A Private Lender’s Duties to the Borrower: “Best Efforts” vs. “Commercially Reasonable Efforts” & Good Faith Obligations in Terminating a Loan

eCaseNote 2024 No. 03

In the recent British Columbia Supreme Court decision of Alderbridge Way GP Ltd. (Re), 2024 BCSC 1433, the Court considered whether a private mortgage lender breached any of its duties of good faith or honest performance in terminating a loan, and if they met their obligations to use reasonable commercial efforts to syndicate the loan.

Between November 2019 and March 2020, Romspen Investment Corporation (the “Lender”) advanced over $143 million to a group of developers (the “Developers”) to finance a construction development project in Richmond, British Columbia. Due to the Lender’s inability to carry a $422 million loan on its own, the Construction Loan Agreement included a condition that the Lender would use its “commercially reasonable efforts” to syndicate the loan by March 31, 2020.

The Lender failed to syndicate the loan under the terms of the Construction Loan Agreement and opted to terminate the loan and suspend further draws and advances to the construction project. This decision ultimately led to the borrowing Developers filing for protection under the Companies’ Creditors Arrangement Act (“CCAA”). The Developers alleged that the Lender’s decision to terminate the loan was a breach of the Construction Loan Agreement and their duty of good faith and honesty in performance of its contractual obligations.

“Best Efforts” vs. “Commercially Reasonable Efforts”

Upon considering that the standard of “commercially reasonable efforts” is lower than that of “best efforts”, the Court concluded that commercially reasonable efforts are not assessed on a correctness or perfection standard, but it is what is reasonable in the circumstances.

In their considerations, the Court heard a submission by the Developers referencing a BC Court of Appeal’s interpretation of “commercially reasonable best efforts”, in which it was determined that the use of the word “best” required the party to take all steps except those that were commercially unreasonable. As the Construction Loan Agreement in this case did not include the word “best”, the Lender was not required to do everything possible to syndicate the loan, but rather to make efforts that made sense given the prevailing commercial realities of the parties.

The Lender’s efforts to syndicate the construction loan were found to be commercially reasonable in the circumstances as it began its preparation of materials and its outreach efforts to potential partners within two weeks of the Construction Loan Agreement being executed, which the Court found to be within a reasonable period of time. The Lender also developed a multi-branch strategy based on the structure of the project to allow for a wider variety of potential partners.

The Lender’s actions it took to syndicate the construction loan were found to be within the range of reasonableness, and its unsuccessful efforts to syndicate the loan were not a result of its failure to act commercially reasonable. Their efforts to syndicate the loan were evidenced by a number of soft commitments in excess of $150 million that ultimately fell through, due in large part to the impending COVID-19 pandemic.

The Developers made arguments for the Lender’s efforts being unreasonable. These arguments brought by the Developers included the Lender’s decision not to use a broker to assist in the syndication effort; not committing to their maximum participation amount in syndicated loan; and offering an initial interest rate on the lower-end within the market range, all of which the Court rejected as being unreasonable.

Was Terminating the Loan Contrary to the Lender’s Good Faith Obligations?

The Developers claimed that the Lender breached its good faith obligations by opting not to waive the Syndication Condition in favour of the Developers and continue to fund the project.

The Court found that the Lender had full discretion in exercising their right to waive the Syndication Condition, which was inserted for their sole benefit. A party’s decision to waive such a condition is a party’s decision to not rely on its strict contractual rights. The Court referred to the Supreme Court of Canada’s holding that even when principles of good faith are applied, a party is entitled to exercise their strict contractual rights in their own best interests, and the duty of good faith is not to be used to second-guess or scrutinize a party’s motives for doing so.

As the Lender held the right to exercise their own discretion in whether or not to waive the Syndication Condition, they did not breach a duty of good faith by insisting on strict compliance with a term of the contract. The Lender was not required to put the interests of the Developers ahead of its own in consideration of waiving the Syndication Condition, and doing so would provide a benefit to the Developers that was not part of their original agreement.

Important Takeaways

This decision reiterates the importance of drafting contractual terms carefully to maximize protections to the parties. By using terms such as “commercially reasonable efforts” as opposed to “best efforts”, it protected the Lender by lowering the threshold of its obligations in the situation it found itself in where the loan was unable to be syndicated.

When a lender has cause to terminate a loan upon a condition having not been met, it does not owe a duty of good faith to the borrower to waive the condition for the benefit of the borrower, even if terminating the loan would result in a detrimental situation for the borrower. A lender is not expected to sacrifice their own best interests for the best interests of the borrower.