Global menu

Our global pages


A lender’s right to request a valuation may be limited

  • United Kingdom
  • Banking and finance


Legal background

Often, under a contract, one party will have a right to exercise discretion - the contract will give the party the right to take a decision that affects the rights of both parties. In real estate finance an obvious example of this is that, under a facility agreement, a lender will usually have a right to require that valuations be carried out, at the borrower’s cost, in respect of real estate assets over which the lender has security. The lender can exercise this right by calling for a valuation at a particular time – it is not unusual for such a right to be exercisable only once a year unless an event of default is continuing, in which case the lender can call for a valuation at any time.

Following the case of Braganza v BP Shipping Ltd [2015], in instances where a party has the right under a contract to exercise discretion affecting both parties (as set out in the case of British Telecommunications plc v Telefónica O2 UK Ltd [2014]), “in the absence of very clear language to the contrary, a contractual discretion must be exercised in good faith and not capriciously, unreasonably or arbitrarily … this will normally mean that it must be exercised consistently with its contractual purpose”. The rule is intended to prevent a party with discretion under a contract from abusing such discretion. This is known as the “Braganza duty”. There is case law stating that a Braganza duty will apply where the party with discretion has a choice of a range of options, rather than a binary choice whereby a party chooses either to do something or not to do something.

A Court of Appeal case has confirmed that the Braganza duty can apply to the contractual right of lenders to require a valuation. This means that (unless expressly stated otherwise in the agreement), the right of a lender to require a valuation is unlikely to be wholly unfettered and is subject to a Braganza duty.


Much has been written about the case of Property Alliance Group Limited v The Royal Bank of Scotland Plc [2018] because it deals with the issue of LIBOR fixing, but the Court of Appeal also looked at how the Braganza duty affects the right of a lender to require valuations.

By way of background, Property Alliance Group Limited (“PAG”) is a real estate developer and investor with a large portfolio of real estate assets. From 2003 RBS provided financing to PAG, and PAG entered into four swaps in relation to the floating interest rates on the facilities. In 2008, due to the financial crisis, floating rates crashed, which meant that PAG was left paying high interest rates and would have to pay very high break costs if it wanted to terminate the swaps.

In 2010, RBS transferred its relationship with PAG from the team in Manchester which had been dealing with it to the Global Restructuring Group (“GRG”) in London. In 2011, PAG terminated the swaps and had to pay break costs of over £8 million. In both 2010 and 2013, GRG demanded valuations of the properties in PAG’s portfolio over which GRG held security (the “PAG Properties”). PAG brought a claim against RBS in 2013, and stayed in GRG until 2015.

The case, when it came to trial, was primarily of interest because of the LIBOR fixing scandal, as this case was one of the first where this issue was dealt with. PAG brought various claims against RBS, including in relation to LIBOR fixing and misselling of swaps, but importantly for the purposes of this note, PAG brought a claim in respect of RBS having required the valuation of the PAG Properties in 2013. PAG claimed that prior to the 2013 valuation, RBS had already decided that it would not provide refinancing to PAG, meaning that that valuation was pointless. This note is only interested in the valuation claim.

The first instance court rejected all of PAG’s claims – with regard to the valuation claim, it found that RBS’ right to call for a valuation was not fettered by any implied term and, even if it had been, there would have been no breach of such an implied term.

The Court of Appeal, however, held that the right of RBS to require valuations was in fact “not wholly unfettered”. The Court held that there was no question of RBS having a fiduciary duty to PAG, or having any duty to balance its own interests against those of PAG, but that “it can be inferred that the parties intended the power granted by [the relevant clause of the facility agreement] to be exercised in pursuit of legitimate commercial aims rather than, say, to vex PAG maliciously”. This would mean that RBS would have been unable to require a valuation “for a purpose unrelated to its legitimate commercial interests or if doing so could not rationally be thought to advance them”.

On the facts of the case, the Court held that there had not been a breach of this implied duty, on the basis that it had not been shown that the decision not to refinance PAG had been taken prior to the 2013 valuation. The Court also found against PAG on the other claims.

Issues to consider

On the narrow issue of valuations, lenders wishing to exercise their right under a facility agreement to require a valuation should be aware that, if they call for a valuation for reasons other than those connected to the lender’s commercial interests, a borrower could challenge this in the courts. On a wider level though, lenders should be aware of the Braganza duty whenever they have discretion under any contract. In a typical facility agreement and finance documents, for example, there are a number of clauses which entitle the lender to exercise its discretion. A lender should be aware whenever it exercises discretion under a finance document that, if it does so capriciously or arbitrarily, there is a possibility that such action could be challenged.

Borrowers can take some comfort from this judgment in that, even where a lender has what looks like an unfettered right to exercise discretion under a contract, it may be that the courts will find that it is subject to a Braganza duty. Consequently, if a lender acts capriciously or arbitrarily, a borrower may have a legitimate claim against that lender.