In this case, the key issue which the High Court examined was whether a bridging loan company had fulfilled its obligations to take reasonable care to obtain the best price reasonably obtainable when selling the property against which the loan was secured.
The Claimant Company, Aodhcon LLP (the “Borrower”), was a special purpose vehicle established by Mr Charles McNicholl as part of his plan to develop 593-5 Roman Road, London, E3 5EL (the “Property”).
The Borrower purchased the Property in March 2007 for a price of £640,000. The purchase was funded in part by a loan from Bank of Scotland Plc and was secured by way of a first legal charge over the Property (the “BOS Loan”).
The Borrower later decided to sell the Property and at around the same time, the BOS Loan was due to expire. In light of this, the Borrower applied to Bridgeco for a bridging loan to complete the redevelopment of the Property and repay the BOS Loan.
In March 2010, Bridgeco obtained a mortgage valuation from Glenny LLP which indicated that the value of the Property with vacant possession, as at that date, was £1.4 million. Glenny LLP had also provided a projected value of £1.25 million for the Property, on the basis of vacant possession and a 90 day period to market and sell the Property.
The Borrower subsequently accepted an offer of a bridging loan from Bridgeco. The loan was in the sum of £750,000 for a term of 6 months (the “Bridgeco Loan”). This Bridgeco Loan was secured by way of first legal charge over the Property. The Borrower drew down the Bridgeco Loan on 7 May 2010 so the term of the loan therefore expired on 7 November 2010.
The Bridgeco Loan expired and between 21 November 2010 and 31 January 2011 the Borrower tried to sell the Property. Various Heads of Terms for the sale of the Property were prepared by several parties at prices between £900,000 and £1,000,000. None of these sales materialised and so on 21 January 2011, the Borrower voluntarily delivered up possession of the Property to Bridgeco. There were several interested parties and three offers were made in relation to the Property, however all fell through, primarily due to a £100,000 Local Authority grant on the Property. Further, Bridgeco was informed on 8 February 2011 of several construction issues at the Property.
Finally, in March 2011, contracts were exchanged between Bridgeco and a company called Perfectlink Estates (the “Purchaser”) for a sale price of £852,000. This was subject to the Local Authority grant, in respect of which the Purchaser provided Bridgeco with an indemnity.
The Borrower claimed that, inter alia, by selling the Property for £852,000, Bridgeco breached its duty as a mortgagee in possession to sell the Property for the best price reasonably obtainable. The Borrower submitted that the Property ought to have been sold for £1.25 million, therefore the price obtained by Bridgeco was significantly lower than this and in breach of Bridgeco’s duty.
When considering Bridgeco’s duty, the Court referred to ten principles relevant to a lender fulfilling its duty to take reasonable care to sell a property for the best price reasonably obtainable:-
A mortgagee has a duty in equity to take reasonable care to sell for the best price reasonably obtainable at the date of exchange of contracts.
The discharge of this duty requires the mortgagee to make an informed judgment. As it is an issue of judgment, there are no specified steps which the mortgagee must take.
Generally, it is for the mortgagee to decide on the manner of sale, if appropriate after having obtained expert advice. The property ought to be properly advertised, in that it is advertised frequently and widely in order to reach a wide range of potential purchasers.
The mortgagee is entitled to decide how long the property should remain available for sale, subject to the requirement that the property is properly advertised.
The mortgagee is not under an obligation to improve the property for sale. In this case, it was not the duty of Bridgeco to remove the grant from the Property. However, a mortgagee is under an obligation to advise prospective purchasers of achievable potential.
Where the sale price is just above the sum required to discharge the debt, the court will scrutinise the sale.
There is an acceptance of the fact that repossession can have a negative impact on the value of the property and this may result in it only being able to achieve a reduced price sale.
The mortgagee will not have breached his duty unless he is plainly on the wrong side of the line.
The fact that a higher price might have been obtained does not necessarily mean that the duty has been breached.
The burden of proving a breach of duty rests on the mortgagor.
The Court made it clear that it will not consider a mortgagee to be in breach of its duty where the power of sale has been exercised in good faith, even where a higher sale price might have possibly been obtained. The basis of this logic is that the mortgagee’s decision is a matter of informed judgment regarding market conditions and market value. The duty of a mortgagee when exercising the power of sale is to take reasonable care to sell for the best price reasonably obtainable, it is not to sell at the best price reasonably obtainable.
The Court was urged by the Borrower to adopt a margin of error approach and apply a margin of 10-15% between the sale price obtained and the market value of the Property; however the Court did not consider it to be appropriate or necessary to fix a mathematical figure on the margin of error. Such an approach would only serve to limit the flexibility of the Court and would depart from the established position that liability was only to be imposed where a mortgagee is plainly on the wrong side of the line.
The Court concluded that Bridgeco was not in breach of its duty as it had engaged agents to market the Property and the Property was marketed at an appropriate price after having obtained marketing appraisals. The Court noted that Bridgeco did not obtain Red Book Market Value valuations, however it indicated that there was no an absolute requirement to do so. In any event, the Red Book Market Value valuation of a property is only one factor which the Court will take into account when deciding whether there has been a breach of the mortgagee’s duty.
The Court did conclude that had a Red Book Market Value of the Property been undertaken as at March 2011, it would have produced a value less than £970,000 as deductions in value ought to be made in light of factors such as a collapsed contract race, the Local Authority grant which encumbered the Property, damage to the Property, the costs of completing works at the Property and the taint which a property will inevitably suffer when repossessed and marketed by a mortgagee in possession.
This decision confirms that the duty of a mortgagee when exercising its power of sale is to take reasonable care to sell the security property for the best price reasonably obtainable. The mortgagee’s duty is not to sell at the best price reasonably obtainable. Further, the mortgagee will not be in breach of this duty unless they are plainly on the wrong side of the line. The mere fact that a higher sale price may have been achievable will not necessarily mean that a mortgagee is in breach of its duty. The decision also clarifies the factors which the Court will review when assessing a mortgagee’s compliance with its obligations.
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