Mortgagee – Breach of duty – Economic duress – Claimant seeking damages against defendant bank following partial loss of commercial property portfolio charged to defendant – Whether defendant in breach of duties as bank and mortgagee – Claim dismissed
The claimant commercial property developer claimed damages against the defendant bank arising from the loss of part of the claimant’s portfolio of commercial properties in northern England, which were charged to the defendant in 2006 to secure a £75m loan. The agreement between the parties provided for various events of default including loan to value covenants, with the defendant entitled to call in the whole amount owing if an event of default occurred.
The claimant was unable to repay the debt in full when the loan facility expired in late 2009. By then the value of the portfolio had dropped sharply. In August 2010, the claimant entered into written agreements with the defendant enabling him to salvage a proportion (less than half in value) of the portfolio for which he paid the bank £20.5m. The rest of the portfolio was transferred to a subsidiary of the defendant (WR). The claimant said those agreements could be rescinded on the ground of economic duress. He claimed damages in tort or in lieu of rescission.
The claimant relied on breaches of: a duty (in tort and contract) to provide banking services with reasonable care and skill; a duty in contract to act in good faith and not for an ulterior purpose unrelated to the defendant’s legitimate commercial interests; and a duty as mortgagee to sell mortgaged assets in good faith and to take reasonable steps to obtain the best price reasonably obtainable. Moreover, the agreements had been procured by threats amounting to the tort of intimidation, in that the threat to arrange for the entire portfolio to be transferred in a “prepack” sale to WR amounted to a manifest threat to commit an unlawful act, namely, the defendant’s breach of its duties as a mortgagee.
Held: The claim was dismissed.
(1) In the provision of lending services to the claimant, the defendant was not bound to protect him against the consequences of breaching the loan to value covenant and to refrain from exercising its contractual rights in response. It was not relevant that the drop in the market value of the properties was a matter beyond his control.
The defendant was not at fault in the conduct of the restructuring negotiations. They were at arm’s length and commercial. The defendant’s duty of skill and care did not require it to negotiate the restructuring any differently. It was not required by its duty to the claimant to advise him how to resist its attempts to get more money. The defendant’s aim had not been to engineer a default by the claimant to enable it to seize the property portfolio; the plain breach of the loan to value covenant was such an event.
There was no breach of the duty to exercise reasonable skill and care in the defendant’s rejection of the claimant’s various offers and to agree £20.5m for the rump of the portfolio. The defendant was entitled, as a matter of commercial judgment, to reject the first two offers made by the claimant. It had properly held out for a higher price than the £17.5m offered and its judgment was vindicated when that offer was accepted. The defendant’s provision of lending services did not fall below the standard required.
(2) In selling a security, a mortgagee had to obtain the best price reasonably obtainable. If the question was addressed from the standpoint of the conventional jurisprudence on mortgagees’ duties when selling a mortgaged asset, the likely conclusion was that the “pre-pack” sale to WR would be unlawful and the sale transaction liable to be set aside. Looking at the issue on conventional lines, there was no real separation or arm’s length negotiation between the defendant and WR. Their interests were the same. The only separation was in legal personality.
Even if WR could be viewed as a genuinely separate commercial entity from the bank, the closeness of the two and their aligned and interwoven commercial interests would raise very serious suspicions about the price to be paid for the portfolio by WR. Their method of valuing the portfolio did not adequately test the market. To perform its duty, in conventional terms, to take reasonable steps to obtain the best price reasonably obtainable, the defendant would have had to do much more than it planned to do. Therefore, if a conventional analysis was applied, it was likely that what the defendant would do was to carry out an unlawful and defective performance of its duties as mortgagee. The envisaged transfer to WR seemed more akin to seizure than sale.
However, the conventional analysis was not appropriate in the present context. In a topsy-turvy world where the beneficiary of the duty paid rather than received money through performance of the duty, the conventional analysis did not work well. The transaction would become more like a reprise of the deal involving discounted redemption of the loan. The rationale was not to provide the mortgagor with a business opportunity but to ensure he received fair value from the sale. In those circumstances, the defendant was threatening do an act which might or might not turn out to be unlawful. To be unlawful, the act would have to be unlawful vis-à-vis the claimant and not just in the abstract. The case was close to the borderline. However, the threat made was not to do an act that was, unequivocally, unlawful and the defendant stayed just the right side of the line: Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971] Ch 949 considered.
(3) Neither intimidation nor economic duress had been made out and the claim for damages founded on them would be dismissed. The claimant had affirmed the disputed agreements and took no step to have them set aside until more than five years later. He retained control over a number of properties and continued to manage them. He allowed third-party rights to be acquired over some of the other properties. He did not ask the bank for his £20.5m back, nor proffer the remaining properties to the defendant to become secured assets. It was too late to rescind the disputed agreements now.
Hugh Sims QC and John Virgo (instructed by Cooke Young & Keidan LLP) appeared for the claimant; Paul Sinclair QC and Natasha Bennett (instructed by Addleshaw Goddard LLP) appeared for the defendant.
Eileen O’Grady, barrister
Click here to read a transcript of Morley (trading as Morley Estates) v Royal Bank of Scotland plc
