acting by the PV Team), as Agent for the B1 mezzanine lenders, owed general duties at common law as an agent, which had not been excluded by the terms of the JMFA. Mr Tregear referred in particular to paragraph 6-001 in Bowstead & Reynolds on Agency (19^th ed.) for a statement of the range of duties owed by an agent to his principal. He submitted that these duties include an obligation to provide relevant information to the principal, which would cover the information at issue in the claims advanced by the Claimants.

I do not accept this wide submission. Mr Beltrami gave a compelling answer to it. RBS was appointed as Agent in respect of the mezzanine B1 lending by clause 26.1(a) of the JMFA, which provided that each B1 lender appointed the Agent “to act as its agent under and in connection with the Finance Documents,” i.e. the set of agreements which constituted the financing structure for the Industrious transaction. There was no appointment of RBS as an agent on some more general basis, without reference to the terms of the agreements. As Mr Beltrami submitted, the duties of RBS as Agent are defined by these agreements.

Mr Beltrami cited Kelly v Cooper [1993] AC 205 at 213H-214A, where Lord Browne-Wilkinson referred to two fundamental propositions:

“first, agency is a contract made between principal and agent; second, like every other contract, the rights and duties of the principal and agent are dependent upon the terms of the contract between them, whether express or implied. It is not possible to say that all agents owe the same duties to their principals: it is always necessary to have regard to the express or implied terms of the contract.”

Mr Beltrami also cited Saltri III Ltd v MD Mezzanine SA SICAR [2012] EWHC 3025 (Comm); [2013] 1 All ER (Comm) 661 at para. [123(f)], in which Eder J referred to leading authorities at the highest level and observed:

“… where … sophisticated parties have chosen to govern their relationship through arm’s length commercial contracts, the scope and nature of the duties owed between the parties are shaped by the terms of, and the language used in, those contracts … This reflects the general approach of the courts to complicated financial transactional documents, in relation to which there is a particularly strong case for giving effect to the contract the parties have agreed …”.

Some obligations of an agent may be characterised as fiduciary: see Bowstead & Reynolds at para. 6-001. In this case, however, clause 26.4 of the JMFA expressly stated that the Agent was not a fiduciary for the Lenders.

There is nothing inconsistent with Mr Beltrami’s submission in the passage from Bowstead & Reynolds relied on by Mr Tregear. Indeed, if anything, the passage tends to support it, since the authors emphasise the immense breadth of the agency concept at common law, so that it is only possible to refer to common law duties of an agent in very general terms. Contrary to Mr Tregear’s submission, the common law does not stipulate a clearly defined set of obligations which attach to every agency relationship unless excluded by agreement. The authors also emphasise the fact that an agent may work under a written contract which contains detailed provisions as to his duties, refer to certain external sources of regulation of certain types of agent and say “Beyond this, the question is one of interpretation.” Where the parties have entered into detailed commercial agreements of the type at issue here, it is not plausible to suppose that they intended that some potential additional set of vague and unspecific duties might apply over and above those specified in the agreements themselves.

In my judgment, RBS as Agent owed no relevant duties to the Claimants beyond what can be found in the JMFA and the Inter-Creditor Deed, on their proper construction.

The Claimants also submitted that a term should be implied into the JMFA imposing an obligation on RBS as Agent to pass relevant information about the performance of the Industrious transaction to the mezzanine B1 lenders, including the information at issue in the claims advanced by the Claimants. I reject this submission as well. No such general term can be implied into the JFMA.

For the purposes of this part of the judgment, I make the assumption that the PV Team as a Creditor in respect of the mezzanine B2 lending had an obligation under clause 6.7 of the Inter-Creditor Deed to inform itself, in its capacity as Agent in respect of the mezzanine B1 lending, of the Event of Default in July 2007 identified above (albeit in fact, as appears below, I do not think that such an obligation arose). The analysis leading to the conclusion that there was no relevant implied term in the JMFA applies with similar effect if the PV Team did not have any such obligation under the Inter-Creditor Deed.

This case concerns the interpretation of complex, interlocking financial transactional documents, which involve multiple parties and contemplate that there may be changes in the identities of the parties from time to time when interests under the financing agreements are syndicated or sold on. Clarity, certainty and predictability of interpretation are always important factors when considering whether a term should be implied into an arm’s length commercial agreement; they are at a particular premium in a context such as the present, as on an objective approach must be taken to have been intended by all parties to the agreements. See, in this regard, Cherry Tree Investments Ltd v Landmain Ltd [2012] EWCA Civ 736, at [124]-[130] per Lewison LJ and Re Sigma Finance Corp. [2009] UKSC 2; [2010] 1 All ER 571 at [37], where Lord Collins SCJ said this:

“Where a security document secures a number of creditors who have advanced funds over a long period it would be quite wrong to take account of circumstances which are not known to all of them. In this type of case it is the wording of the instrument which is paramount. The instrument must be interpreted as a whole in the light of the commercial intention which may be inferred from the face of the instrument and from the nature of the debtor’s business. Detailed semantic analysis must give way to business common sense: The Antaios [1985] AC 191, 201”.

I was referred, in the usual way, to the leading speech of Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896. I accept Mr Beltrami’s main submissions regarding the relevant approach to contractual interpretation in this case:

I turn, then, to consider the proposed term which Mr Tregear submits should be implied into the JMFA. As pleaded in paragraph 24D of the Amended Particulars of Claim, the Claimants contend that RBS was under an obligation to inform the Claimants of any Event of Default and of the circumstances which constituted an Event of Default by reference to clause 23.5(a) of the JMFA in July 2007. In my judgment, there is no proper scope for this proposed implication.

In the present context, it cannot be said that it is necessary to imply the proposed term. Addressing the question posed in AG of Belize, the parties to the JMFA would not reasonably understand that it contained such a term, not expressed in the document itself. The general points made at (iv) to (ix) above all apply.

Further and of particular relevance here, the JMFA at clause 26.7(d) makes express provision regarding the position of the Agent where it is without instructions from the Lenders (it “may act (or refrain from taking action) as it considers to be in the best interest of the Lenders”) and at clause 26.6(e) makes express provision regarding the position where the Agent receives information in its capacity as such (it has a discretion as to how to proceed: “The Agent may disclose [such information] to any other Party …”). The natural and obvious inference is that the parties intended that these discretions should be governed by the Socimer implied term that they should be exercised in good faith, without capriciousness and rationally: see paras. [35]-[39] above. It is unnecessary to imply any further term to give the JMFA and Inter-Creditor Deed business efficacy or proper effect. I accept that it is obvious that if the Agent in respect of the mezzanine B1 lending receives notice of a Default from another Agent or Lender pursuant to clause 6.7 of the Inter-Creditor Deed (or otherwise), there should be provision allowing for that notice to be passed on by the B1 Agent to the B1 Lenders, since such information is of primary relevance to the Lenders not the Agent. However, clause 26.6(e) and clause 26.7(d) do allow for this, and the Socimer implied term ensures that the discretion there contained will be exercised properly and without capriciousness. This is in my view a strong indicator that the wider and more absolute implied term proposed by the Claimants cannot be read into the JMFA. The Claimants’ proposed implied term would in substance conflict with the express terms of the JMFA (contrary to point (xii) above), by imposing an absolute obligation to pass on such information rather than a discretion, and would offend against the guidance in point (xiii) above for the same reason.

Whilst it might be said that the proposed implied term would be sufficiently certain (see points (x) and (xi) above), that is a minor factor when weighed against the other points referred to above and when one stands back to address the basic question posed in AG of Belize. In fact, however, the certainty of operation of such a term would be illusory to a large extent, since working out whether an Event of Default has in fact occurred may involve difficult evaluative judgments, and the indications in the JMFA are that the Agent should not have responsibility for making such judgments: see, in particular, clause 26.2(e). Therefore, in my view, point (xi) also tends to indicate that such a term should not be implied. The existence of clause 26, and clause 26.2(e) in particular, also gives further force to points (xii) and (xiii) above, as indications that no such implied term could properly be read into the JMFA.

The Claimants’ case based upon an implied term in the JMFA therefore fails. As mentioned in para. [39] above, they chose not to plead any alternative case based on alleged breach of clause 26.7(d) (or, for that matter, clause 26.6(e)) and improper exercise of the discretions contained in them.

The Claimants relied on both limbs of clause 6.7 of the Inter-Creditor Deed (set out at para. [44] above) and a contention that a further obligation should be implied into the Inter-Creditor Deed to the effect that upon being notified or becoming aware of any Default, the PV Team in its capacity as Agent for the mezzanine B1 lenders had an obligation under that Deed to notify the Claimants of the Default. In reliance on the first sentence of clause 6.7, the Claimants submitted that the PV Team in its capacity as Agent for the mezzanine B2 lending became aware of the Default in respect of clause 23.5(a) referred to above, and therefore came under an obligation to notify itself of the Default in its capacity as Agent for the B1 lenders, and then came under an implied obligation to inform the Claimants about this. Alternatively, in reliance on the second sentence of clause 6.7, the PV Team in its capacity as B2 lender became aware of the Default and came under an obligation to notify itself in its capacity as Agent for the B2 lending, and then to notify itself in its capacity as Agent for the B1 lending, and then again came under an implied obligation to inform the Claimants.

RBS submitted that obligations under clause 6.7 were not triggered, because the PV Team did not become aware of any Default. On RBS’s case as explained by Mr Beltrami in opening, on its proper construction clause 6.7 requires that the relevant person (Agent or Creditor, as the case may be) should actually appreciate that an Event of Default has occurred, and the PV Team had no such appreciation in July 2007. RBS also denied that the Inter-Creditor Deed contained the implied term alleged by the Claimants.

In my judgment, on both issues these submissions of RBS are correct.

As regards the first, the trigger condition in relation to both limbs of clause 6.7 (the Agent obligation limb in the first sentence and the Creditor obligation limb in the second sentence) is drafted in identical terms (“on becoming aware of any Default”). “Default” is defined to mean “an Event of Default or any event or circumstance in Clause 23 … which would (with the expiry of a grace period, the giving of notice, the making of any determination under the Finance Documents or any combination of any of the foregoing) be an Event of Default.” In turn, “Event of Default” is defined to mean “any event or circumstance specified as such in Clause 23 …”.

In my view, the definition of “Event of Default” (and hence the definition of “Default”) focuses not just on the underlying facts – the “event or circumstance in Clause 23” (to use the language in the opening part of the definition of Default) – but also on whether that event or circumstance is “specified [as an Event of Default]” in clause 23 (as stated in the definition of Event of Default) or would (with the expiry of a grace period etc) be so specified (reading the definitions of “Default” and “Event of Default” together). This interpretation attaches proper weight to the difference in language between the first part of the definition of Default and the definition of Event of Default. The former uses words (“any event or circumstance in Clause 23”) apt to refer only to the underlying event or circumstance which happens to fall within the menu of events and circumstances set out in clause 23; the latter adds the words “specified as such”, which indicates that it must properly be specified as an Event of Default upon application of clause 23. Therefore, I consider that on its proper construction the trigger condition in clause 6.7 is that the Agent or Creditor becomes aware of the relevant “event or circumstance” in clause 23 and that it qualifies (or would qualify) as an Event of Default under clause 23.

This interpretation is also supported by consideration of clause 26.2(e) of the JMFA, the general scheme of the contractual arrangements (in line with Re Sigma Finance) and business common sense (in line with Rainy Sky v Kookmin Bank):

At this juncture it is relevant to make two further points in relation to clause 26.6(b)(i). First, according to its terms the Agent is entitled to make the assumption of no Default unless it is has actual knowledge of a very limited class of Default, which is narrower than the first sentence of clause 6.7 of the Inter-Creditor Deed (which refers to the Agent “becoming aware of any Default”). This is a situation in which the provisions giving priority to the terms of the Inter-Creditor Deed (clause 1.5 of that Deed and clause 1.6 of the JMFA) would, apart from any other argument, have the effect that the wider obligation under clause 6.7 would apply. An Agent with actual knowledge that an event had taken place and that it was properly to be regarded as an Event of Default could not circumvent its obligation under the first sentence of clause 6.7 to give notice of that to other Agents by referring to the assumption in clause 26.6(b)(i). However, the interpretation of clause 6.7 which I have arrived at minimises the scope for conflict between these interlocking agreements, and therefore better reflects what the parties intended should happen (i.e. that the agreements should operate together harmoniously). Secondly, where an Agent receives a notice of Default from another Agent pursuant to the mechanism in clause 6.7, the opening words of clause 26.6(b) make it clear that the assumption of no Default does not apply. Therefore, where a notice of Default is received by the Agent, clause 26.6(b)(i) would not create any impediment to the operation of clause 26.7(d) (and clause 26.6(e)) in conjunction with the Socimer implied term, as explained above.

One other feature of the finance agreements deserves mention in this context. Clause 19.6 of the JMFA (and the equivalent provision in the other facility agreements), set out at para. [27] above, provides that Dunedin shall notify the Agent “of any Default (and the steps, if any, being taken to remedy it) promptly upon becoming aware of its occurrence …”. The definitions of “Default” and of “Event of Default” in the JMFA are the same as in the Inter-Creditor Deed. The argument for saying that Dunedin should be regarded as being under an obligation to inform the Agent when it becomes aware of the underlying facts which constitute an Event of Default, even though it does not appreciate that they qualify as such, is stronger than in relation to the Agent and Creditors. Dunedin’s duties are not administrative like the Agent’s and it is directly involved in the implementation of the transaction in a way that the Creditors are not. However, I do not consider that clause 19.6 provides any good guide to the interpretation of clause 6.7. The textual indications from the definitions of Default and Event of Default, though not crystal clear, still tend to indicate that the narrower meaning applies for the purposes of clause 19.6, and in my view the other factors explained above clearly outweigh any counter-indication one might derive from clause 19.6, at any rate for the purposes of interpretation of clause 6.7 of the Inter-Creditor Deed.

In his closing submissions, Mr Beltrami put forward a different and still narrower interpretation of the first sentence of clause 6.7, which I do not accept. His suggestion was that an Agent only becomes “aware” of a Default when it has the obligation to notify its own Lenders under the relevant facility agreement, i.e. when it knows of a non-payment Default (see clause 26.2(d) and clause 26.6(b)(i)) or receives written notification of any other default. I was not persuaded by this. The language of the first sentence of clause 6.7 is clear, that the obligation to notify arises where the Agent becomes “aware of any Default”, and in my view it is not possible to cut down the scope of the words “any Default” by the tortuous interpretation of the word “aware” which Mr Beltrami proposed. His proposed process of reasoning on this point comes perilously and illegitimately close to giving primacy to the JMFA over the terms of the Inter-Creditor Deed, contrary to the expressed intention of the parties. It would also create a distinction between the meaning and effect of the phrase “becoming aware of any Default” in the first sentence of clause 6.7 (in relation to an Agent) and the identical phrase in the second sentence (in relation to any Creditor, in relation to whom there is no equivalent of clause 26 of the JMFA) which is wholly unwarranted and contrary to the way in which a reasonable party would interpret that provision.

On the facts, it is quite clear that no-one in the PV Team believed that an Event of Default occurred in July 2007; and, as it happens, nor did Dunedin, the EIC and the GCC or anyone else within RBS who was involved with the transaction. Accordingly, taking each of the two limbs of clause 6.7 in turn, the PV Team as Agent in respect of the B2 lending did not “become aware of any Default” so as to come under a duty to inform itself as Agent in respect of the B1 lending; and the PV Team as Creditor in respect of the B2 lending likewise did not “become aware of any Default” so as to come under a duty to notify itself as Agent in respect of the B2 lending (and then to notify itself as Agent in respect of the B1 lending under the first sentence of clause 6.7).

Secondly, I agree with Mr Beltrami’s submission that on proper application of the relevant principles it is not possible to imply an obligation into the Inter-Creditor Deed to the effect that the Agent under the JMFA who receives notice of an Event of Default from another Agent must pass that notice on to the B1 Lenders. The reasoning here is closely similar to that in relation to the JMFA set out at paras. [149]-[157] above and it is not necessary to repeat it. I emphasise that, on proper interpretation of the JMFA and the Inter-Creditor Deed, there is no lacuna with respect to onward transmission to the B1 Lenders of a notice of Event of Default passed to the PV Team in its capacity as Agent in respect of the B1 lending under clause 6.7 of the Inter-Creditor Deed. If such a notice came into the PV Team’s hands in that capacity, it would have a discretion under each of clause 26.7(d) and clause 26.6(e) of the JMFA to pass that notice to the B1 Lenders, and its exercise of that discretion would be governed by the Socimer implied term: see paras. [35]-[39] above. There is no necessity to imply any further term to give the JMFA and Inter-Creditor Deed business efficacy in relation to the transmission of such a notice.

Mr Tregear sought to derive support for this part of the Claimants’ case from clauses 10.3 (pre-emption rights), 10.4 (conduct of enforcement), 13.1 (cure payments) and 14.1 (purchase option) of the Inter-Creditor Deed (set out at para. [44] above). The first sentence of clause 10.3(a) refers to notice of disposal of a property held as security given by the Security Trustee to the Agents in respect of each tranche of lending; the second sentence stipulates that on receipt of such a notice an Agent may notify the Security Trustee that one or more Lender wishes to purchase the property. As Mr Tregear pointed out, the structure of this provision assumes that the relevant Agent will have passed on the notice from the Security Trustee to the relevant Lenders and obtained instructions whether they wish to purchase the property in question, albeit it contains no express provision saying that the Agent should do this. A similar point can be made about the structure of clause 10.4, which assumes that the Agent will pass on details of enforcement action to the relevant Lenders to obtain instructions how to proceed. Similar points can be made about clause 13.1 and 14.1, which both provide for action to be taken by Lenders after the giving to the Agent of notice of a particular event.

I do not consider that reference to these provisions assists the Claimants. Such guidance as they provide is too indirect to outweigh the force of the reasons pointing against the proposed implied term in relation to clause 6.7. Moreover, as with clause 6.7, it is possible to analyse the operation of these provisions by reference to the discretion of the Agent under clause 26.7(d) and clause 26.6(e) of the JMFA, as governed by the Socimer implied term. And even if that were not correct, the argument for implication of an obligation in these provisions to pass on the relevant notice or information is materially stronger than in the case of clause 6.7, because these provisions each provide within their own text for the action which might be taken by Lenders in consequence of receipt of the notice or information by the Agent, whereas in the case of a notice given to the Agent under clause 6.7 the provision does not itself stipulate the actions which the Lenders may take with respect to the loan (which is a matter for the exercise of rights under the JMFA, subject to any constraints provided for in the Inter-Creditor Deed). Therefore clauses 10.3, 10.4, 13.1 and 14.1 of the Inter-Creditor Deed do not provide any sound basis on which one could confidently infer that the parties intended that there should be an implied term read into clause 6.7.

The Claimants’ alternative submission that the PV Team was aware of the Default (in the requisite sense for the purposes of clause 6.7 of the Inter-Creditor Deed) and then was under an implied obligation to give notice to itself as Agent in respect of the B1 lending in such a form as to trigger an obligation on the PV Team as Agent in respect of the B1 lending under clause 26.2(c) of the JMFA to give notice of the Default to the Claimants can be dealt with more shortly. It too fails because the PV Team did not “become aware of any Default” within the meaning of clause 6.7. It also fails because it is not possible to imply the term suggested, both for similar reasons to those set out above and more particularly because clause 26.2(c) of the JMFA (set out at para. [27] above) clearly only applies where the Agent under that agreement receives notice from “a Party”. This is a term defined in the JMFA (see para. [26] above) to mean a party to the JMFA itself. Accordingly, if the Agent under the JMFA received a notice of a default from a person not a party to the JMFA itself, such as an Agent under another facility agreement, there would be no obligation under clause 26.2(c) to pass that notice on to the Claimants as B1 lenders. No tinkering with the form of the notice which the PV Team might (in its capacity as Agent in respect of the B2 lending, i.e. a person not a party to the JMFA) give to itself as Agent in respect of the B1 lending could transform it into a notice which fell within the scope of clause 26.2(c) of the JMFA, requiring onward transmission to the Finance Parties, including the Claimants.

The analysis above is sufficient to dispose of the Claimants’ Event of Default claim. RBS also relied on further defences under the exclusion clauses contained in clause 26 of the JMFA and in relation to what it maintained was an absence of causation between any breach of duty and loss suffered by the Claimants. I will turn to deal with those further defences after discussion of the Business Plan claim and the negligent mis-statement claim.

The Business Plan claim

The Claimants say that the PV Team should have passed on to them the Business Plan and October cashflow in October 2007, as documents which constituted or should have been treated by the PV Team as constituting Dunedin’s Annual Budget for the purposes of clause 19.1(c) of the JMFA (set out at para. [27] above).

Clause 19.1 provided that Dunedin should supply the PV Team as Agent with sufficient copies of certain documents “for all the Lenders”. In my view, it was clearly intended (on a straightforward reading of clause 19.1 itself) that upon receipt of such documents the Agent should pass them on to the Lenders, since the only point in imposing the obligation on Dunedin to provide sufficient copies for the Lenders was to enable the Agent to do just that. That implied obligation was consistent with the provision in clause 26.2(e) that the duties of the Agent should be mechanical and administrative.

In relation to the obligation in clause 19.1(c), a prior step had to be satisfied by virtue of the definition of “Annual Budget” in the JMFA (set out at para. [26] above), which described it as a budget “prepared by the Borrower and approved by the Agent”. In my view, this provision conferred a discretion on the PV Team as Agent, exercisable subject to constraints imposed by the Socimer implied term described above, to consider any document put forward by Dunedin as its annual budget for a relevant year in order to decide whether to approve it as such. Once approved, Dunedin would be obliged under clause 19.1 to provide the PV Team with sufficient copies of that budget for onward transmission to the Lenders.

In my judgment, the Claimants’ Business Plan claim fails because Dunedin did not put forward the Business Plan and October cashflow as its annual budget for consideration by the PV Team with a view to their giving approval for it as the Annual Budget, so that copies of it could be provided by Dunedin for transmission to the Lenders. The PV Team was not asked by Dunedin to treat and approve the Business Plan and October cashflow as the Annual Budget, and accordingly they did not treat and approve it as the Annual Budget (and Dunedin did not then supply copies of it for the Lenders). Accordingly, the PV Team did not become subject to any obligation to pass the Business Plan and October cashflow to the Claimants. (I should make it clear that I do not accept another, distinct argument by Mr Beltrami that the Business Plan and October cashflow could not qualify as the Annual Budget because they depended upon the contingency that rolling up the B2 interest would be approved: it is in the nature of forward looking budgets that the figures in them reflect a range of contingencies, and Dunedin and RBS made the reasonable assumption in October 2007 that this particular contingency would be satisfied so that the October cashflow did indeed reflect Dunedin’s best forward-looking estimate of what would happen in 2008 and beyond).

Further, the PV Team did not act in breach of duty in failing to treat the Business Plan and October cashflow as a proposed Annual Budget – so as to set in motion the requirement for Dunedin to provide sufficient copies for onward transmission to the Lenders - because (judged on an objective basis, as things appeared to the PV Team) Dunedin did not put them forward as such. The discretion of the PV Team (and any attendant obligation under the Socimer implied term) to approve such a proposed Budget therefore never came into operation.

In that regard, although Mr Barry thought that provision of the Business Plan, taken with the October cashflow, amounted to compliance by Dunedin with its obligation under clause 19.1(c) to supply the Agent with the Annual Budget for the Dunedin Group for the next financial year, in my view it plainly did not. The information provided could probably have been adjusted to take the form of a proposed Annual Budget, if anyone complained that one had not been provided, but it was not put forward as such a Budget to be considered for approval by the PV Team. Neither the documents themselves nor the emails by which they were sent, nor any other communication from Dunedin to the PV Team, gave notice or any indication to the PV Team that these were to be considered for approval so that they could become the Annual Budget for distribution to the Lenders. The October cashflow was not in the form of an annual budget; rather, it was presented as a cashflow for a number of years through to maturity of the financing. The Business Plan and October cashflow were sent well in advance of the clause 19.1(c) deadline and did not include the materials which clause 19.1(c) said the Annual Budget should include (such as a profit and loss account and balance sheet). It could not be said that, even though Dunedin said nothing to indicate this, it nonetheless was or should have been obvious to them that the documents were being put forward by Dunedin as (or as part of) its proposed Annual Budget for the purposes of clause 19.1(c). Moreover, the October cashflow contained a profit calculation for RBS which was clearly confidential to RBS and Dunedin, and not for onward transmission to other Lenders (see para. [83] above). This feature would positively have led the PV Team to think that this was not part of a set of materials which it was proposed should be approved and sent to the Lenders (indeed, when the team supplied the October cashflow to Marathon in January 2008, they deleted this calculation: see para. [104] above).

The obligation under clause 19.1(c) to provide an Annual Budget was expressed to be an obligation on Dunedin. If Dunedin failed to provide one, it would be for the Lenders to complain to Dunedin about that (in the event, although no Annual Budget was provided by Dunedin before its financial year end on 31 December 2007, as the Lenders were aware, no Lender complained). It is clear from clause 26 (in particular, Clause 26.2(e) and Clause 26.14(d)) and the scheme of the JMFA that it was not the responsibility of the PV Team, as Agent, to do so. The PV Team was under no obligation, express or implied, to chase Dunedin to ensure that it provided a proposed Annual Budget which it could review and approve so as to bring clause 19.1(c) into operation. That would have been an obligation well in excess of the “solely mechanical and administrative” nature of the duties which the parties intended should rest on the PV Team as Agent: see clause 26.2(e). Nor was the PV Team under any obligation to inform the Claimants of any failure by Dunedin to perform its obligations with respect to provision of an Annual Budget under clause 19.1(c). Such an obligation was unnecessary, since the Lenders would be aware of any such failure and in a position to chase Dunedin for themselves, and again would have been in excess of the “solely mechanical and administrative” nature of the Agent’s duties. It would also have been in conflict with Clause 26.14, which provided that the Lenders were to be “solely responsible” for making their own independent appraisal of risks relating to the adequacy and completeness of any information provided by Dunedin.

Contrary to the Claimants’ case, the PV Team, as Agent under the JMFA, was not under any implied obligation to pass on to the Claimants any financial information actually received from Dunedin which came into the categories of information set out in clause 19 of the JMFA. Nor was the PV Team under an implied obligation to consider from time to time on its own initiative what additional financial information should be sought from Dunedin regarding its financial condition. Such obligations were not consistent with the scheme of the Agent’s duties as set out in clause 26 of the JMFA and the specific information provision requirements in clause 19; would again have extended beyond (well beyond, in the case of the latter proposed implied obligation) the “solely mechanical and administrative” nature of the duties which it was intended to impose on the Agent; and were unnecessary in the scheme of the JMFA.

For reasons similar to those in relation to the alleged implied terms relied on for the purposes of the Event of Default claim, above, all the various ways in which the Claimants pleaded or sought to put their case in relation to implied terms in respect of the Business Plan and the October cashflow (see in particular paragraph 22 of the Amended Particulars of Claim) fall to be rejected. In summary, in the context of the Business Plan claim, it is likewise unnecessary in the requisite sense for the various proposed implied terms to be read into such a carefully and comprehensively drafted agreement as the JMFA.

The PV Team did nothing to indicate to the Claimants that it assumed any responsibility beyond the terms of the JMFA to obtain, consider obtaining or pass financial information to the Claimants. Accordingly, the Claimants’ alternative pleaded case (paragraph 23 of the Particulars of Claim) also falls to be rejected.

This is sufficient to dispose of the Business Plan claim. Further defences in relation to it based on the exclusion clauses in clause 26 of the JMFA and by reference to the evidence on causation are addressed separately below, after discussion of the negligent mis-statement claim.

The negligent mis-statement claim

In my view, when in December 2007 and January 2008 RBS (in its capacity as B2 lender and/or loan note holder, acting by Mr Elliott) provided an explanation why the Claimants’ consent was sought for the B2 interest to be fully rolled up to maturity, with the object of persuading the Claimants to give such consent, RBS assumed responsibility for the accuracy of the explanation given such as to owe the Claimants a duty of care in tort to take reasonable care to ensure that the explanation was accurate: Hedley Byrne v Heller & Partners [1964] AC 465. RBS wanted to secure the Claimants’ consent for its own purposes, and appreciated that in order to obtain that consent it had to offer an explanation why it was being sought. It did not have to speak, but chose to do so. In the emails, Mr Elliott said nothing to indicate that RBS was not assuming responsibility in relation to the accuracy of the explanation given.

This seems to me to be a clear case in which the court should find that the person making the relevant representation has assumed responsibility to the representee to take reasonable care as to its accuracy. The situation in which Mr Elliott gave his explanation was not one governed or regulated by the terms of the JMFA or the Inter-Creditor Deed; on the contrary, he made the request and gave the explanation in support of it with a view to inducing the Claimants to take action which would enable the relevant financing arrangements to be changed. I therefore do not accept Mr Beltrami’s submission, based on authorities such as Standard Chartered Bank v Ceylon Petroleum Corp. [2011] EWHC 1785 (Comm), esp. at [521]; IFE Fund SA v Goldman Sachs International [2006] EWHC 2887 (Comm); [2007] 1 Lloyd’s Rep. 264, at [52]-[54] and [63]; [2007] EWCA Civ 811; [2007] 2 Lloyd’s Rep. 449, at [28]; and Raiffeisen Zentralbank Osterreich AG v Royal Bank of Scotland plc [2010] EWHC 1392 (Comm); [2011] 1 Lloyd’s Rep. 123. at [314], that the contractual context was such as to exclude such a duty of care. The relevant agreements did not purport to determine the respective responsibilities of and risks assumed by a lender seeking consent to a variation of the financing arrangements and a lender from whom such consent is sought.

Mr Beltrami placed particular emphasis upon clause 26.14 of the JMFA (set out at para. [27] above). However, I do not consider that there is anything in that provision which is inconsistent with the imposition of the relevant duty of care in this case. The Claimants’ case is not that the responsibility for appraisal and investigation of risks arising under or in connection with any Finance Document has, by virtue of the duty of care, passed from them. Rather it is that if RBS chose to provide them with information regarding the reason it was requesting them to agree to a change in the financing arrangements, with a view to them making the appraisal for themselves contemplated by clause 26.14, then RBS should take reasonable care to ensure that the information it provided was accurate. Similarly, the Claimants did not seek to avoid the onus on them to make an investigation of the risks involved. Mr Galloway investigated those risks by asking Mr Elliott why the request to roll up the B2 interest was being made. Mr Elliott invited Mr Galloway to rely on his explanation by answering Mr Galloway’s questions (rather than refusing to answer), and without suggesting that RBS assumed no responsibility for the accuracy of his answer or that Mr Galloway should pursue his questions with others (such as Dunedin).

I consider that RBS breached the duty of care referred to. In his email of 29 December 2007 and in his emails in January 2008 in response to Mr Galloway’s queries (paras. [94]-[98] above), Mr Elliott gave a materially inaccurate and misleading account of the reason for the request and of why it was desired to save the cash represented by rolling up the B2 interest in question. I accept Mr Tregear’s submission that these emails contained a material mis-statement of the facts: see para. [100] above. On a fair reading of the explanation given by Mr Elliott in the emails in question, he asserted that the reason for the request was to enable Dunedin to retain cash to spend more on capex so as to improve the quality of the portfolio on an essentially voluntary basis. Contrary to this account, had he exercised reasonable care in answering the questions and providing the explanation for RBS’s request, Mr Elliott should have told Mr Galloway that the predominant reason for the request was that RBS and Dunedin predicted that, absent the rolling up of the interest, the transaction would run out of the cash needed to service the various layers of debt at some point in about mid-2008, and therefore the preservation within the transaction of the rolled up B2 interest was a necessity for the viability of the financing structure through to maturity. (In fairness to Mr Elliott, it should be emphasised that the Claimants did not suggest that Mr Elliott deliberately lied to them in making the statements he did, and I note that in an attempt to persuade Marathon in relation to the same request addressed to it he supplied it with the October cashflow which, by implication, revealed the true picture).

However, the negligent mis-statement claim fails by reason of limits upon the scope of the duty of care. As was obvious from the exchanges between Mr Elliott and Mr Galloway, the sole purpose of the request and of the explanation for it offered in support was to persuade the Claimants to give their consent to roll up the B2 interest. The Claimants did not seek the explanation for the purpose of conducting a wider review of their overall involvement in the Industrious transaction, and RBS did not volunteer the explanation for that purpose. In my view, therefore, the ambit of the duty of care assumed by RBS was limited to that proposed transaction. RBS only assumed an obligation to exercise reasonable care to protect the Claimants against such loss as they might suffer by reason of giving their consent to the rolling up of the B2 interest: compare Caparo Industries plc v Dickman [1990] 2 AC 605, esp. per Lord Bridge at 620H-621F, 622C-E (citing with approval the judgment of Denning LJ in Candler v Crane, Christmas & Co. [1951] 2 KB 164) and 623A; per Lord Oliver at 638C-G, 642G, 643E and 651E-654D; and per Lord Jauncey at 658F and 661D-E; and South Australia Asset Management Corporation v York Montaue Ltd [1997] AC 191 (“SAAMCO”), esp. at 211G-212F per Lord Hoffmann. However, the Claimants suffered no such loss. In the event, though they gave their consent, Marathon did not and the proposed change to the financing arrangements to roll up the B2 interest did not come into effect. The breach of the duty of care had no relevant impact upon the Claimants and they suffered no relevant loss as a result of it. The duty of care did not incorporate an obligation to protect the Claimants against harm in respect of any decision made by them to remain part of the Industrious transaction.

That is sufficient to dispose of the negligent mis-statement claim. However, RBS says it has further effective defences in relation to it (and the other claims) based on the exclusion clauses in clause 26 of the JMFA and by reference to the evidence on causation, to which I now turn.

In relation to the Event of Default claim I have already explained why clause 26.6(b)(i) does not afford direct protection for RBS in the context of the Claimant’s argument based on the Inter-Creditor Deed: see paras. [164] and [166] above.

In relation to the Claimant’s argument based on the JMFA alone, I consider that clause 26.6(b)(i) is clear: the Agent is entitled to behave in relation to the Lenders on the assumption that no Default has occurred, even if the Agent in fact has actual knowledge that a Default – i.e. an Event of Default properly so specified – has occurred, unless the actual knowledge is of “a Default arising under clause 23.1 (Non-payment)”. It is a strong thing to say that an Agent at a particular level of the financing structure would have no obligation to take action to alert the Lenders at that level even if it had actual knowledge that an Event of Default properly so specified had occurred (apart from in relation to a Default under clause 23.1), especially where under the first sentence of clause 6.7 of the Inter-Creditor Deed it would have an obligation in such circumstances to notify the Agents for Lenders at other levels of the financing structure; but I think that the drafting of clause 26.6(b)(i) is clear and clearly has that effect. (One answer to the apparent dissonance with the Inter-Creditor Deed may be that, once an Agent gives another Agent notice of a Default, the second Agent comes under an obligation under Clause 6.7 to give such notice “to each other Agent”, including the first, at which point the assumption in clause 26.6(b)(i) would be disapplied; but in any event the problem, such as it is, is likely to be a limited one, since it is not usual for an Agent to fulfil multiple roles as the PV Team did in this case, and accordingly the sources of information usually available to the Agent, from which it may become aware of a Default, will be highly circumscribed).

In my view, outside the special class of Defaults under clause 23.1, clause 26.6(b)(i) creates a contractual estoppel which would preclude the Claimants from basing their Event of Default claim on an alleged breach of the JMFA alone: see Peekay Intermark Ltd v Australia and New Zealand Banking Group Ltd [2006] 2 Lloyd’s Rep. 511, CA; Springwell Navigation Corp. v JP Morgan Chase Bank [2010] EWCA Civ 1221; [2010] 2 CLC 705, at [143]-[171]; Raiffeisen Zentralbank Osterreich AG v Royal Bank of Scotland plc [2010] EWHC 1392 (Comm); [2011] 1 Lloyd’s Rep. 123 at [230]-[267]. Clause 26.6(b)(i) is a contractual agreement as to the basis upon which the business between Agent and Lenders under the JMFA is to be conducted, even if at certain points in time it does not correspond with the actual facts (in that the Agent in fact came to know that a Default other than under clause 23.1 had occurred). In the context of the JMFA, I do not think that it makes any difference to this analysis that the agreement set out in clause 26.6(b)(i) is as to the assumption the Agent is entitled to make during the course of implementation of the JMFA, as distinct from at the time it was entered into. Such a term is capable of serving a valid commercial objective, by emphasising the mechanical and administrative role of the Agent and (when it applies) precluding the need for argument about the Agent’s state of mind in relation to a particular Default.

RBS placed heavy reliance on clause 26.9 (exclusion of liability). This provides, in sub-paragraph (a), that the Agent “will not be liable for any action taken by it under or in connection with any Finance Document, unless directly caused by its gross negligence or wilful misconduct.” Clause 26.10 (Lenders’ indemnity to the Agent) reflects this standard, by providing for an obligation upon Lenders to indemnify the Agent “against any cost, loss or liability incurred by the Agent … (otherwise than by reason of its gross negligence or wilful misconduct) in acting as Agent”.

Mr Tregear submitted that clause 26.9(a) did not assist RBS. He contended that this provision only applies as an exemption clause in relation to “any action” taken by the Agent, and so did not cover any omission by the Agent or failure to act when obliged to do so by the JMFA or the Inter-Creditor Deed; therefore, it provided no defence in relation to the Claimants’ Event of Default claim and Business Plan claim, which both turned on allegations that RBS had failed to act when it was obliged to do so. In that regard, he drew attention to the contrast between clause 26.9(a) and clause 26.9(b), which provides in terms that no proceedings may be taken against any officer, employee or agent of the Agent in respect of any claim it might have against the Agent “in respect of any act or omission of any kind by that officer [etc] in relation to any Finance Document …” (emphasis added).

Mr Tregear also submitted that the exclusion of liability in clause 26.9(a) is restricted to action taken by the Agent (“any action taken by it”) in its capacity as such. Therefore, the provision provided no defence in relation to the Claimants’ negligent mis-statement claim, which was based on action (the making of a misrepresentation) by Mr Elliott acting for the PV Team and RBS in their capacity as B2 lender or equity participant in the Industrious transaction, and not in their capacity as Agent.

I accept the second of these submissions. I consider that on proper construction clause 26.9(a) only provides for an exemption in relation to action taken by an Agent in its capacity as such. I think that is the natural meaning of the words used, as further supported by the context in which they appear. The exemption appears in a discrete part of the JMFA dealing with the role of Agent and Arranger, which does not on the face of it appear to regulate action taken by a person acting in other roles (as is emphasised by, e.g., clause 26.12). In terms of the general scheme of the standard legal provision contained in clause 26 of the JMFA, it is adventitious whether the Agent is the same legal person as a Lender or equity participant – the Agent need not be; and it is difficult to see any commercial logic in interpreting the exemption as applying to cover action taken by another Lender or equity participant who as it happens also has the role of Agent (but is not acting in that capacity), whereas it would not cover action taken by such Lender or equity participant who happened not to have that role. Clause 26.9(a) falls to be read with clause 26.10, which clearly is intended to reflect it and makes clear that the indemnity it provides for is only available where the Agent is acting as such. Therefore, clause 26.9(a) does not in my view provide a defence to the negligent mis-statement claim. However, that claim fails for other reasons, as explained elsewhere in this judgment.

I do not accept the first of Mr Tregear’s submissions. In my view, on their proper interpretation, the words “any action taken by it” in clause 26.9(a) include any act or omission to act, as RBS contends. Although it is somewhat strained as a matter of ordinary language, I think that the words “any action” as used in this context are capable of covering omissions to act as well acting, taking the notion of action to cover the whole course of conduct of the Agent in relation to the JMFA. The scheme of the JMFA and business common sense point strongly in favour of such an interpretation, and in accordance with the approach in Re Sigma Finance provide the better guide here to the meaning the parties intended the provision to have than an unduly close focus on or narrow reading of the phrase “any action”.

It is difficult to see any commercial logic in limiting the exclusion to circumstances in which the Agent takes positive action, rather than reading it to cover both positive actions and omissions to act. In the context of clause 26 as a whole, with all its indications that the substantive role of the Agent is to be extremely narrow (see, in particular, clause 26.2(e)), it is not plausible to suppose that the parties intended clause 26.9(a) to have the narrow interpretation contended for by Mr Tregear. Indeed, one might think that, if anything, the parties would expect the case for the protective provision in clause 26.9 to apply would be strongest in the case of an omission to act (where the Agent may simply have overlooked its duty through relatively innocent misunderstanding or inadvertence), as compared with the case of positive action being taken (where the Agent would be expected to have applied its mind in deciding what to do), and hence would reasonably expect that provision to be read as covering the former as well as the latter.

Moreover, on a proper reading, I consider that clause 26.9(b) points more in favour of the wider interpretation of clause 26.9(a) urged by Mr Beltrami. Sub-paragraph (b) uses different phraseology from sub-paragraph (a) (“any act or omission of any kind” as opposed to “any action taken”), which weakens the force of the linguistic point made by Mr Tregear. And, significantly, I consider that one commercial purpose of sub-paragraph (b) is to forestall any attempt to subvert the exclusion of liability of an Agent provided for in sub-paragraph (a), by preventing action being taken against an officer, employee or agent of the Agent in similar circumstances. This suggests that sub-paragraphs (a) and (b) should be read together as providing a similar level of protection for both the Agent and any officer etc. of the Agent, which indicates that the words “any action taken” in sub-paragraph (a) should be read to cover omissions as well as acts.

On the basis of this interpretation of clause 26.9(a), I would have held (had it been necessary to do so) that even if the Claimants made out the basic elements of their case for the Event of Default claim and the Business Plan claim, they would have failed to establish liability on the part of RBS by reason of this provision.

In relation to the omission of the PV Team to act to bring the Event of Default to the attention of the Claimants, the Claimants have no pleaded case that RBS acted with gross negligence or wilful misconduct (see paragraph 19.2 of the Amended Reply, where the relevant pleading of gross negligence and wilful misconduct is limited to the Business Plan claim). Accordingly, it is not open to them to pursue such a case. In any event, I do not consider that the PV Team acted with gross negligence or wilful misconduct in relation to the Event of Default claim. Mr Tregear submitted that they were grossly negligent because they failed to read and check on their duties under the JMFA and the Inter-Creditor Deed, but in my view that alone does not establish gross negligence for the purposes of clause 26.9. On a wider assessment, Dunedin and the PV Team believed that the cash flow issue identified in July 2007 was well capable of being resolved without difficulty and would be so resolved; they were very far from believing that any Event of Default as defined in clause 23 had occurred; and they had good grounds for believing that the matter would be resolved without difficulty. Although I have held that an Event of Default did occur, there was in my view clearly no gross negligence or wilful misconduct on the part of the PV Team in failing to recognise this at the time. There was no “serious disregard of or indifference to an obvious risk” to others, including the Claimants, on the part of the PV Team (to adopt the formulation in Red Sea Tankers v Papachristidis [1997] 2 Lloyd’s Rep 547, 586 per Mance J).

As regards the omission of the PV Team to bring the Business Plan and October cashflow to the attention of the Claimants, again I consider that they did not act with gross negligence or wilful misconduct. Even if I were wrong in my assessment that these documents did not constitute documents falling within clause 19.1 of the JMFA, there were good reasons to which I have already referred why the PV Team failed to recognise them as such. Again, there was in my view clearly no gross negligence or wilful misconduct on the part of the PV Team in failing to recognise them as documents which they were obliged to pass on to the Claimants and in failing to appreciate that they owed any other duties to the Claimants in respect of them.

I should perhaps add that in terms of the contractual analysis set out above by reference to clause 26.7(d), clause 26.6(e) and the Socimer implied term, in circumstances where the Agent received notice of a Default either from Dunedin or another Agent and the only rational course was to pass that notice to the Lenders, it might well be the case that a failure to do so would amount to gross negligence. It is unnecessary to explore this further because, as explained above, the Claimants did not pursue any claim based on these provisions.

A further provision in clause 26 on which RBS placed particular emphasis was clause 26.14 (set out at para. [27] above), which provides that each Lender confirms to the Agent “that it has been, and will continue to be, solely responsible for making its own independent appraisal and investigation of all risks arising under or in connection with any Finance Document including but not limited to” matters such as “the financial condition” of Dunedin (sub-paragraph (a)) and “the adequacy, accuracy and/or completeness of any information provided by” the Agent or Dunedin (sub-paragraph (b)). RBS also relied on clause 24.4(b) (also set out at para. [27] above), which includes a similar confirmation on the part of each New Lender, such as the Claimants, joining the financing structure. These are provisions which tend to emphasise, in the scheme of the JMFA and clause 26, the limited, mechanical and administrative nature of the duties of the Agent and which accordingly provide support for the limited interpretation of clause 6.7 of the Inter-Creditor Deed set out above. They also provide a strong reason for rejecting the proposed implied terms on which the Claimants sought to rely, in particular in relation to the Business Plan claim.

However, apart from this, I do not consider that clause 26.14 or clause 24.4(b) provide a distinct defence for RBS in the circumstances of this case. I have already explained why that is so in relation to the negligent mis-statement claim (see para. [186] above). In relation to the Event of Default claim and the Business Plan claim, clause 26.14 and clause 24.4(b) are not inconsistent with and do not preclude reliance by the Claimants on the basic elements of those claims (if they were able to make them out). If RBS had an obligation to inform the Claimants of the Event of Default or to pass on the Business Plan and the October cashflow, that obligation would be to furnish the Claimants with information material to the appraisal and investigation they were required themselves to carry out by virtue of clause 26.14 and clause 24.4(b). Those provisions would not apply at the prior stage to preclude those obligations from arising. Neither provision sets out an agreed basis for the conduct of relations between the Claimants and RBS as Agent which could absolve RBS from providing specific information to the Claimants as required by other terms of the JMFA or the Inter-Creditor Deed. Clause 26.14 and clause 24.4(b) would prevent the Claimants from claiming that RBS should have given any advice or provided any appraisal regarding the significance of the information to be provided as regards matters such as the financial condition or creditworthiness of Dunedin; but the Claimants do not seek to make any such claim.

I have already explained above that the negligent mis-statement claim fails because the Claimants suffered no relevant loss falling within the scope of the duty of care owed by RBS. In this section I address a further defence relied on by RBS in relation to the Event of Default claim and the Business Plan claim. RBS contends that the cause of the loss suffered by the Claimants (loss of the value of their loans to Dunedin) was the decline in the market value of industrial property from the latter part of 2007 and during 2008, in the context of a highly leveraged transaction with little room for comfort in terms of LTV covenants. RBS says that this is a cause of loss which fell outside the scope of any duty owed by it relevant to the Event of Default claim and the Business Plan claim. It relies on the decision of the House of Lords in SAAMCO and the decision of the Court of Appeal in Haugesund Kommune v Depfa ACS Bank (No. 2) [2011] EWCA Civ 33; [2012] Bus LR 230.

SAAMCO concerned claims by lenders against valuers of property to be taken as security in respect of the loans made. The lenders maintained that the valuers had negligently over-valued the property, with the result that the lenders made loans which they otherwise would not have made. As in this case, there was then a general fall in the market value of property which had the result that the lenders suffered a loss through being unable to recover the full amount of their loans through realisation of the security provided. The issue arose whether the negligent valuers should be liable for the full amount of losses suffered by the lenders, including losses attributable to the fall in the market. In significant respects, the House of Lords held that loss attributable to a general fall in the market fell outside the scope of the duty owed by the valuers, with the result that that part of the loss was not recoverable from them. As Lord Hoffmann put it (p. 211G-H), “A plaintiff who sues for breach of a duty imposed by the law (whether in contract or tort or under statute) must do more than prove that the defendant has failed to comply. He must show that the duty was owed to him and that it was a duty in respect of the kind of loss which he has suffered.” The duty owed by the valuers was to exercise reasonable care in making the valuations in question so that the lenders could choose the margin of security they wished to take as a protection against a fall in the market (p. 211C-E). Where the market fall exceeded the margin the lenders believed they had, on the basis of the negligent valuation, the excess was irrecoverable.

Lord Hoffmann, giving the leading speech in the House of Lords, distinguished between cases involving an obligation to advise a person and cases involving an obligation merely to provide information:

“ … a person under a duty to take reasonable care to provide information on which someone else will decide upon a course of action is, if negligent, not generally regarded as responsible for all the consequences of that course of action. He is responsible only for the consequences of the information being wrong. A duty of care which imposes upon the informant responsibility for losses which would have occurred even if the information which he gave had been correct is not in my view fair and reasonable as between the parties. It is therefore inappropriate either as an implied term of a contract or as a tortious duty arising from the relationship between them.

The principle thus stated distinguishes between a duty to provide information for the purpose of enabling someone else to decide upon a course of action and a duty to advise someone as to what course of action he should take. If the duty is to advise whether or not a course of action should be taken, the adviser must take reasonable care to consider all the potential consequences of that course of action. If he is negligent, he will therefore be responsible for all the foreseeable loss which is a consequence of that course of action having been taken. If his duty is only to supply information, he must take reasonable care to ensure that the information is correct and, if he is negligent, will be responsible for all the foreseeable consequences of the information being wrong.” (214C-F)

Lord Hoffmann also distinguished between the measure of damages in an action for breach of a duty to provide information and the measure of damages in an action for breach of a warranty that the information is accurate:

“The measure of damages in an action for breach of a duty to take care to provide accurate information must also be distinguished from the measure of damages for breach of a warranty that the information is accurate. In the case of breach of a duty of care, the measure of damages is the loss attributable to the inaccuracy of the information which the plaintiff has suffered by reason of having entered into the transaction on the assumption that the information was correct. One therefore compares the loss he has actually suffered with what his position would have been if he had not entered into the transaction and asks what element of this loss is attributable to the inaccuracy of the information. In the case of a warranty, one compares the plaintiff's position as a result of entering into the transaction with what it would have been if the information had been accurate. Both measures are concerned with the consequences of the inaccuracy of the information but the tort measure is the extent to which the plaintiff is worse off because the information was wrong whereas the warranty measure is the extent to which he would have been better off if the information had been right.” (216D-F)

In Haugesund Kommune a bank entered into swap contracts with Norwegian local authorities and lent them money under those contracts on the basis of negligent advice from lawyers that the local authorities had capacity to enter into the contracts, whereas in fact they did not. Had the bank known this, it would not have entered into the transaction. The local authorities failed to repay the bank the sums loaned to them under the swap contracts, and the bank sued the lawyers to recover the whole sum lost. The Court of Appeal held, applying the principle in SAAMCO, that in order to recover the bank had to show that the loss suffered fell within the scope of the advice given and followed from its incorrectness. This the bank failed to do. The bank could not show that the loss had been suffered by reason of the invalidity of the transaction, which had been the sole issue within the scope of the lawyers’ duty, rather than due to difficulties or impecuniosity suffered by the local authorities: see esp. paras. [73]-[80]. In rejecting the bank’s claim, Rix LJ observed at para. [80], “It seems to me to be a harsh doctrine to visit a loss in fact due to lack of creditworthiness on a solicitor as being within the scope of his duty to advise as to the validity of a transaction, when that creditworthiness has been entirely within the province of the lender and outside the scope of the solicitor’s duty.”

In the present case, the duties relied upon by the Claimants were duties to provide information, not advice. It is clear from clauses 24.4(b) and 26.14 of the JMFA, among others, that RBS as Agent owed no duty under the JMFA to provide advice regarding the merits of the transaction. Similarly, any duty under clause 6.7 of the Inter-Creditor Deed was only to provide information, not to advise the Claimants what to do in the light of that information.

Nonetheless, I think that it remains relevant to examine the purpose of the duties to provide information under the JMFA and the Inter-Creditor Deed in order to examine the scope of those duties with respect to the type of loss against which Lenders were to be protected. The Claimants say that if they had been provided with notice of the Event of Default or with the Business Plan and October cashflow (as the approved Annual Budget), they would at each point in time when such information should have been provided have taken a decision to exit from the transaction and sell their loans, and would thereby have avoided the later loss in the value of those loans. Could it be said that the relevant duties were imposed to enable a Lender, when provided with information about an Event of Default or with the borrower’s approved Annual Budget, to consider selling its investment? If so, it might be argued that a failure by RBS to comply with such duties had deprived the Claimants of an opportunity to consider (with the benefit of the information which should have been passed to them) selling their loans and withdrawing from the transaction, and that the loss resulting from losing that opportunity did fall within the scope of the duties (cf Caparo v Dickman at p. 652F-G per Lord Oliver).

In my judgment, however, such an argument cannot be sustained. In my view, the primary purpose of the duties in question was to ensure that Lenders would be provided with information regarding the performance of their loans and the underlying business of the borrower with a view to enabling them to consider how to exercise their rights under the various facility agreements in relation to accelerating the debt, calling in the security and so forth. In that regard, the position is similar to that in relation to the purpose of the duty to provide audited accounts in relation to a company reviewed in Caparo v Dickman, which was to assist shareholders to know what action to take in relation to the management of the company rather than to assist them to know whether to invest in (or remain invested in) the company: see 626C-D per Lord Bridge; 653G-654D per Lord Oliver; 661E-662C per Lord Jauncey. Losses in relation to investment decisions fell outside the scope of the duty in question and could not be recovered. So also in this case I consider that losses in relation to the Claimants’ decision to maintain their investments in the Industrious transaction in the form of their loans are outwith the scope of the duties asserted. The fact that a Lender might well wish to take account of information provided pursuant to obligations under the financing agreements when considering whether to invest further or remain invested in the transaction is a purely incidental effect of such obligations; it is not the object or purpose of those obligations to afford the Lender that opportunity and to protect the Lender against loss of such an opportunity.

In relation to the possibility asserted by the Claimants that if the further information had been provided the financial arrangements for the Industrious transaction could have been restructured, the suggested loss likewise falls outside the scope of the duties owed by RBS, for similar reasons. It is in fact difficult to disentangle this aspect of the Claimants’ case from their case regarding loss of the opportunity to sell the loans, since ultimately their main suggestion was that the financing could have been re-structured to such a degree as to allow them to sell their loans.

The Claimants do not suggest that, as a result of being deprived of the information in question, they suffered loss through being disabled from taking some step to protect themselves by reference to their rights under the JMFA or the Inter-Creditor Deed. They were in fact in a highly subordinated position in the financing structure and there was little they could in reality have done to improve their position.

Once one puts to one side, as falling outside the scope of the relevant duties, the contention that the Claimants suffered loss by being deprived of an opportunity to sell their loans or seek a restructuring of the financing at a stage before the Industrious transaction ran into major financial difficulties, the reason for their loss is clear. It is that they had made loans to a borrower who ran into financial difficulties and proved to be unable to repay them, in circumstances where the realisations from the security taken in respect of the loans also proved to be inadequate to ensure that they were repaid. This type of investment loss is clearly outside the scope of the relevant duties asserted by the Claimants. RBS had assumed no responsibility to advise them about the ongoing merits of their investment in the Industrious transaction. As in Haugesund Kommune, the creditworthiness of the borrower was “entirely within the province of the lender” and outside the scope of any duty owed by RBS.

I do not think it is necessary to analyse in more detail the precise reasons why Dunedin ran into financial difficulties and why ultimately the Claimants’ loans were not repaid. However, in case I am wrong about that and it is relevant to separate out different causative strands regarding what led to this outcome, I consider that by far the most important factor was the general decline in property values from late 2007 which created increasingly intense pressure in respect of the LTV covenants and then breach of those covenants. That situation meant that it became very difficult to come up with satisfactory solutions to what was, by comparison, a relatively minor problem in relation to Dunedin’s cash flow as its original business plan took longer to get off the ground than had been hoped. One effect of the decline in values was to make Marathon unwilling to agree the proposed roll up of B2 interest in January 2008. Further consequences of anticipated then actual breach of the LTV covenants was that the whole financing structure was put in jeopardy, as the Super Senior Lenders looked to exercise their security rights in a falling market, in circumstances where the falls in value of the security meant that the Claimants would be left completely exposed, and further intense pressure was put on Dunedin’s cash flow because of the costs it had to incur to try to come up with viable restructuring proposals. The general fall in market values and the LTV problems were in my view clearly outside the scope of any duty owed by RBS.

A lesser, but still significant, causative strand was the general worsening in the economic outlook from the end of 2007, which made it increasingly difficult for Dunedin to let out properties in the portfolio at good rates, and the impact of the imposition of rates in respect of vacant commercial property, all of which put increased pressure on Dunedin’s cash flow in 2008 and made it increasingly difficult to recover the lost ground in relation to cash flow which it had expected to achieve according to the October cashflow. These were matters not anticipated in or covered by the information which the Claimants say should have been given to them by RBS. Again, these were causative factors clearly outside the scope of any duty owed by RBS.

Both sets of causative factors greatly outweighed the modest impact of the cash flow pressures identified in the October cashflow and preceding cashflows from July 2007 in leading to the eventual non-recovery by the Claimants in relation to their loans.

This view is in line with, and supported by, the evidence of Mr Shaw and the assessment of the receivers of Dunedin in the section of their report of 10 December 2008 report quoted at para. [128] above. As Mr Shaw observed, even if the roll up of B2 interest proposed in the Business Plan had been agreed and implemented, “it simply would not have been sufficient to cater for the subsequent … problems which would have been seen.” In his view, the Industrious transaction ultimately failed due to a rapid deterioration in the economy during 2008 causing much higher cash needs even than those expected by Dunedin according to cashflows prepared by it as late as March 2008, compounded by the extent of the fall in real estate prices which had become clear by July 2008. Dunedin’s cash flow position by July 2008 was “very much worse” than had been expected in March 2008.

For the reasons given above, I conclude that even if the Event of Default claim and Business Plan claim survived the other objections to them which I have reviewed above, they would fail at this stage in the analysis.

Finally, RBS also submits that the claims fail for the further reason that in each case the Claimants cannot show that they (acting by CPIM as their investment manager) would in fact have sold their loans had they been provided with information about the Event of Default or with the Business Plan and October cashflow or had the negligent mis-statement not been made. Nor would any restructuring of the lending to Dunedin have been achieved which would have saved the Claimants from the loss they suffered. Although at earlier points in the proceedings the Claimants had also maintained that RBS would have purchased the loans back from them, in closing submissions Mr Tregear made it clear that the Claimants accepted that, if RBS had been approached to re-purchase the loans from the Claimants, it would have refused. I think that is right: there was no good reason why RBS would have felt itself to be under any obligation, moral or legal, to buy back the loans and release the Claimants from the bargain they had made in early 2007.

In relation to the Claimants’ submission that they would have sold their loans to external purchasers, the parties were agreed that, in accordance with the principles in Allied Maples Group Ltd v Simmons & Simmons [1995] 1 WLR 1602, CA, the first stage of the analysis on this issue should be for the court to assess on the balance of probabilities whether CPIM would have sought to sell the loans, and if the answer to that inquiry was positive the court should assess the price which would have been obtained in the market or value the lost opportunity to sell them. This part of the case turns on an assessment of what CPIM (acting in particular by Mr Galloway) would in fact have sought to do and on an assessment of the state of the market for mezzanine B1 loans in this type of transaction at the relevant times.

The background to the assessment is that the market for mezzanine B1 loans worsened after about July 2007. The market outlook and valuations for the commercial property market also worsened from about that time. However, as Mr Merchant explained, the general view in the market was that the reduction in values “was more of a temporary blip rather than a sustained downturn, and therefore the majority of investors that didn’t have to sell weren’t looking to sell in late 2007/2008”, so as to avoid crystallising a loss.

The Claimants were passive investors in relation to the loans. They acquired them intending to hold them to maturity. This is the usual pattern for those investing in mezzanine B loans, which are bespoke lending arrangements which are comparatively illiquid.

Mr Galloway had the primary responsibility within CPIM to assess the creditworthiness of Dunedin and the performance of the loans over time. He was aware that the financing for the Industrious portfolio was highly leveraged with tight LTV and ICR covenants, and was aware that in order to service the lending Dunedin would need to increase the income from the portfolio over time. He was aware from the compliance certificates, quarterly report and CBRE valuation received in 2007 that Dunedin had fallen behind its original business plan to achieve this growth in income. Nonetheless, he remained unconcerned. He remained persuaded that the transaction remained basically sound, presumably on the basis that Dunedin were good managers and could be expected to make up the income shortfall sufficiently as they increasingly got to grips with the Industrious portfolio over time. He did not raise any concerns about the performance of the loans internally within CPIM until well into 2008. He did not press for production of an Annual Budget by Dunedin, in accordance with its contractual obligations, in late 2007. There was no evidence of any kind of heightened scrutiny by him of Dunedin’s performance in relation to the portfolio or the loans in the latter part of 2007 or early 2008, even though he knew its cash flow was subject to some strain.

As Mr Beltrami emphasised, there is a basic tension in the Claimants’ case regarding causation. To the extent that any of the information which they say should have been provided to them showed that there was a serious problem with the loans, that could be expected to undermine the price at which they could be sold in the market and so give rise to a crystallised loss for the Claimants, tending to make sale of the loans unattractive; on the other hand, if the information did not show that there was a serious problem, it is difficult to see why CPIM and the Claimants would wish to depart from their basic investment strategy to hold the loans through to maturity and choose to go through the process of marketing and selling them.

Mr Kramer sought to meet this point by suggesting that CPIM was subject to particular financial pressures in the latter part of 2007 and early 2008 and would have a different (lesser) appetite for risk and for holding mezzanine B loans than others in the general market for such loans; accordingly, CPIM would have wished to sell while at the same time the market price at which they could sell would have been high and at a level acceptable to both CPIM and the putative purchaser. I did not find this evidence persuasive. There was no contemporaneous documentary evidence which indicated that the Claimants or CPIM were under any particular financial pressure to seek to sell any mezzanine B loans held by them in 2007 or early 2008, and there was no pattern of activity at those times which indicated that they were seeking to do that.

In my assessment, had Mr Galloway been told in July 2007 that an Event of Default had occurred as set out above, he would have remained happy for the Claimants to continue to hold their loans to Dunedin. He would not have raised any particular concerns about the position within CPIM, because the information would not seriously have undermined his assessment about the fundamentals of the transaction and its attractiveness for CPIM and the Claimants.

Whilst the circumstances of the Event of Default showed that the cash flow for the Industrious transaction was under pressure, Mr Galloway was already alerted to that possibility. The cash flow problem identified would not have appeared to Mr Galloway to be radically out of line with the risks which CPIM knew it was accepting when it entered into the loan transaction in the first place.

RBS and Dunedin both remained confident that, assuming the B2 interest was rolled up in its entirety, the transaction was sound. There was good reason for that confidence, since Dunedin was already making improvements in the management of the portfolio which would be likely to improve the income from the portfolio, albeit somewhat later than had originally been hoped. Dunedin had a long and successful track record as a property manager. It is likely that Mr Galloway would have accepted all this without demur.

RBS and Dunedin were also both confident that there would be agreement that the B2 interest could be rolled up. There was good reason for that confidence as well. RBS was heavily invested in the Industrious transaction and was willing to forego receipt of cash in the form of the B2 interest until maturity to ensure its continued viability (as the PV Team recommended should happen and the EIC and the GCC eventually agreed without any difficulty), and on the face of it there was no obvious reason why other lenders would not be happy to give their consent. A good indicator of the reaction of an informed third party at the time is that of RBS’s solicitor, who assumed that there would be no difficulty in obtaining the consent of lenders because in effect it was RBS, not them, who proposed to bear the financial cost of improving the overall viability of the transaction in this way: see para. [79] above. It is likely that Mr Galloway’s reaction at the time would have been the same. The proposal that the B2 interest should be rolled up until maturity would have seemed the obvious and most viable and attractive solution to the temporary cash flow strain which Dunedin was experiencing.

By contrast, Marathon’s refusal to give consent in January 2008 was unexpected and was affected by the by then increasingly severe downturn in market values. Even then, Mr Galloway remained relaxed about the roll up proposal. Marathon’s reaction in January 2008 does not provide a sound guide to Mr Galloway’s likely reaction in July 2007 in relation to the Event of Default claim.

For similar reasons, I consider that had Mr Galloway been provided with the Business Plan and October cashflow in October 2007, he would again have remained happy for the Claimants to continue to hold their loans to Dunedin and would not have thought it necessary to raise any particular concerns about that within CPIM. Once again, the proposal that the B2 interest should be rolled up until maturity would have seemed the obvious and most viable and attractive solution to the temporary cash flow strain which Dunedin was experiencing.

Mr Beltrami rightly emphasised passages in Mr Galloway’s evidence in cross-examination about the Business Plan and October cashflow in which, looking at those documents now, he said that nothing jumped out of them to indicate a major problem and that they actually represented good news for the Claimants, in that they showed that even though the property market was becoming worse and there had been slippage against Dunedin’s original cash flow expectations, under the proposed course of action the B1 interest due to the Claimants would be paid in full through to maturity. In substance, the Business Plan and October cashflow would simply have provided more detailed figures to illustrate and explain the same basic picture of which Mr Galloway was already aware, that there had been slippage against Dunedin’s original cash flow expectations and that this put pressure on the cash flow requirements for the finance structure.

Moreover, as the property market worsened at this stage and the secondary market for mezzanine B loans became more difficult, there would have been a real risk that if the Claimants tried to sell their loans they would have had to take a loss on them. This reinforces my assessment that, if provided with the Business Plan and the October cashflow, Mr Galloway would have been happy to sit tight and hold on to the loans. I consider that his reaction would in all probability have been the same as that of other participants in this market, as explained in Mr Merchant’s evidence referred to above.

Finally, I turn to assess the position which would have arisen had Mr Elliott not made the mis-statement in December 2007/January 2008, but had explained accurately why the request to roll up the B2 interest was being made. By early 2008, the outlook for the general property market had got markedly worse and, reflecting that, the secondary market for mezzanine B loans had deteriorated.

If Mr Elliott had given an accurate explanation of the reason for the request at this stage, by reason of the mounting concerns about what was happening in the property market I consider that the probability is still that Mr Galloway would not have raised the issue internally within CPIM. He had not raised any issue of concern even as the basic picture of slippage by Dunedin against its original cash flow predictions had emerged in 2007, and if Mr Elliott had given an accurate explanation of the request to consent to rolling up the B2 interest at this stage I do not think that it would have been so at variance with that basic picture as to cause Mr Galloway to raise it within CPIM as a concern. That is particularly so since it would have been appreciated that RBS had got all necessary internal credit approvals to proceed to put forward a firm request to external lenders for their consent, so that it appeared that the problem was being actively addressed and was likely to be resolved in a satisfactory way. Mr Galloway would still have assessed that the fundamentals of the Industrious transaction remained good and broadly in line with CPIM’s original expectations. I see no reason to think that his assessment in that regard would have been significantly different from that of the PV Team, the EIC and the GCC of RBS, which had approved the roll up of the B2 interest shortly before. The proposal to roll up the B2 interest would still have seemed to Mr Galloway to be the obvious and most viable and attractive solution to the temporary cash flow strain which Dunedin was experiencing. Albeit he was not given the full picture, it is significant that his reaction was to approve the proposal when Marathon refused to consent: again, Marathon’s reaction does not provide a sound guide to Mr Galloway’s or CPIM’s likely reaction (and on the evidence it seems that even Marathon did not attempt to sell its loans). At this point, with the worsening market, the Claimants would only have been able to sell the loans (if at all) at a considerable loss. It is likely that Mr Galloway would have regarded the proposal to roll up the B2 interest as a satisfactory way forward and would have strongly preferred to hold on to the loans in the hope and expectation that the Claimants would thereby avoid crystallising a loss, again in line with Mr Merchant’s evidence about what others in the market were doing at this stage.

In my judgment, even if (contrary to my assessment above) Mr Galloway had raised the cash flow issue with senior management in CPIM, including Mr Kramer, on the basis of additional or more accurate information supplied by RBS, it is likely that he would have done so with the recommendation at each stage that no attempt be made at that stage to sell the Claimants’ loans. It is also likely that senior management would have accepted his recommendation on the grounds of the commercial merits at each stage, which Mr Galloway would have explained.

For these reasons, I find that at the first stage in the Allied Maples analysis the Claimants have failed to establish on the facts that there was relevant causation of loss. This finding provides a further reason why the Claimants’ claims fall to be dismissed.

It is not necessary to proceed to the second stage of the analysis. However, I note that at any rate by January 2008, based in particular on the evidence of Mr Merchant and Mr Garfield, I do not consider that there was any significant chance that the Claimants could have sold the loans. Any likely purchaser would have required the problem with Dunedin’s cash flow to be resolved before considering purchase of the loans, and Marathon’s refusal to agree to the roll up of the B2 interest meant that this could not be achieved. Although Mr Garfield (but not Mr Merchant) thought there might have been some hope of selling loans as distressed debt at that stage, the prospect of being able to do so was minimal and not at a level that could give rise to a liability in damages in accordance with Allied Maples.

As to a possible restructuring of the financing for the Industrious portfolio, this suggestion ultimately received little emphasis by Mr Tregear. The evidence which Mr Pearce felt able to give about it was vague and highly speculative. I do not consider that there was ever any real or significant possibility that a restructuring would have been arranged to save the Claimants from loss, either by putting the overall financing of the Industrious transaction into a state in which their loans might be marketable or by preventing the Industrious transaction from failing in 2008.

Care obviously needs to be taken to eliminate the benefit of hindsight in assessing the prospects from time to time of putting a restructuring in place. It would have appeared in 2007 and early January 2008 that the most obvious and, in practice, only potentially viable form of restructuring was for agreement to be reached to roll up the entirety of the B2 interest until maturity. That was the option which Dunedin and RBS sought to investigate and pursue from July 2007. Had CPIM been provided with information about the cash flow problem and the proposed solution in July or October 2007, as Mr Tregear says it should have been, it would have been content that RBS and Dunedin were proceeding in a sensible way to arrange for a satisfactory solution. It would not have sought to pursue any other kind of restructuring - anything else would have been far less obvious and extremely difficult to negotiate with all other parties interested in the financing arrangements.

When in January 2008 it became clear that Marathon would not agree to the rolling up of the B2 interest, there was no significant possibility (if there had ever been one, which is very doubtful) that a different form of restructuring could have been achieved. The economy (and, as a result, Dunedin’s cash flow) were weakening and asset values were falling, putting pressure on both the ICR and LTV covenants. Particularly with concerns regarding an impending breach of the LTV covenants, substantial new funding would have been required to ensure that the Industrious transaction would continue to be viable, and there is no good evidence that anyone would have wished to provide it under the market conditions at this time. More senior lenders would not have wished to put more of their funds at risk, counting instead on the extent of protection they believed they had against loss by being able to rely on security. More junior lenders would not have wished to put more of their funds at risk as the market turned, precisely because the risk of loss in a potentially faltering transaction was beginning to look significant. They would potentially be throwing good money after bad.

This view is supported by what happened within RBS. RBS was very exposed on the Industrious transaction and hence commercially motivated to try to support the transaction and keep it viable if it could. Its solution to the cash flow problem identified in July 2007 was the proposal to roll up the B2 interest. When that did not prove acceptable, it looked at other possibilities for restructuring but could identify none which were either acceptable to it (e.g. putting in significant additional equity) or others in the financing structure. It is difficult to conceive that there would have been better prospects for restructuring the transaction than those looked at by RBS or that there was any person in the financing structure or the general markets better placed than RBS to offer a restructuring solution and the additional finance that would have required.

Mr Shaw’s evidence, addressing the position from February 2008, was that a restructuring of the finance arrangements was not a realistic option. In the event, no viable restructuring proposal emerged under the pressure of events from June 2008.

For the reasons given above, each of the claims fails.

In these circumstances it is not necessary to go on to consider a yet further defence put forward by RBS, of contributory negligence.