I acted for a bank in successfully defending at trial a claim that it had sold a repossessed property at an undervalue: Aodhcon v Bridgeco  EWHC 535 (Ch). The duty on receivers is analogous to the duty on mortgagees, and in this article published by Lexis PSL I draw on the caselaw to provide practical advice for receivers selling security properties.
The receiver’s duty
The duty owed by a receiver to a mortgagor when selling a property is the same as that owed by the mortgagee to a mortgagor:
- in exercising his power of sale over mortgaged property a mortgagee is under a general duty to take reasonable care to obtain the true market value of the mortgaged property at the time he chooses to sell it (Cuckmere Brick Co v Mutual Finance  Ch 94)
- ‘True market value’ is synonymous with ‘the best price reasonably obtainable’ and ‘a proper price’ (Michael v Miller  EWCA Civ 282)
- a receiver is under the same duty (Silven Properties Limited v Royal Bank of Scotland  EWCA Civ 1409)
- this duty to take reasonable steps to obtain the best price reasonably available is an equitable duty, not a duty in negligence (Medforth v Blake  Ch 86)
Risk of challenge – to whom is the duty owed?
A duty is owed to the mortgagor. In fact this is really a shorthand—the duty is to all those interested in the equity of redemption (Silven Properties Limited v Royal Bank of Scotland  EWCA Civ 1409).
The mortgagor’s action is for an order that the receivers account to the persons interested in the equity of redemption, for the price the receiver should have realised but did not (Silven Properties).
A duty is similarly owed to a guarantor of the secured debt because of the guarantor’s interest that the debt should be paid as far as possible out of the proceeds of sale (Standard Chartered Bank v Walker  1 WLR 1410).
However, there is authority that no duty is owed to a guarantor of unsecured indebtedness (Burgess v Vanstock  2 BCLC 478).
The receivers will also owe a duty to the mortgagee (Silven Properties).
As well as a fiduciary duty, receivers may owe contractual or tortious duties to the mortgagee or debenture holder who appointed them.
Burden and standard of proof
Noting that the duty owed by receivers to the mortgagors has been held to be the same as the duty owed by mortagees to mortgagors, these principles are drawn from cases against mortgagees:
- ordinarily, the burden of proof is on the mortgagor to show that the mortgagee failed to take reasonable care to obtain the best price reasonably obtainable (Aodhcon LLP v Bridgeco Limited  EWHC 535 (Ch))
- a mortgagee will not be found to have been in breach unless he was ‘plainly on the wrong side of the line’ (Cuckmere Brick Co v Mutual Finance  Ch 949,  2 All ER 633)
- this has been equated to the ‘bracket or margin of error’ allowed to a valuer in a negligence action (Michael v Miller)
- where the sale price is just above the sum required to discharge the mortgagor’s outstanding debt, the court will scrutinise the sale with particular care (Aodhcon LLP v Bridgeco Limited)
- there is a recognition that the fact of repossession can taint the property so resulting in it only being capable of sale at a reduced price (Aodhcon LLP v Bridgeco Limited)
- where the mortgagee sells to a a connected or associated person, the burden shifts, and there is a heavy onus on the mortgagee to show that it obtained the best price reasonably obtainable (Tse Kwong Lam v Wong Chit Sen  1 WLR 1349)
- the mortgagee may not sell to himself, for that is no sale at all. This also applies to a receiver (Farrar v Farrars Ltd (1888) 40 Ch D 395 and Hodson v Dears  2 Ch 647)
In an action against a receiver for failure to take reasonable care to obtain the best price reasonably obtainable, it is it necessary to show both: (i) that the receiver failed to take reasonable steps and (ii) that consequently the price obtained was not the market value/best price reasonably obtainable. Expert evidence as to the value of the property will need to be adduced, but it should be noted that:
- the court is looking for the price which should have been obtained, which may be different from a Royal Institution of Chartered Surveyors (RICS) Red Book valuation, that being based on certain assumptions (Aodhcon LLP v Bridgeco Limited)
- expert evidence as to market value may not be accepted if it is not borne out by offers in fact made for the property (Meah v G E Money Home Finance Limited  EWHC 20 (Ch) Michael v Miller)
Use of advisers/selling agents
Because the receiver is required to exercise informed judgment in exercising the sale, it will be prudent to take advice, including (where appropriate) valuation advice, from a duly qualified agent (Michael v Miller).
The receiver cannot escape any risk of liability merely by appointing an agent or by following the advice of a professional adviser: if the agent/adviser is negligent, the receiver who fails as a result to obtain the best price reasonably available will be liable (Michael v Miller, Meah v G E Money Home Finance Limited)
Time of sale/improvements before sale
A mortgagee may chose the time of the sale to suit his own interest, and owes no duty to the mortgagor in relation to the timing of the sale. The same applies to a receiver. However, a duty may arise to exercise the power of sale if, for example, the property includes perishable goods (Silven Properties).
Receivers are not obliged to improve a property before marketing it for sale by:
- spending money on repairs (Meftah v Lloyds TSB Bank  2 All ER (Comm) 741)
- making the property more attractive (Garland v Ralph Pay & Ransom  2 EGLR 147)
- working an estate by refurbishing it (Routestone Limited v Minories Finance Limited  1 EGLR 123)
If receivers do take steps for example, to investigate or to proceed with an application for planning position, they would be free at all times (subject to any question which may arise in respect of their costs) to halt those steps and exercise their right to proceed with an immediate sale of the mortgaged properties (Silven Properties).
Method of sale
In Aodhcon v Bridgeco the court accepted the following principles:
- how the duty is to be discharged requires the mortgagee to make an informed judgment and, because judgment is required, there are no steps which the mortgagee must definitely take;
- generally, it is for the mortgagee to decide on the manner of sale, if appropriate after having sought expert advice. The property should be properly advertised; that is, advertised sufficiently frequently and sufficiently widespread to reach the appropriate pool of prospective purchasers;
- the mortgagee is entitled to decide the length of time the property should remain available for sale, subject to this—the property must be fairly and properly exposed to prospective purchasers; and
- as the mortgagee is not under a duty to improve the property for sale, by parity of reasoning, the mortgagee is not under a duty, for example, to remove incumbrances from the property. But a mortgagee is under a duty to bring to the attention of prospective purchasers potential advantages that might be achievable, so that, for example, prospective purchasers ought to be informed of the property’s development potential.
In Michael v Miller the Court of Appeal emphasised that it is for the mortgagee to decide in the circumstances of each case how the general duty is to be discharged (subject to any restrictions in the mortgage deed), so that:
- it is for the mortgagee to decide whether the sale should be by public auction or private treaty; in some cases the appropriate mode of sale may be sale by public auction; in others, for example where there is a falling market, it may not; a mortgagee who receives an offer in advance of an auction may have to make a judgment as to whether to accept it or whether to proceed to the auction;
- it is for the mortgagee to decide how the sale should be advertised and how long the property should be left on the market; and
- there is no absolute duty to advertise widely—what is proper advertisement will depend on the circumstances of the case.
Saltri III Limited v MD Mezzanine SA Sicar  EWHC 3025 (Comm), concerned the duty owed by a security trustee, treated the same as that of a mortgagee. Eder J held that:
- the issue of what is required to discharge the duty is a commercial one, to be viewed in the round in practical commercial terms; and
- relying merely on a desktop valuation exercise rather than exposing the property to the market may be insufficient, because of the limitations of such an exercise.
In appropriate circumstances, it may be reasonable to sell a number of properties together on a portfolio basis (Bell v Long  EWHC 1273 (Ch),  All ER (D) 179 (Jun)).
The cases above emphasise that there is no prescribed method for a mortgagee or receiver to discharge the duty to obtain the best price reasonably obtainable. It follows that there is no guaranteed fail-safe approach, for example, as is sometimes thought, putting a property into auction.
What can be drawn from the authorities are examples of the sorts of criticisms that have been made, suggesting some practical steps which receivers would be well advised to think carefully about:
- check carefully that any sales particulars are accurate and that they include reference to any advantages of the property which may not otherwise be obvious;
- check that any selling agents have taken the agreed steps by asking for evidence of use of ‘for sale’ boards or published advertisements;
- take advice on a suggesting asking price; would it be prudent to seek advice from more than one agent;
- keep a record of any offers received and any advice/discussion/deliberations as to whether or not they should be accepted;
- in determining a marketing strategy, take into account any marketing which has already taken place;
- consider carefully, and if appropriate take advice on, the manner of sale, whether by auction or private treaty; and
- if the sale is to be by auction, ensure that it has been adequately publicised and that advice has been taken on the reserve/asking price.