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Duties on sale
Duties on sale
Duties on sale
This page deals with a number of cases and issues arising out of the duty of a mortgagee or receiver to obtain a proper price when selling the property.
Best price reasonably obtainable
Meah v Ge Money Home Finance Limited
 EWHC 20 (Ch)
The court dismissed a borrower’s claim that his lender had failed to obtain the best price reasonably obtainable on sale. Despite serious misgivings about the manner of marketing, the property had been exposed to the market and the eventual sale price was the best price that could have been achieved at the time.
The borrower defaulted in repayment of his mortgage to the lender. The property, described as a “somewhat dilapidated detached house” was repossessed in September 2005 and was put on the market with local agents at the beginning of 2006 at an asking price of £185,000. Within days they received offers at and above the asking price and after increasing the asking price to £245,000 they sold the property in March 2006 for £221,500 to a local developer who intended to convert it into five flats with basement office space, for which planning permission was swiftly obtained.
The borrower brought an action against the lender on the basis that they had failed to take reasonable care to obtain the best price obtainable. He produced a “residual development assessment” from an expert witness, which suggested that the market value of the property, having regard to its development potential, was about £325,000. He therefore claimed the difference.
There were three issues:
Did the lender breach its duty to take reasonable care to obtain the best price reasonably achievable for the property?
If so, did this breach result in the best price reasonably achievable for the property at that time not being achieved?
If so, what was the true market value of the property at the time of its sale?
The High court dismissed the claim and found for the lender.
As to the breach of lender’s duty to take reasonable care to obtain the best price reasonably achievable, it was possible to make a number of criticisms about what the agents had done. Despite the fact that there were no real comparables that could be relied upon to assess market value, it was self-evident that the asking price was set too low. It was also surprising that neither the sales particulars nor advertisements made any mention of the development potential of the property. However, the court only had estate agency evidence from the lender’s agent who marketed and sold the property, to the effect that it was important to set the asking price at a level to generate interest.
Further, that when dealing with a sale by a mortgagee, it was claimed that it was commonly understood that the asking price was not necessarily the price which the vendor was willing to accept because the mortgagee would place a “public notice” in a local newspaper to invite further offers above the price accepted. The evidence given was that sales particulars were circulated to developers and that the development potential would have been obvious. Further, it was pointed out that obtaining a “residual development assessment” of the kind obtained by the borrower was not something that was habitually or ever done by or on behalf of a vendor.
Despite misgivings about the marketing of the property, the court held that the property was sufficiently exposed to the market to enable all purchasers to bid for it. The court was unable to find that the lender was “plainly on the wrong side of the line” (
Cuckmere Brick Co v Mutual Finance Ltd
 Ch 949 per Salmon LJ.)
There was no evidence to establish that the eventual sale price was less than the best price reasonably achievable. Many offers had been made and three notices had been placed in the local newspaper. There was nothing to prevent anyone from making a higher offer. The fact that none of them did so lead to the inescapable conclusion that the best price had been achieved.
Therefore, bearing in mind that the market value is the price which a willing purchaser was prepared to pay for the property to a willing vendor after the property has been exposed to the market for a reasonable period, the court held that the market value had been achieved.
Dispossessed borrowers frequently criticise their lenders for failing to get a better price for the property. They have two options (1) seek to restrain any sale by injunction, or (2) if the sale has gone through, bring an action for an account of what the lender should have received (
Standard Chartered Bank v Walker
 1 WLR 1410). The burden of proof is usually upon the borrower seeking to set aside the sale or challenge the sale price to prove breach of the equitable duty to take reasonable care to obtain the best price reasonably obtainable.
Whilst best price means market value (
Cuckmere Brick Co v Mutual Finance Ltd
 Ch 949), the court will usually apply a “bracket” or margin of error (typically around 10%) (
Michael v Miller
 EWCA Civ 282 - see below).
Whether a lender has discharged its duty is fact sensitive and depends on all the circumstances of the case, but invariably requires satisfactory evidence of valuation and marketing (
Bishop v Blake
 EWHC 831 (Ch)). The most appropriate manner of sale – whether by private treaty, auction or sealed bids (or a combination of them) is a matter for marketing evidence on the facts of each case (
Tse Kwong Lam v Wong Chit Sen
 1 WLR 1349).
On a practical note, claims usually stand or fall on the quality of the borrower’s expert evidence. The court is unlikely to accept vague and generalised assertions from an estate agent that he might have got a better price.
Duty to obtain best price
Michael v Miller
 EWCA Civ 282
The Millers sold a Gloucestershire Estate to Michael and others and took a charge to secure the balance of the purchase price. Michael planted out thousands of lavender and other herbal plants with a view to selling essential oils. They defaulted on repayment of the loan and Miller repossessed, appointing John D Wood & Co as selling agents. They achieved a sale at £1.625M which was subsequently challenged on a number of grounds. After a two-week trial HHJ Weeks QC held, amongst other things, that while the price fell short of the market value of the property it was within the bracket of non-negligent valuations. The mortgagors appealed, contending that the mortgagees were in breach of their duty to obtain the best price reasonably obtainable. They ran a fairly simple but compelling argument that since best price meant market price, the mortgagees were necessarily liable for the shortfall, and that the concept of the bracket was therefore inappropriate.
Jonathan Parker LJ, giving the judgment of the Court made some useful comments about the role of valuers and selling agents; methods of advertising and modes of sale. He held that since a valuer does not breach his duty of care if his valuation falls within an acceptable margin of error, nor will a mortgagee be liable if he takes reasonable care to assess the market value of the property and his assessment similarly falls within an acceptable margin of error. In dismissing the mortgagors appeal he held that the mortgagors arguments about the bracket confused the issue of breach of duty with the measure of damages (applying
South Australia Asset Management Corp. v. York Montague Ltd
 AC 191 at 221F that it is only if the valuer has been found to be negligent that he is liable for all the loss which has been caused by the valuation being wrong i.e. the difference between market price and sale price).
There was another aspect to the case, ie. the effect on market value of the separate value (if any) to be attributed to the lavender. The Judge concluded that it must have had some value and therefore ordered an Inquiry. Jonathan Parker LJ held that the Judge should have properly addressed liability first whether in fact the mortgagees had been in breach of any duty they owed to achieve an uplift in price on account of the lavender, and allowed the mortgagees cross-appeal by directing the Inquiry to include liability as well as quantum.
The main points to bear in mind are that the duty to obtain best price is a duty owed in equity along defined lines see
Fisher & Lightwoods Law of Mortgage
, 11th Edn, para 20, and that while the range and scope of the duty is not closed, it is not yielding much flexibility either. Lenders do need to be alert to subsequent challenge and ensure not only that they employ the right selling agents for the job, but also that they take the precaution of obtaining a decent second opinion. On a straightforward cost/benefit analysis, it may well be worth trying to accommodate the borrowers views on sale so far as reasonably practicable.
Duty of good faith
Meretz Investments NV v ACP Limited
 EWHC 74 (Ch)
One of the fundamental equitable principles for the enforcement of mortgages and the protection of borrowers is that the powers conferred on a mortgagee must be exercised in good faith for the purpose of obtaining repayment. This principle applies also to a receiver and manager. (See
Downsview Limited v First City Corporation Limited
 A.C. 295 at p 312 F per Lord Templeman and
Raja v Austin Gray
 1 EGLR 91 at p 96 per Peter Gibson LJ.)
In practice, there are few cases in which good faith is directly in issue. The defence is usually raised (if at all) in consequence of other issues, such as the timing of repossession and sale, or the manner of marketing, or the selling price.
Further, in a recent first instance decision, the High Court also emphasised that where the mortgagee has mixed motives for exercising the power of sale, and one of the motives was to recover the mortgage debt, his exercise of the power would not be invalidated.
Facts and argument
The facts of the case were complicated, but in essence B and M were interested in the freehold and leasehold respectively of a block of flats. B had granted a lease to X to enable the development of the roof area into penthouses. X had in turn charged the lease to F, a parent company, who in turn had purported to sell the lease to T, who was interested in acquiring one of the penthouses.
B and M raised various claims against X, F and T. Counsel for the Claimants argued that a power of sale would only be properly exercised where the mortgagee had "purity of purpose"; that is to say where the mortgagee's
motive was to recover, in whole or in part, the debt secured by the mortgage. Even if the mortgagee's purpose was to protect his security, rather than to recover the secured debt, that was an illegitimate purpose. Moreover, it was submitted that if the mortgagee had mixed purposes, the requisite purity of purpose was not achieved, and the exercise was improper.
Counsel for the Defendants on the other hand argued that as long as
of the mortgagee's purposes was to recover the debt secured by the mortgage or to protect his security, it did not matter that he had other purposes as well. He referred to
Fisher & Lightwood on Mortgages
(11th ed para 16.13) in which it is said:
"It seems that a mortgagee who genuinely seeks payment of sums due will not be defeated merely because he has an additional
In a judgment of epic proportions Lewison J carefully assessed the authorities and concluded that none of them gave unequivocal support to the proposition that there must be "purity of purpose", and commented that a dissection of a mortgagee's motives is likely to be difficult in practice. Moreover he said that unlike statutory powers conferred for the public benefit, or trustees' powers conferred for the benefit of beneficiaries (being two analogies relied on by the Claimants) a mortgagee's powers are conferred upon him for his own benefit. In such circumstances "purity of purpose" may be difficult to achieve.
On the other hand he said the cases did support the proposition that a power of sale is improperly exercised if it is
part of the mortgagee's purpose to recover the debt secured by the mortgage. But where the mortgagee has mixed motives (or purposes) one of which is a genuine purpose of recovering, in whole or in part, the amount secured by the mortgage, then the exercise of the power of sale will not be invalidated on that ground. In addition, he considered that it was legitimate for a mortgagee to exercise his powers for the purpose of protecting his security. (See in particular paragraph 314 of the judgment).
This case will, if anything, tend to put the defence of good faith out of reach of most disappointed borrowers since it is likely to be rare for a mortgagee ever to embark on repossession and sale unless one of his motives is to protect his security or recover his debt. Further, the judge's comments on the difficulties of carrying out an evidential dissection of the mortgagee's motives may well dissuade many judges from embarking on what may well turn out to be a wholly disproportionate exercise. The moral of the case seems to be that unless lack of good faith can clearly be demonstrated as the mortgagee's fundamental purpose, borrowers may be well advised to try and find alternative means of challenging a repossession or sale.
Duty to obtain best price sale to associated company
Mortgage Express v Mardner
 EWCA Civ 1859
This case contains some useful clarification of the extent of a mortgagees duty and liability when selling at an undervalue.
M defaulted in payment of his residential mortgage to ME. ME took possession; obtained three valuations and put the property on the market for sale. Only one offer was made which fell through. After three months ME sold to an associated company for 68,000, leaving a shortfall debt. Several years later, ME sued for the shortfall and M counterclaimed that the property had been sold at an undervalue. A jointly appointed valuer valued the property at a figure higher than MEs sale price. The county court judge found in favour of M and dismissed MEs claim in its entirety. ME appealed on two grounds (1) the judge had erred on the burden of proof; and (2) the judge had erred in dismissing the claim in its entirety even if ME had sold at an undervalue.
(1) The evidential burden was on the mortgagee to show that it had taken all reasonable steps to obtain the best price reasonably obtainable on the sale of the property. On the facts, the judge had been entitled to conclude that ME had not discharged its duty.
(2) However, the judge had erred in dismissing MEs claim in its entirety. He should have substituted the experts valuation for the best price reasonably obtainable, and allowed ME the difference between that figure (from which would be deducted the estate agents fees and conveyancing costs of the original sale together with mortgage interest which would have accumulated in waiting for a private sale) and the balance of the mortgage debt, with interest.
The burden of proof is normally on the mortgagor or other person seeking to challenge a sale, to prove breach of duty by the mortgagee (
Fisher & Lightwood, Law of Mortgage
, 11th Edn, para 20.23). Here, in view of the conflict of interest in selling to an associated company, the evidential burden shifted to the mortgagee to show that it had taken all reasonable steps to comply with its duty (
Tse Kwong Lam v Wong Chit Sen
 1 WLR 1349). As to the extent of liability, the Court of Appeal was plainly right in identifying the true extent of the mortgagees entitlement, substituting the best price reasonably obtainable for that actually obtained by the mortgagee on sale (
Michael v Miller
Portfolio of properties
Bell v Long
 EWHC 1273 (Ch)
Depending on the evidence, it may be permissible to sell a number of mortgaged properties in a portfolio rather than individually.
In January 2000, administrative receivers were appointed by a bank under a fixed and floating charge over a company’s assets, which included four properties. The receivers engaged selling agents to conduct the marketing and sale of the properties, during the course of which they provided valuations of the individual properties on three standard RICS valuation bases: OMV (open market value); ERP (estimated realisation price) and ERRP (estimated restricted realisation price).
Three of the four properties were on the same street and comprised let offices. The fourth, larger, property was some distance away and comprised 13 suites of serviced offices, some of which were let, the others vacant. All four were placed on the market as investment properties, with the total open market valuations coming in at £955,000. It was anticipated that the bank would make a full recovery on the basis of sales at 75% or more of OMV.
The agents received expressions of interest and offers, including (a) individual offers for three of the properties which matched the total of the open market valuation for all three, and (b) a global offer for all four properties of £730,000.
By April 2000, in view of what was perceived to be changing market conditions, the agents recommended acceptance of the global offer and from that point onwards, they concentrated on achieving a sale of the whole portfolio. There was some competitive bidding, and ultimately the receivers concluded the sale in July 2000 at £775,000.
The claimant – a director and majority shareholder in the company – sued the receivers and the selling agents. He initially ran an allegation that one of the receivers conspired with the purchaser and the selling agents to defraud the company and its shareholders by selling the property at an undervalue. That was effectively abandoned. His main claim was that the receivers had sold at an undervalue and the principal argument was that they had not properly tested the market and should not have opted for a portfolio sale.
Patten J addressed himself according to the traditional principles set out in
Cuckmere Brick Co Ltd v Mutual Finance Ltd
 Ch 949 – that a mortgagee is not a trustee of the power of sale for the mortgagor; that he can consult his own interests etc.
The judge also accepted that the nature of the equitable duty owed by a receiver acting for a mortgagee is effectively the same as a mortgagee owes in equity, and that there is no distinction between an LPA receiver (
Silven Properties Ltd v Royal Bank of Scotland
 1 WLR 997 - see below) and an administrative receiver (
Raja v Austin Gray
 EWHC 1607 (QB)).
Claim dismissed. On the evidence, a portfolio sale was justifiable. There had been some problems in obtaining information about the lettings and there was reliable evidence that the market was changing. The receivers relied on competent advice:
“For an allegation that this advice was negligent to succeed it is not enough to produce evidence which shows with the benefit of hindsight that an alternative strategy could or would have produced a higher return. What has to be demonstrated is that no competent valuer standing in [the agent’s] shoes at the time with the information which he had could reasonably have given the advice contained in his [report]”
The judge concluded that a portfolio sale might be inappropriate if there had been four certain and more valuable offers for the individual properties at the time, but that in view of the uncertainties, a portfolio sale was an acceptable strategy. Even then, there had been competitive tendering for the portfolio.
This is a helpful decision on mortgagees’ (and receivers’) duties on the marketing and sale of a number of properties in a portfolio, rather than individually.
A case such as this will inevitably throw up contested valuation evidence bearing in mind that a portfolio sale will often attract a discount in price of 10-15%. However this decision emphasises that the issue isn’t simply one of mathematics. It turns on a careful assessment of the way in which the agents discharged their duty of care having regard to the particular circumstances in which they were operating. (For a similar approach by the Court of Appeal, see
Michael v Miller
 EWCA Civ 282 - see above).
In so doing, the judge rejected retrospective expert valuation evidence based in large part on the subsequent sale prices of the individual properties, and from which the expert concluded that the values were in fact much higher. The judge said that this did not assist on the question whether the advice given to proceed with a portfolio sale was in breach of duty.
Note, finally, that although the judge took the traditional approach on mortgagees’ duties per
Cuckmere Brick Co Ltd v Mutual Finance Ltd
, and held that the mortgagee could consult its own interests as to when it sold, this now has to be read subject to the provisions of
Mortgage and Home Finance: Conditions of Business, 13.6 (1)
, that in respect of regulated mortgage contracts to which MCOB applies, a lender (which will include his receivers and agents) must ensure that steps are taken to market the property as soon as possible.
Freeguard v Royal Bank of Scotland plc
 All ER (D) 304 (19th May 2005)
Bernard Livesey QC Sitting as a Deputy Judge of the High Court, Chancery Division
F exercised an option to (re) purchase a strip of land comprising 0.06 acre and which provided the only means of access to an adjacent field which had the benefit of planning permission for 5 large houses. The strip of land had previously been charged to the bank and in separate proceedings, the bank established it had priority over F and subsequently proceeded to sell as mortgagee in possession.
The land clearly attracted a ransom value and agents were instructed to sell on that basis. They considered a number of options and chose to negotiate a sale of the ransom strip to the trustees of the adjacent development land to enable both plots to be sold on. The price agreed for the ransom strip was £60,000 and following an informal tender for both plots in which prices ranged from £200-£300,000, a local entrepreneur offered £527,000 which price was accepted.
F claimed that the bank had acted in breach of its equitable duty to obtain the best price reasonably obtainable and in simple terms alleged that the bank should have negotiated longer and harder. The agents were alert to
Stokes v Cambridge
and it was alleged that they should have held out for 50% of the development value.
Where the mortgaged land is a ransom strip, the best price reasonably obtainable on a sale by the mortgagee is not the open market value but is the price which can be obtained only from the person with the special interest in purchasing it the owner of the ransomed land. The best price depends on what that person is prepared to pay when the mortgagee decides to sell. Whilst the bank had a strong negotiating position and in reliance on
Stokes v Cambridge
could have argued for a percentage share of 50% and not less than 33%, the valuation principles on which it relies depends on the artificial concept that there were willing buyers and sellers respectively at the hypothetical figures. There was no evidence that the trustees of the development land were willing to pay more than £60,000, nor would the court infer that they would have done. In any event, in order to succeed in showing that the claimant would be entitled to a surplus over the amount secured, it is necessary to show that the proper price achieved for the ransom strip would have exceeded 205,785 (the balance of the mortgage debt plus costs). The bank had no prospect whatsoever in achieving a sale in excess of this figure.
The unusual feature of this case is that it involved a ransom strip with all the valuation problems that that entailed. The critical requirement in all cases remains the same lenders must employ the right agents to carry out a proper marketing exercise and be alert to the subsequent risk of challenge by having in place a sufficient paper trail concerning valuation and marketing. In any non-standard sale where comparables are hard or impossible to find, agents would be well advised to obtain detailed second opinions. In particular, property litigators will be well aware that the words
Stokes v Cambridge
are like brightly-lit flashing neon signs to prospective claimants. Lenders and their agents can and should do more to prevent the flow of claims.
Sale by receiver
Silven Properties Ltd v Royal Bank of Scotland plc
 EWCA Civ 1409
A receiver is under the same, but no greater, obligations as a mortgagee when selling the property, i.e. to act in good faith and to take reasonable care to obtain a proper price. The receiver in this case was not in breach by failing to get planning permission in respect of some properties and by selling others as part of a portfolio containing less attractive properties.
The case continues a useful statement as to the duties of a mortgagee with a power to sell, which includes the following:
"A mortgagee has no duty at any time to exercise his powers as mortgagee to sell, to take possession or to appoint a receiver and preserve the security or its value or to realize his security. He is entitled to remain totally passive. If the mortgagee takes possession, he becomes the manager of the charged property.. He thereby assumes a duty to take reasonable care of the property secured .. and this requires him to be active in protecting and exploiting the security, maximizing the return, but without taking undue risks. A mortgagee is not a trustee of the power of sale for the mortgagor In default of provision to the contrary in the mortgage, the power is conferred upon the mortgagee by way of bargain by the mortgagor for his own benefit and he has an unfettered discretion to sell when he likes to achieve repayment of the debt that he is owed.. A mortgagee is at all time free to consult his own interests alone as to whether and when to exercise his power of sale.. The mortgagees decision is not constrained by reason of the fact that the exercise or non-exercise of the power will occasion loss or damage to the mortgagorIt does not matter that the time may be unpropitious and that, by waiting, a higher price could be obtained: he is not bound to postpone in the hope of obtaining a better priceThe mortgagee is entitled to sell the mortgaged property as it is. He is under no obligation to take any such pre-marketing steps to increase the value of the property... The mortgagee is free (in his own interest as well as that of the mortgagor) to investigate whether and how he can unlock; the potential for an increase in value of the property mortgaged (e.g. by an application for planning permission or the grant of a lease), and, indeed, (going further) he can proceed with such an application or grant. But he is likewise free, at any time, to halt his efforts and proceed instead immediately with a sale. By commencing on this path, the mortgagee does not, in any way, preclude himself from calling a halt at will: he does not assume any such obligation of care to the mortgagor in respect of its continuance, as the claimants contend. If, however, the mortgagee is to seek to charge to the mortgagor the costs of the exercise that he has undertaken of obtaining planning permission or a lessee, subject to any applicable terms of the mortgage, the mortgagee may be entitled to do so only if he acted reasonably in incurring those costs and fairly balanced the costs of the exercise against the potential benefits taking fully into account the possibility that he might, at any moment, pull the plug on these efforts and the consequence for the mortgagor if he did so. (Paragraphs 13 to 17)."
Preferred Mortgages Limited v Countrywide Surveyors Limited
Chancery Division (Edward Bartley Jones QC) 25 July 2005
Issues about property valuations frequently crop up in claims by borrowers of a sale at an undervalue, and practitioners will know how difficult it is, on occasion, to obtain a reliable second opinion on historical values. Recourse often has to be had to restrospective valuations essentially a desktop appraisal of historical values sometimes using indices of house prices.
In a recent case involving surveyors negligence on a mortgage valuation, the High Court has expressed further caution about the use of retrospective valuations to the extent that the process of retrospective property valuation by working back from later valuations was non-probative and contrary to authority. The correct approach in accordance with
South Australia Asset Management Corp v York Montague Ltd
 AC 191 is to fix a property value by using the information that had been available at the relevant date.
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