Can a lender be held liable for terminating a loan?

Overview: In this case, the Court considered an argument that a private mortgage lender breached the duty of good faith in terminating a loan, a decision which ultimately led the borrower — a construction developer — to file for protection under the CCAA. The Court rejected this argument, finding that the lender was entitled to suspend further draws and advances to the construction project, did not breach any of its duties of good faith or honest performance, and met its obligations to use reasonable commercial efforts to syndicate the loan.

Beginning in November 2019, Romspen Investment Corporation (“Romspen”)—a private mortgage lender specializing in commercial real estate mortgages—provided construction financing to a number of corporate entities (the “Developers”) for the first phase of a large and complex construction development project in Richmond, British Columbia. Romspen and the Developers understood that any construction loan would need to be syndicated because Romspen could not carry a loan of $422 million on its own. Romspen ultimately advanced $143,616,213.23 to the Developers in four separate draws between November 25, 2019, and March 17, 2020.

Romspen attempted, but ultimately failed, to syndicate the loan under the terms of the Construction Loan Agreement. Accordingly, on March 31, 2020, Romspen ceased funding the project, while construction was at its early stages but after a significant amount of money had been advanced. The Developers were unable to secure other financing to proceed with the project and ultimately entered into proceedings under the Companies' Creditors Arrangement Act.

Various disputes arose between the parties that crystallized in a number of actions (the “Related Actions”) filed after the Initial Order was granted. Specifically, Romspen commenced an action seeking judgment against the Developers and guarantors for the outstanding debt owed to it under the Construction Loan Agreement and pursuant to the various guarantees provided by the guarantors. The Developers, guarantors, and a corporate entity (unrelated to the Developers or Romspen) who had agreed with the Developers to pre-purchase a portion of the project (“GEC”) all alleged that Romspen’s decision to stop funding the project on March 31, 2020 was a breach of the underlying Construction Loan Agreement and/or was tortious conduct. These parties commenced their respective actions against Romspen for breaches of contract.

The issues to be determined at the trial of the Related Actions were whether Romspen was entitled to terminate its funding of the project in March 2020, and whether Romspen owed the Developers and/or GEC a duty of good faith and honesty in the performance of its contractual obligations, including in relation to its decision to terminate funding of the project.

Romspen’s obligations to fund draws from the construction facility were clearly subject to the satisfaction of terms and conditions found in the Construction Loan Agreement, and Romspen had a wide discretion in respect of the decision to advance those funds. Therefore, while it was indisputable that Romspen’s obligations to fund under the Construction Loan Agreement were not unconditional, what was arguable was whether or not Romspen’s commitment to provide funding of $212 million was conditional on a successful syndication of the construction facility. Romspen argued that the $212 million commitment was conditional upon the satisfaction of certain conditions, including a successful syndication. The Developers and GEC argued that the $212 million commitment was not conditional upon a successful syndication.

The Court found that when the provisions of the Construction Loan Agreement were read in context, it was evident that there was no obligation for Romspen to provide a minimum funding of $212 million. The Construction Loan Agreement provided that $212 million was the limit of Romspen’s commitment in the circumstances described in the Agreement, and Romspen could have no liability beyond its committed amount.

Romspen argued that, under the terms of the Construction Loan Agreement, it was entitled to suspend funding of the project if the Developers failed to satisfy any one of the approximately 50 funding conditions contained in the Agreement. Among other defaults, there was no dispute that the Syndication Condition was not met. However, the dispute with respect to that funding condition was about whether Romspen made commercially reasonable efforts to syndicate the loan.

The Court concluded that Romspen was entitled to cease funding on March 31, 2020 because the Syndication Condition was not met. Romspen was not obliged to provide a minimum of $212 million to the Developers regardless of whether the Syndication Condition was met. If the parties had intended for Romspen to have a minimum funding commitment, they could have simply said in the agreement that Romspen “has an obligation to fund no less than $212 million” rather than saying, as they did, that Romspen “has no obligation to fund future advances beyond the portion of the Construction Loan Amount set out in Schedule B”. In another words, to stipulate that the limit of something will be X is not to guarantee that the minimum amount of that thing will also be X.

Pursuant to the Construction Loan Agreement, Romspen was required to use its commercially reasonable efforts to syndicate the loan. The standard of “commercially reasonable efforts” is lower than “best efforts”. “Commercially reasonable efforts” did not mean that Romspen was required to do everything possible in the context of the case, stopping only at what was “commercially unreasonable”. In the circumstances of this case, the phrase should be taken to mean that Romspen was required to make efforts that made sense given the prevailing commercial realities and Romspen’s and the Developers’ mutual objective of syndicating the loan.

The syndication of large construction loans is a complex and nuanced process with no set rules of engagement. Notably, in this case, the Construction Loan Agreement was for a multi-hundred-million-dollar loan for a multi-hundred-million-dollar project. Moreover, Romspen had never previously syndicated a loan amount greater than $70 million, nor had it syndicated a loan with more than two partners.

The Court found that Romspen’s efforts to syndicate the construction loan were commercially reasonable in the circumstances. Romspen began its preparation of materials and its outreach efforts to potential partners within a reasonable period of time. It developed a two-tranche strategy based on the structure of the project, which was intended to allow for a wider variety of potential syndication partners as compared with syndication on a pari passu basis, in which all lenders participate on equal terms. This two-tranche structure is common in syndicated construction loans. The fact that Romspen was not successful in its efforts to syndicate was not a result of its failure to act commercially reasonably. The actions it took were within the range of reasonableness. Accordingly, the Court concluded that Romspen did not breach its duty to make commercially reasonable efforts to syndicate the loan as required by the Construction Loan Agreement.

Romspen did not mislead the Developers with respect to the reasons it decided to stop funding the Project. The evidence did not support the allegation that Romspen had disdain for the Project and was looking for ways to “bail”. Rather, the concerns expressed by Romspen were consistent with those of other lenders, the Developers themselves, and at least one member of GEC’s senior executive team. Romspen did not mislead the Developers with respect to the success of its syndication efforts. To the extent that it applied, Romspen met its duty of good faith and honest performance in its performance of the Construction Loan Agreement.

The Court concluded that Romspen was entitled to suspend further draws and advances to the Project when it did on March 31, 2020. Romspen did not breach any of its duties of good faith or honest performance, and it met its obligations to use reasonable commercial efforts to syndicate the loan. The claim against Romspen was dismissed in its entirety.

Judge: The Honourable Justice Majawa

Counsel: Peter Rubin, Peter Bychawski, Joshua Hutchinson and Roy Lou for Romspen Investment Corporation

John Sullivan, Salman Bhura, Karina Alibhai of Harper Grey for GEC (Richmond) GP Inc. and Global Education City (Richmond) Limited Partnership

Howard Shapray, KC of Kornfeld and Nikhil Pandey for Alderbridge Way Limited Partnership, Alderbridge Way GP Ltd. and 0989705 B.C. Ltd.