Written by Dean Nicholls
Many property developers have had a tough time in recent years. The financial crisis and subsequent recession was bad enough, but often the biggest challenges arose from the hostile conduct of their banks. This conduct has taken many forms, but an all too common complaint has been that banks agreed to fund developments through to completion only to ‘lose their appetite’ part way through and pull the plug.
This scenario typically left developers facing huge losses and, worse still, legal claims for repayment of the outstanding lending. However, the recent Supreme Court’s decision in Carlyle v Royal Bank of Scotland Plc may significantly improve the prospects of some aggrieved developers succeeding in claims for damages against their banks.
Background to the Case
Mr Carlyle had an opportunity to buy land at Gleneagles in order to develop two houses. The seller of the land insisted on a buy-back clause so that he could re-purchase the plots if they were not fully developed by March 2011. In order to complete the development, Mr Carlyle needed a loan of £3.745m. He approached RBS, making it clear that unless RBS agreed to provide funding to buy the plots and construct the houses then he would not proceed.
During a subsequent telephone conversation, RBS’s representative stated ‘You’ll be pleased to know it’s all approved.’ Relying on this verbal agreement Mr Carlyle proceeded, even though the formal loan agreements had not been signed.
Unfortunately, when Mr Carlyle needed to drawdown funds for the construction costs RBS called in the loan and sued Mr Carlyle for £1,449,660.00 (plus interest). This was in August 2008, a time when RBS was confronting its own financial pressures. Putting this in context, four months earlier RBS had announced a rights issue to offset a writedown of £5.9bn, and three months later came the bailout when the British Government took a stake of up to 58% in the RBS Group.
Mr Carlyle complained that RBS had breached their agreement to fund the development to completion and counterclaimed for lost profits.
The critical issue in the case was whether or not, on an objective analysis, RBS had intended to enter into a binding promise to advance funds to Mr Carlyle, not only for the purchase of the plots but also for the construction of the two properties.
At the first hearing the Lord Ordinary found in favour of Mr Carlyle on the basis that RBS had breached a collateral warranty to make development funding available. However, RBS successfully appealed to the Inner House (the highest civil appeal court in Scotland) on the basis that its representative’s phone call was merely confirming a decision in principle and that banks would not oblige themselves to lend in the absence of formal loan documents.
Despite this setback Mr Carlyle remained undeterred and he appealed to the Supreme Court. Finding in favour of Mr Carlyle, Lord Hodge held that even though parties may anticipate that their agreement may later be formalised in a formal written agreement, this does not preclude them from concluding a binding verbal bargain in advance.
Thoughts on the Case
It has been suggested that the outcome of Mr Carlyle’s case is so closely linked to its ‘unique’ facts that it is unlikely to have wider implications. However, experience suggests that the practice of bank staff telling customers that lending is ‘agreed’ (before providing the bank’s standard loan agreements for signature) and then subsequently withdrawing funding is far more widespread.
The reality is that property developers (as well as other commercial borrowers) often rely on such verbal agreements and Mr Carlyle’s case may yet have far reaching implications. If this scenario sounds familiar then you may be able to bring a claim for damages caused by your bank’s breach of its agreement to lend. However, any claims must normally be commenced within six years from the date of breach so it is essential that they are considered and advanced before it is too late.
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