Home / Enforcing your negative pledge
10th April 2025
Callum Duff, Solicitor
The recent judgment in Macdonald Hotels Ltd and another v Bank of Scotland plc [2025] EWHC 32 (Comm) highlights some interesting issues concerning a lending bank’s powers to enforce a negative pledge made by its borrowers. The judgment makes it clear that if lenders do not have consistent and transparent policies in place they could be penalised when seeking to enforce their borrowers’ negative pledges.
This article sets out practical steps which lenders may take to protect their rights to enforce negative pledges.
A negative pledge is a clause often found in loan agreements, or associated documents, under which a borrower promises not to dispose of or grant further security over any assets, over which the lender has an existing security, during the term of the loan. A negative pledge protects lenders from the risk of holding security over an asset which is later sold or used by the borrower as security for further loans, which may diminish the protection afforded to the lender by having the agreed security. For example, a negative pledge in a mortgage loan agreement could prevent the borrower from selling the house or granting a further mortgage over the house.
In Macdonald Hotels v Bank of Scotland, the lender refused to allow the borrower to grant security over a hotel which the lender already held security over. The borrower claimed that the refusal was a breach of the loan agreement, arguing that the loan agreement contained an implied term that the lender must (a) act in good faith, (b) take into account all relevant considerations and not take into account irrelevant considerations, and (c) not use its discretion for improper use when seeking to enforce the negative pledge.
The lender argued that it had an unrestricted right to enforce the negative pledge and that there was no such implied term in the loan agreement.
While the borrower was unsuccessful in arguing that the implied term existed in the loan agreement, the court provided some clarity on when a lender can and cannot enforce a negative pledge. In the current case, the court decided that the lender was not entitled to enforce its negative pledge, or refuse consent to the borrower, for reasons that were not connected with the lender’s perceived commercial best interest or when it could be considered that no reasonable lender in the same position could have refused consent. The court’s decision confirms that:
When considering whether to enforce a borrower’s negative pledge, lenders should consider what genuine commercial interest would be preserved by doing so. For example, a lender may enforce a negative pledge to protect the value it has secured by way of an existing charge. However, if the value of the lender’s security is not diminished by the borrower’s further proposed charge, refusing the borrower consent to register such a charge might not be protecting a genuine commercial interest of the lender. Lenders should also consider previous decisions taken when determining whether to enforce a negative pledge. Where the circumstances for a borrower’s request for consent are largely consistent with a previous request of another borrower, the lender’s decision in respect of enforcing a negative pledge should be similarly consistent.
Lenders may take practical steps to ensure they can enforce negative pledges made by its borrowers.
For example, lenders could prepare and publish a policy document noting the commercial interests they will seek to protect when enforcing negative pledges.
It would also be prudent for lenders to document each of their decisions and the reasoning for either enforcing a negative pledge or choosing not to enforce a negative pledge. These documented decisions may be referred to in future, to ensure that the lender is exercising its right to enforce negative pledges consistently.
If a lender is asked to demonstrate consistency in making these decisions, before disclosing any documented decision or reasoning, the lender should be sure to redact any personal data of its borrowers to avoid breaching data protection regulations.
If you would like to discuss your ability to enforce a negative pledge, get in touch with a member of Kuits by emailing callum.duff@kuits.com or calling 0161 832 3434.