Reservation of Rights – is it possible for lenders to have their cake and eat it?

Reservation of Rights and clauses case study

The recent case of Lombard North Central Plc –v- European Skyjet Limited (in liquidation) [2022] ALL ER (D) 11 has raised some questions about the extent to which such clauses and reservation of rights letters are effective.

Lombard made a secured loan to Skyjet in respect of a Bombardier Lear Jet. On 8 November 2012, it purported to terminate the loan, serving notice under the agreement and enforced its security by appointing receivers and selling the Lear Jet for $3.1m, leaving a shortfall of $5.78m.

Skyjet asserted that Lombard was not entitled to terminate the loan agreement and therefore not entitled to enforce its security.

Skyjet had repeatedly failed to pay the monthly instalments when they fell due. The question was whether Lombard could rely on these failures for the purpose of terminating the agreement, and part of that assessment involved looking at whether Lombard had waived any right to terminate the agreement for those failures by virtue of its own actions.

There was a specific email from Lombard that offered Skyjet additional time to clear the arrears and bring the payments up to date, thereby rendering any payment punctual. The Court found that it was implicit in that email that Lombard was waiving any right to treat the payments made to date as being late and as an event of default. Further, Lombard’s decision to assert its contractual entitlement to default interest arising from the late payments was only consistent with Lombard deciding to treat the contract as continuing. Therefore, Lombard was not entitled to terminate on the basis of the “late payments”.

Lombard sought to reply on the “no waiver/delay” clause that appeared in the finance documents and in its correspondence sent subsequent to its specific email offering time to pay. However, the Court found that the correspondence from Lombard went further than a failure to exercise or delay, but was a positive action or assertion of contractual entitlements arising from the “late payments”. Therefore, Lombard could not rely on this clause or its subsequent correspondence.

The conclusion of this case was that Lombard was able to rely on another event of default for the purpose of the termination notice (in this case a breach of representation and warranty) such that the challenge to the termination and subsequent enforcement failed.

What you need to know

In practice, clear communication is key; both with the borrower and within the lender’s internal team.

In Lombard’s case, the relationship manager may simply have been too nice or generous in allowing further time, rather than saying, “we will accept payment, but we maintain that this is late payment and is a default and we are not waiving that.”

A careful balance to be had when a lender’s primary concern is simply to be paid.

If you are concerned about a reservation of rights letter and any of the issues raised in this note, please do contact Katie James of Blake Morgan’s Business Support and Insolvency team.