Grupo Hotelero Urvasco SA v Carey Value Added SL & Anor

A material adverse change clause in a loan agreement is construed according to its terms. Where the clause concerns a borrower’s financial condition, the assessment should normally begin with contemporaneous financial information, although compelling other evidence may be considered. The change must significantly affect the borrower’s ability to perform the transaction, particularly to repay the loan, and must not be merely temporary. A lender cannot rely on circumstances known when the agreement was made, unless they materially worsen. A rescheduling provision may be engaged by negotiations with one creditor, but the negotiations must concern formal deferment or altered maturity arrangements caused by substantial financial difficulties.

GHU claimed damages against Carey for withholding further advances under a loan supporting the development of a London hotel and apartments. Carey counterclaimed for repayment of advances and claimed against GU under a guarantee. The central issue was whether GHU was in default under the contractual arrangements when the April 2008 tranche fell due on 6 June 2008. The court considered material adverse change, negotiations for debt rescheduling, alleged development defaults, the use of subsequent tranches and GHU’s claim for damages.

1. Default and disposition. GHU was in default under the Loan Agreement on 6 June 2008. Carey was therefore entitled to withhold the advance and later cancel the agreement. Carey succeeded on its counterclaim for repayment, and against GU under the guarantee. GHU’s damages claim failed.
2. Material adverse change. “Financial condition” ordinarily requires examination of the relevant financial information, but other compelling evidence may be considered. Materiality requires a significant effect on the borrower’s ability to perform the transaction, especially its ability to repay. The change must not be temporary, and circumstances known to the lender when contracting cannot ordinarily constitute the relevant change. Carey proved a material adverse change in GU’s financial condition, but failed to prove the required representation by GU on 6 June 2008. It failed to establish a MAC in GHU or Urvasco Ltd.
3. Rescheduling negotiations. Clause 21.6(d) of the BBVA Credit Agreement required negotiations with any creditor for rescheduling of indebtedness, caused by actual or anticipated substantial financial difficulties. It did not require negotiations for a wholesale restructuring. Negotiations with Unicaja, and probably Caja Rioja and Ibercaja, constituted the relevant default.
4. Development defaults. The obligation concerning completion by the Long Stop Date could be breached only after that date. Reporting obligations did not extend to every immaterial breach or to Urvasco Ltd’s own non-payment. However, substantial unpaid contractor and professional liabilities falsified the material representation that no outstanding breach existed. The April certification materially overstated development costs incurred in that month.
5. Subsequent tranches. Each tranche had to be transferred by GHU to Urvasco Ltd at the relevant time, subject to limited flexibility. GHU failed to transfer the full second tranche and thereby committed a further default. Clause 6.17 of the SPA consequently did not relieve GHU from repayment.

The judgment records that an earlier summary judgment application by Carey was dismissed: [2011] 1 B.C.L.C. 352. This was a first-instance trial judgment.