APPROVED JUDGMENT
I DIRECT THAT PURSUANT TO CPR PD 39A PARA 6.1 NO OFFICIAL SHORTHAND NOTE SHALL BE TAKEN OF THIS JUDGMENT AND THAT COPIES OF THIS VERSION AS HANDED DOWN MAY BE TREATED AS AUTHENTIC.
MR JONATHAN KLEIN:
1. This is a judgment in (i) a claim principally relating to a sale, by the Defendant (“Bridgeco”) as mortgagee in possession, of 593-5 Roman Road, London, E3 5EL (“the Property”) about which the Claimant (“Aodhcon”) complains and (ii) a counterclaim by Bridgeco for what it alleges are outstanding sums under a bridging loan agreement between the parties because, it alleges, the sale of the Property left a shortfall on the sums due to it from Aodhcon.
Factual Background
2. Mr. Charles (Cathal) McNicholl is a property developer. In December 2006 Aodhcon was registered with the intention, as in fact happened, that it would be used as a special purpose vehicle for Mr. McNicholl’s acquisition and development of the Property.
3. On 8th March 2007 Aodhcon bought the Property for the price stated on the transfer to be £640,000.
4. The purchase price was raised in part by a loan of £437,267 from Bank of Scotland plc which loan was secured by a first legal charge over the Property.
5. On 27 July 2007 planning permission was granted for the development of the Property into a complex of 6 flats and 2 ground floor commercial units.
6. On 15th April 2009 the London Borough of Tower Hamlets (“LBTH”) approved a discretionary Empty Property Grant (“the Grant”) in the sum of £115,000 to assist the development on the following conditions amongst others:
“…8. You have agreed in a separate document (the certificates of intended letting) to let out the dwellings for 5 years following the final payment of the grant.
9. This grant will be registered as a local land charge against the property for 5 years following the final payment of the grant.
10. You must retain the ownership of the property for 5 years following the final payment of the grant.
11. The grant has been approved subject to you being an accredited landlord under the London Landlords Accreditation Scheme. You must maintain your accreditation throughout the grant condition period….
If any of the grant conditions set out above are breached then the Council may recover the grant with interest….”
7. Aodhcon drew down £99,739.50 of the Grant and, in due course, but it is not clear to me when (although nothing turns on this), Aodhcon employed GD City Ltd. (“GD”), apparently under a JCT Design and Build Contract revision 1 2007, to carry out the development of the Property.
8. According to Mr. David Palumbo, who gave evidence for Aodhcon, in March or April 2010 Bank of Scotland was putting pressure on Aodhcon to repay the loan it had made, the term of which, Mr. McNicholl confirms, was due to expire some time in 2010.
9. On 26th April 2010 a sale memorandum for the Property was issued by Look Properties, estate agents. The prospective purchaser was identified as Palmhurst Residential Property Fund Ltd. (“Palmhurst”) and the sale price was said to be £1.02 million. The following were further terms of the sale as recorded in the memorandum:
“A deposit of 10% will be paid but held as stakeholder; however £50,000 of the said deposit will be released to the vendor in order for him to pay the contractor to complete the building works…Contracts will be exchanged subject to building work being completed and signed off. The Property will not be encumbered by any rights reserved by the grants that the vendors (sic) have had the benefit of…There is no CML approved warranty Or guarantee in place.”
10. At the same time, because the Bank of Scotland loan was due to expire, Aodhcon was trying to obtain a bridging loan to repay Bank of Scotland and to complete the development.
11. Aodhcon obtained a bridging loan from Bridgeco the terms of which are set out in an offer letter, dated 12th April 2010, which was accepted by Mr. McNicholl on Aodhcon’s behalf on 15th April 2010. The following are some of the terms of the offer:
i) Bridgeco offered to lend Aodhcon £750,000 for 6 months;
ii) As security, (i) Aodhcon was to give a first legal charge over the Property to Bridgeco, (ii) Mr. McNicholl was to give a personal guarantee and (iii) Aodhcon was to give a debenture over its assets;
iii) Interest on the outstanding balance of the loan “until such time as the loan has . been repaid in full [was to be] at the rate of 1.35% calculated on a daily basis, payable monthly in arrears on the 5th day of the month calculated from the date of advance of the loan and compounded on a monthly basis”;
iv) “A facility fee of 1.25% per month calculated on the balance outstanding from time to time as at each monthly anniversary of the drawdown (“the Facility Fee”) will be debited to your account and will be payable on redemption of the loan. However, we will waive our right to collect the Facility Fee if there are no arrears of interest or any other breaches of the terms and conditions set out in this offer letter or of the terms of the security including your failure to repay the loan at the end of the term”.
12. The offer letter made clear though that the offer was subject to Bridgeco’s due diligence amongst other matters.
13. Aodhcon drew down the bridging loan on 7th May 2010 so that the term of the bridging loan expired by 7 November 2010.
14. Glenny LLP (“Glenny”) appears to have reported on the value of the Property to National Westminster Bank plc on 15th January 2010. Neither party has taken me to a copy of that report. On 25th March 2010 Glenny reported on the value of the Property to Bridgeco. By that report (“the March Glenny Report”):
i) Without re-inspecting the Property, Glenny valued the Property with vacant possession at £1.4 million and gave a projected value for the Property with vacant possession based on a 90 day period to market and sell (“a 90 day sale” – sometimes described as a “forced sale”) of £1.25 million;
ii) Glenny reported that only minor cosmetic works were required to complete the development which was, in general, to a good modern standard;
iii) Glenny reported that the property market had been in a period of decline for the previous 2 years which had resulted in a “very cautious approach from investors” and yields moving “out” during that period but it detected now some modest growth in the market. During the period “the buy to let investment sector, which was particularly active prior to 2008, has fallen away. Where it does exist however, we understand that current investment demand is much more focused upon rental yields…”. Glenny also recorded that there was strong competition which would “further suppress the opportunity for future investment growth” so that, on residential property, yields had increased in recent years. Glenny also noted that, if the Property was sold as a single unit to an investor, the yield would be expected to increase because of reduced market for such investments and because of the inherent risk. Glenny expressed the view that an appropriate All Risks Yield would be 7% – although it is not clear to me from the appendix to the report which purports to show how this figure was reached how, in fact, it was calculated;
iv) Glenny noted that there were “increasing numbers of void units available to let…” with the overall consequence that there would be downward pressure on rents;
v) Glenny seemed untroubled by the Grant requirement that the flats be let to tenants LBTH had selected because, it took the view, the minimum rents paid by such tenants would exceed, in the case of each of the flats to a greater or lesser degree, the amount which could be obtained in the open residential letting market.
15. In April 2010 Aodhcon engaged GB Fitzsimon LLP, quantity surveyors, who reported that the work then required to complete the development of the Property would cost £72,856 excluding VAT and fees.
16. On 1st May 2010 Mr. David Williams wrote to Bridgeco, his principal, that:
i) The development of the flats was basically complete but that they would need to be redecorated;
ii) The development appeared not to have progressed for some months;
iii) The development displayed two serious defects; namely, the incorrect installation of the communal stairs which would ultimately require the first floor levels to be adjusted but that this defect would be remedied free of charge by the contractors and the flat roof had been formed incorrectly resulting in water penetration;
iv) He estimated the cost of finishing the work was £15,000 but “I would state that the costs would run to at least £50k but potentially £75k taking into consideration the above”;
v) He valued that property at £1 million taking into account the remedial works.
17. On 20th August 2010 Glenny reported again (“the August Glenny Report”). On that occasion Glenny valued that Property with vacant possession at £1.35 million and gave a projected value based on a 90 day sale of £1.15 million. The report continued:
“We would comment that the development does not appear to have moved significantly forward since our last inspection of the premises in January 2010 and indeed some elements of the property appear to have deteriorated so that a number of finishings will need to be undertaken afresh. Furthermore, ongoing remedial works were observed to the reinforced concrete slab to the rear of the development….[W]e have in response incorporated an increased sum of £50,000 to cover the cost of completing the development within our assessment of value. We also understand that the development does not have any form of construction warranty such as an NHBC guarantee…[W]e are advised that the cost of securing retrospective premier certification could stand in the region of £10,000.”
18. The August Glenny Report further noted that:
“With respect to the subject property, we believe the prospect of rental growth within the retail market over the foreseeable future to be limited and without a strong tenant in place, the uncertainty surrounding occupation levels and rental growth are likely to suppress levels of investment demand….With regard to the residential market, we [are] aware that following a general improvement in values over the past twelve months or so, performance has stagnated of late….”
Otherwise, the report made similar sorts of comments to those made in the March Glenny Report.
19. In October 2010 the Property was damaged by vandalism.
20. GB Fitzsimon appears to have indicated that between £60,000 and £69,000 of the work, which it had reported, in April 2010, was required to complete the development, had been carried out by 5th November 2010. Mr. McNicholl suggested that GD had in fact indicated this. I do not discount this as a possibility, but looking at the document in which that indication was made, this seems to be unlikely.
21. On 21st November 2010 (by which time, as I have noted above, the bridging loan term had expired) Stirling Ackroyd issued Heads of Terms for the sale of the Property to Noble House for £915,000 on the following terms amongst others:
“Sign off by LA building control and completion certificate issued….Noble House will take on £99,000 (approx) grant from the LA.”
22. Apparently on the same day, Stirling Ackroyd issued further Heads of Terms for the sale of the Property to Noble House by which the proposed sale price was increased to £940,000 (and the sale was otherwise on the same terms).
23. On 29th November 2010 Spencers Property Services, estate agents, and in particular Mr. Adam Ward, issued a sale memorandum which recorded that, subject to contract, Aodhcon had agreed to sell the Property to Miriad Ltd. (“Miriad”) for “£930,000…net of grant from LBTH and fee”.
24. On 10th December 2010 Mr. Ward issued a further sale memorandum, this time recording that Aodhcon had agreed to sell the Property to Mr. Roidos for “£1,000,000 subject to contract net of grant from LBTH”.
25. On 17th December 2010 Mr. Ward issued a further sale memorandum, this time recording that Aodhcon had agreed to sell the Property to Mr. Joel Franks for “£940,000 subject to contract net of grant from LBTH”.
26. I have been taken to the draft sale contract issued by Ms. Sarah Hung, Aodhcon’s solicitor, relating to the proposed sale to Miriad Ltd. The sale price was expressed, in that draft contract, to be £930,000 but special condition 11 provided further that:
“The Property is sold subject to the…Grant….In the event that following completion the seller is obliged to return the…Grant…then the buyer shall indemnify the seller for the full amount, the price agreed having reflected this eventuality.”
27. On 17th December 2010 Winkworth, estate agents, wrote to Mr. Williams on Bridgeco’s behalf (“the Winkworth Letter”). The Winkworth Letter was a marketing appraisal for the purposes of securing instructions to market the Property on Bridgeco’s behalf. Mr. Ben Robinson, who wrote the letter, said in it:
“…we believe that a realistic asking price for your property in the current market condition to be in the region of £1,000,000 and believe that this would be a realistic price to achieve a quick sale, as it would still be appealing to investors. Obviously if there were not time constraints on the sale, then the individual properties could be sold for perhaps 15 to 20% higher, but this would be a much longer and more complicated process.”
28. On 7th January 2011 Mr. Ward issued yet another sale memorandum, on similar terms, this time to Mr. Gill which recorded a sale price of £920,000.
29. On 17th January 2011 Mr. Barry Wise of Strettons Chartered Surveyors’ Auction Department e-mailed Mr. Adnan Sajid, who was acting for Aodhcon and who is Mr. Palumbo’s business colleague, to “confirm your instructions to include the…Property in our forthcoming auction [and to also] confirm that a reserve of £940,000 will be set with a guide price of £900,000 plus”.
30. By 18th January 2011 LBTH’s position relating to the Grant and future compliance with its terms was set out in an e-mail to Ms. Hung. The local land charge which protected the Grant would be replaced, after a sale of the Property by Aodhcon, by a deed of covenant by the purchaser by which the purchaser covenanted, amongst other matters:
i) To complete the development to a satisfactory standard in compliance with planning and building regulations;
ii) To let the flats to tenants proposed by LBTH for 5 years following completion of the development at rents not exceeding the Local Housing Allowance;
iii) To retain ownership of the Property for 5 years following completion of the development;
iv) To be an accredited landlord under the UK Landlord Accreditation Partnership;
v) In default, to repay the Grant with interest. (It will be appreciated that LBTH strictly, under the Grant terms, could have demanded repayment on a sale by Aodhcon).
LBTH was not prepared, however, to allow the purchaser to draw down on the balance to the Grant not already drawn down.
31. Ms. Hung forwarded that e-mail, on the same day, to Chris of Lorrells, solicitors for Noble House, adding:
“…I need to know by close of business today if there are any outstanding matters before we proceed with exchange tomorrow. I am meeting my client tomorrow morning….”
32. On 19th January 2011 Mr. Sajid wrote to Mr. Williams explaining that he had advised Aodhcon to co-operate with Bridgeco (and, in particular, Mr. Williams), seemingly by voluntarily delivering up possession of the Property, on the understanding that, in selling the Property for sale, Bridgeco would follow certain procedures which Mr. Sajid said (and had advised Mr. McNicholl) were standard. In the same e-mail to Mr. Williams, Mr. Sajid wrote:
“…lawyers are poised with all enquired (sic) dealt with and “tricky” issues addressed for example in relation to the grant being recalled which most buyers will want to retain the benefit of….”
33. On 21st January 2011 Aodhcon, on advice it seems, voluntarily delivered up possession of the Property to Bridgeco.
34. On 28th January 2011 Mr. Williams acknowledged receiving, from Mr. Palumbo, a copy of LBTH’s e-mail of 18th January to Ms. Hung to which I have just referred.
35. On 31st January 2011 Winkworth’s Hackney branch issued a sale memorandum recording an agreement, subject to contract, between Bridgeco and Mr. Shahid Ikbal for the sale of the Property at the price of £900,000.
36. On 2nd February 2011 Andrew Dabner, LBTH’s building control surveyor, wrote to Mr. Sajid, copying in Mr. McNicholl, Mr. Palumbo, Ms. Hung and others as follows:
“There were a number of issues with [the Property] and I suggest we have a meeting on site at the earliest opportunity to discuss any remedial works proposed to avoid wasted time, effort and expense.”
37. On 8th February 2011 Mr. Williams wrote to Mr. McNicholl amongst others. Mr. Williams identified a number of matters which he said troubled the LBTH building control officer, as follows:
i) The air circulation system fans were apparently of a “lesser spec”;
ii) The entrance stairs apparently needed to be removed and replaced;
iii) The communal staircase to the 1st floor was apparently too close to the entrance door so that the whole staircase needed to be moved;
iv) The ceiling void insulation was said to be inadequate;
v) The commercial units’ steel shutters apparently needed to be relocated.
38. On 14th February 2011 Ms. Hung was telephoned by Mr. Kerallah who indicated that he was interested in buying the Property. Mr. Kerallah did not tell Ms. Hung how he had become aware that the Property was for sale. By this time Ms. Hung had ceased to act in the sale of the Property (because it had been repossessed) but she did pass on Mr. Kerallah’s contact details to Bridgeco’s solicitors.
39. On 16th February 2011 Mr. Ward issued a further sale memorandum to Mr. Roidos recording a sale price of “£950,000 subject to contract net of grant from LBTH”.
40. On 4th March 2011 Mr. Ward wrote to Mr. Williams. Like the Winkworth Letter Mr. Ward’s letter (“the Spencers Letter”) was a marketing appraisal given for the purposes of securing (or, possibly, recording) instructions to market the Property. Mr. Ward said:
“Unfortunately the sale we have been running on the…property for you since January is no longer proceeding. I am, of course, extremely eager to market the property for you and to secure a new buyer. We have been marketing the…property on behalf of Aodhcon…since the end of October 2010. In that time we had a number of clients look at the property, some of which made offers. We had 3 offers agreed with conveyancing in progress which fell through. The biggest stumbling block being the £100,000 council grant on the property, the terms of the grant and the risks of paying it back and getting the property to meet the building regulations. We also have interest and offers for the property at £850,000. Based on the present market conditions and taking into account the above from marketing and feedback so far, it is our professional opinion that the…property should be marketed at a guide price of £850,000 to £870,000 f/h subject to contract. These figures are based on considerable experience and success in the local area and on market conditions at the time of our visit. It may not necessarily be correct at any other time.”
I cannot deduce, from the Spencers Letter, when Mr. Ward visited the Property.
41. There is also in evidence, a further letter (“the 9th August letter”), dated 9th August 2011, from Mr. Ward to Mr. Williams, in which Mr. Ward expresses the view that, based on present market conditions and taking into account the Grant and “the works that need completing to meet building regulations”, the Property should be marketed at a guide price of £825,000 – £875,000. Although that letter is dated 9th August 2011 it seems unlikely to have been written by Mr. Ward on that day. The much more likely explanation, in the light of what I was told by Mr. Innes for Bridgeco, is that the document was automatically re-dated by computer software at some time after it was written.
42. There is a similar version of the 9th August letter, which was produced to me by Bridgeco on the last day of the trial, which is dated 20th April 2011 (“the 20th April letter”). The words on the 20th April letter are identical to those in the 9th August letter but the formatting of the two letters is noticeably different and, in the 9th August letter, one word, “really”, was italicised, whereas in the 20th April tetter it was not.
43. Mr. Innes told me that Bridgeco’s previous solicitors, who were acting in April and August 2011, do not have a copy of the letter, in either form, and nor do Spencers. Mr. Innes told me that Bridgeco has established that the 20 April letter was received by it from Mr. Williams on 20th April 2011, under cover of an e-mail timed at 17:47 (which e-mail Mr. Innes had seen and considered). Mr. Innes told me that the 20th April letter was then e-mailed by Bridgeco to its then solicitors on 9th August 2011. It is to be noted that this explanation does not help to establish (i) when Mr. Ward wrote the letter, (ii) when he sent it to Mr. Williams or (iii) how come the 20th April and 9th August letters are not identical in every way.
44. Mr. Ward apparently produced sales particulars for the Property; although it is not clear when they were produced. The sales particulars:
i) Contain a photograph showing the rear view of the Property and a location map;
ii) Identify the number and type of residential units and the number of commercial units;
iii) Describe the Property as a “fantastic investment opportunity” and continue “Build nearly finished”;
iv) State that the Property potentially could achieve a rental income in excess of £100,000 p.a.;
v) State that the Property was offered for sale for a price in the region of £1 million.
The sales particulars contain little further information. About 1 ½ sheets are blank.
45. On 8th March 2011, Mr. Palumbo wrote to Mr. Williams (“the 8th March E-mail”):
“…Agreed on the total waste of time Mr. Roidos and his useless entourage of clowns has been. Luckily the applicant from Winkworth will exchange within the next week at £900k which in my opinion given the circumstances is a result.”
46. Mr. Williams responded the same day to the effect that he was led to believe that Mr. Roidos had intended to “flip” the Property to a third party for £1 million. By the same e-mail Mr. Williams criticised the marketing of the Property during 2010.
47. On 9th March 2011 Mr. Palumbo wrote to Mr. Williams in response (“the 9th March E-mail”), saying the following amongst other things:
“…Consider the possibility that the property was marketed in the best possible way given the circumstances. It would be fair to say that we brought to the table Noble House, Miriad Properties and Commodore Group….”
48. On 16th March 2011 contracts for the sale of the Property at a price of £852,000 (“the Bridgeco contract”) were exchanged between Bridgeco and Perfectlink Estates Ltd. (“Perfectlink”). Completion was not expressed to be conditional of the completion of the development. The Property was sold subject to the Grant in respect of which Perfectlink gave Bridgeco an indemnity and Perfectlink was required to enter into a deed of covenant with LBTH. Special condition 15 recorded that Perfectlink could, on terms, enter the Property, pending completion, to carry out works, decorations and other associated matters. I have been given no further particulars of the intended work.
49. Until about 16th March 2011 Perfectlink was not going to be the named purchaser of the Property. Share Lease Ltd. was to be the named purchaser. The same solicitor, Mark Jacob of Miller Rosenfalk LLP, acted for both parties. As Share Leases Ltd.’s solicitor Mr. Jacob received, on 10th March 2011, “various documentation relating to [the] Grant…[and] correspondence with [LBTH]”. (It is reasonable to infer and I do conclude that Perfectlink was aware, prior to exchange of contracts, of the contents of LBTH’s e-mail, dated 18th January 2011, to Ms. Hung).
50. On 21st March 2011, Aztec Property Valuers Ltd. reported on the value of the Property as follows:
i) £850,000 – “market value with vacant possession”;
ii) £750,000 – “90 day sale with vacant possession”.
The report and this valuation (“the Aztec Valuation”) was expressed to be as at 17th March 2011.
51. In the Aztec Valuation are some colour photographs; a number of which show the front view of the Property. Those photographs show a street in front of the Property wholly taken up by an outdoor market apparently selling clothes. They show a small amount of graffiti on one of the steel shutters and they distinctly show a Winkworth board which reads in large red letters “Under offer”. The Aztec Valuation also contains a photograph of the entrance to the basement flat. That photograph shows a large, but not very deep hole, over which two planks of wood have been laid to provide access to the basement flat. There is another photograph; this time of a flat bathroom. This photograph too shows that further work was required.
52. By 4th July 2011 all (or, at least, most of) the flats at the Property were being occupied.
53. Even before completion of the Bridgeco contract Aodhcon was concerned about the sale price. On 13th April 2011 (when she was under the misapprehension that completion had taken place on 11th April) Ms. Hung, on its behalf, wrote that:
“Our clients are contemplating a claim for damages arising out of your failure to obtain the best price reasonably obtainable in the current market conditions. It appears that the actions you have taken have been actuated by an intention to dispose of the property at a price which simply discharges the mortgage debt and prolong the recovery by you of an unauthorised monthly penalty….”
54. The claim was begun on 19th September 2012.
The Claim
55. By paragraph 15 of the Particulars of Claim, Aodhcon asserts that Bridgeco was in breach of its duty as mortgagee to sell the Property as the best price reasonably obtainable. Aodhcon provides particulars of that alleged breach as follows.
56. By paragraph 15(a) of the Particulars of Claim, as explained to me by Mr. Caun for Aodhcon, Aodhcon asks me to infer that Bridgeco must have breached its duty because the price it obtained (£852,000) was substantially lower than the price it ought to have obtained (£1.25 million).
57. By paragraph 15(b) of the Particulars of Claim, Aodhcon asserts that Bridgeco ought to have obtained, but did not obtain, Red Book Market Value valuations and/or, if it did so at all, it failed to obtain a sufficient number (at least 3) prior to exchange. By paragraphs 15(c)-(e) of the Particulars of Claim, Aodhcon attacks the Spencers Letter, the Aztec Valuation and Bridgeco’s reliance on them. I explored these particulars in a little detail with Mr. Caun. As I understand the position the particulars in subparagraphs (c)-(e) are, in effect, a recasting of the complaint made in sub-paragraph (b).
58. Aodhcon asserts that Bridgeco ought to have placed the Property for sale in an auction.
59. Aodhcon complains that Bridgeco failed to market the Property sufficiently or at all for a reasonable period, which it contends was at least 90 days.
60. At my invitation, Mr. Caun provided further particulars of the marketing and offering for sale which, Aodhcon claims, Bridgeco ought to have carried out as follows:
i) It ought to have instructed one or more estate agents;
ii) It ought to have ensured that such agents prepared detailed sales particulars which included measurements and/or internal and external photographs of the Property;
iii) It ought to have ensured that the sales particulars adequately described the Property and/or that the sales particulars included full information about the Property including appropriate information about the Grant;
iv) It ought to have ensured that the sales particulars were circulated to as many prospective purchasers as could reasonably be found;
v) It ought to have ensured that the sales particulars were circulated and the Property was advertised for a period of at least 90 days or other reasonable fixed period;
vi) It ought to have ensured that the Property was advertised on the agents’ website and/or on other property-related websites, in the agents’ shop windows, by erecting a For Sale sign at the Property and by advertising in one or more newspapers at least twice a month.
61. Aodhcon also alleges that Bridgeco breached its duty to act in good faith, using its powers for proper purposes and requiring it to act fairly towards Aodhcon, in that, Aodhcon asserts:
i) Shortly before the Property was repossessed, Mr. Williams told Mr. McNicholl not to complete the development and yet, thereafter, he drew attention to the fact that the development was incomplete as an item likely to reduce the Property’s value;
ii) Mr. Williams also told Mr. McNicholl, untruthfully, that he had prospective purchasers who were willing to offer £1.1-1.2 million to buy the Property;
iii) Mr. Williams misled Aodhcon as to his remuneration;
iv) Mr. Williams required the Property to be withdrawn from Strettons’ auction for his personal gain (that is, to obtain a commission);
v) Mr. Williams had a conflict between his own personal interests and those of Bridgeco because he was paid a commission;
vi) The Aztec Valuation was sought not from a local valuer and was only sought after the Bridgeco contract was entered into and Bridgeco relied on the report and valuation without demur when it should have challenged them;
vii) Bridgeco, and, in particular, Mr. Williams, knew or must have known that £852,000 was lower than a reasonable price;
viii) Bridgeco sold the Property without allowing at least 90 days exposure to the market.
62. Aodhcon asserts that, had Bridgeco not breached its duties, the Property would have sold for £1.25 million, or a price substantially higher than £852,000.
63. Aodhcon makes a number of subsidiary complaints.
64. It complains that Bridgeco did not credit the deposit, paid by Perfectlink, to the loan as soon as the deposit was received by its conveyancing solicitors, so that interest was charged on an outstanding sum which was more than it ought to have been.
65. Aodhcon asserts that, by using the expression “monthly anniversary”, the Facility Fee is uncertain or should be construed so as to refer to 6th May in every year (so substantially reducing the compounding effect of the clause) and, in any event, Aodhcon asserts, the Facility Fee is a penalty. (The percentage charge referred to in the Facility Fee may appear, at first, to be very low but, on Bridgeco’s application of it, because of its compounding effect, Bridgeco claimed £49,991.98 for the Facility Fee for the period between December 2010 and May 2011.)
66. Finally, Aodhcon asserts that Bridgeco was not entitled to debit it £3,794.61 for the cost of a live in caretaker (Mr. Nock). In terms, Aodhcon puts Bridgeco to strict proof that this charge was properly incurred.
The Counterclaim
67. Bridgeco counterclaims for the sum which it says is outstanding on the bridging loan. In its counterclaim it asserts that, as at 8th November 2012, about £90,000 was owing.
Witness Evidence
68. I heard factual evidence, for the Claimant, from Mr. McNicholl, Mr. Stephen Bayne, Mr. Palumbo and Ms. Hung. I heard factual evidence, for the Defendant, from Mr. Jonathan Samuels, Mr. Williams and Mr. Wise.
69. I heard expert valuation evidence, for the Claimant, from Mr. Mark Dooley and, for the Defendant, from Mr. Sebastian Deckker.
Mr. McNicholl
70. Following university, from 1990 to 1999 Mr. McNicholl worked for Aer Rianta International, a large duty free retailer, finishing his employment there as a general manager. When he left Aer Rianta’s employment he became a property developer. It was he who registered Aodhcon, which is named after his sons, and he is its managing partner.
71. In his evidence he gave me some of the factual background to the purchase of the Property and later events which I have recorded above where it is uncontentious.
72. He also explained why the development of the Property was not completed by the time the term of the Bank of Scotland loan was due to expire and why he first contemplated taking a bridging loan from Bridgeco. He explained that, between January and March 2010, work had stopped because he had run out of money. Nevertheless, he had expected Bank of Scotland to extend the term of its loan because a promise to do so had been made to him. At the last minute that promise was reneged on. It followed therefore that Aodhcon needed money to complete the development and was liable to repay the Bank of Scotland loan.
73. Mr. McNicholl explained that the Property was offered for sale in the Spring of 2010 so that Aodhcon had a fall back position in case refinancing did not materialise. He said that, as soon as Aodhcon obtained the bridging loan he ceased to be interested in selling the Property and, in fact, as the background facts recount, no sale then took place.
74. Mr. McNicholl’s evidence (elaborated on by Mr. Palumbo) was that the Spring 2010 offering of the Property for sale, and the later one at the end of 2010, were no more than testings of the market. He said that he made clear to Mr. Palumbo that he, Mr. McNicholl, would not exchange sale contracts at a sale price of less than £1.3 million. But he also said that Aodhcon’s solicitor, Ms. Hung, had no reason to doubt that both offerings for sale were genuine attempts to sell the Property.
75. Regarding the Grant, Mr. McNicholl said that, at some point, LBTH made clear that, if a single unit at the Property was sold, it would expect the Grant to be repaid.
76. Mr. McNicholl gave evidence about the conversation he said he had with Mr. Williams on which Aodhcon’s claim for breach of a duty of good faith is partly based. Mr. McNicholl said that, after the work to remedy the vandalism damage had been completed, he met with Mr. Williams and told Mr. Williams that Mr. Bayne could complete the development over a two week period beginning in the third week of January 2011. Mr. McNicholl says that Mr. Williams told him that:
i) If the Property was repossessed Mr. McNicholl should not try to complete the development;
ii) If the Property was repossessed Mr. Williams had 7 or 8 clients who would be interested in buying the Property;
iii) The Property would comfortably sell for up to £1.2 million;
iv) An auction would be likely to achieve a considerably lower price;
v) Mr. Williams was paid a flat fee of £300 per month by Bridgeco.
77. Mr. McNicholl did not suggest that this conversation caused him to do anything he would not otherwise have done. Indeed, he fairly says that, before repossession “I became convinced that David Williams was not acting in my best interest regarding the auction…”.
78. Mr. McNicholl seemed to me to be an individual who dealt with others, to a great degree, on trust and honour. So, by way of example, although Mr. McNicholl had never met Mr. Bayne, he agreed to Mr. Bayne repairing the vandalism damage solely on the basis of an oral quote for the work. There is also evidence, which was not challenged, that Mr. McNicholl paid GD a substantial sum of money, because he felt honour bound to do so, even though he might, legitimately, not have been obliged to do so. Mr. McNicholl trusted Bank of Scotland to extend the term of its loan. More significantly, as it turned out, Mr. McNicholl believed that he had an assurance, in honour, from Bridgeco that, at the end of the bridging loan term, he would be able to re-finance under one of its buy to let products. At the end of the bridging loan term, as will be apparent, no such product was made available to him.
79. Mr. McNicholl is also a man who takes and follows professional advice. For example, Mr. Palumbo and Mr. Sajid advised him that Aodhcon ought to co-operate with Bridgeco (in particular, Mr. Williams) and to deliver up possession of the Property voluntarily. They advised him to do so on the basis that Mr. Williams would follow what they said was the standard procedure of obtaining “valuations” from 3 local agents, appointing 2 agents on a joint agency basis to market the Property and of “allowing 90 days for sale by private treaty followed by an auction”. This advice was recorded in Mr. Sajid’s e-mail, dated 19th January 2011, to Mr. Williams to which I have already referred.
80. Mr. McNicholl struck me as a man who felt let down because others did not seem to him to meet the high standards of trust and honour to which he felt he operated. He was clearly distressed about the turn of events, because the development of the Property was at least a very important part of his business by which he supported himself and his family. Despite this distress, and perhaps because of the high standards to which I have referred, Mr. McNicholl came across as a witness who was doing his best to help me to resolve the issues in this case.
Mr. Palumbo
81. Mr. Palumbo provides property asset management services as a director of Origen Group Ltd. He has some knowledge, borne of experience of the local market, of property values in and around the location of the Property but, in his business, he told me, for valuation and estate agency services he used “blue chip” companies including Winkworth, Strettons and Stirling Ackroyd.
82. In 2008 Mr. Palumbo was engaged by Mr. McNicholl to assist Aodhcon in the management of the Property.
83. As a result of the pressure from Bank of Scotland for the repayment of its loan in Spring 2010 Mr. Palumbo says that he advised Mr. McNicholl that Mr. McNicholl should have a contingency plan in case refinancing was not possible. They agreed therefore that Mr. Palumbo should test the market for a sale of the Property through Mr. Palumbo’s contacts. Mr. Palumbo explained that he contacted a “good trusted contact”; Martyn Stables of Look Properties. Mr. Palumbo said in cross examination that he particularly selected Mr. Stables because Mr. Stables worked with developers and was particularly active in sales in the area. It was Mr. Stables who procured Palmhurst’s interest in the Property. Mr. Palumbo explained what he meant by “testing the market”. The intention was that the Property should not be advertised to the general public for sale. Instead it should be offered to professional investors who were known to Mr. Stables.
84. On 1st June 2010 Mr. Palumbo e-mailed Mr. Stables to say that Aodhcon was not interested in proceeding with a sale. By this time the bridging loan had been obtained. Mr. Palumbo acknowledged that, by offering the Property for sale and then withdrawing it in this way, Palmhurst might not have been interested in buying the Property if it later became available again.
85. Mr. Palumbo said that, in late 2010, he persuaded Mr. McNicholl again to test the market. One of the agents who was approached by Mr. Palumbo was Lance Calder of Stirling Ackroyd.
86. It was at about this time that Mr. Ward made what Mr. Palumbo said was an unsolicited enquiry about whether the Property was available for sale because he had a prospective purchaser for it. Mr. Palumbo says, in his witness statement, that he instructed Mr. Ward to market the Property on the same basis as he had instructed Mr. Calder and Mr. Stables before him and it was Mr. Palumbo who told Mr. Williams of Mr. Ward’s interest in the Property on behalf of some potential investors.
87. Mr. Palumbo said in cross examination that, despite his instructions to Mr. Ward, Mr. Ward had actively marketed the Property. He also said that, in his opinion, what Mr. Ward was doing, by going beyond his brief, had a detrimental impact on the Property.
88. Mr. Palumbo said in cross examination that, assuming the development of the Property was completed, the most likely purchaser would be an investor looking for a yield; that is, an investor who wanted to buy the Property in order to receive the rent it was expected to or was generating. He also said that he told Mr. Williams about the purchase offers that had been made whilst he, Mr. Palumbo, had been marketing the Property; although he somewhat resiled from this in re-examination when he also said that he could not recall if he told Mr. Williams the proposed sale prices in relation to those offers.
89. Mr. Palumbo was also asked in cross examination about the effect of repossession. He said that in his experience if a property had been repossessed it was in “a different market”. In fact, Mr. Palumbo went further and said, in terms, that “the damage had been done” when Bridgeco placed a notice at the Property saying that it had been repossessed. In re-examination he said:
“When the repossession was out there the whole situation changed.”
90. Mr. Palumbo did acknowledge as well that damage was done to the saleability of the Property by 4 draft sale contracts being issued between November 2010 and January 2011 on Aodhcon’s behalf as a result of the subject to contract sale agreements reached during this time to which I have referred above.
91. Mr. Palumbo was taken in cross examination to the 9 March E-mail. He explained that he meant by it that, in his opinion, when he was involved in the marketing of the Property it had been properly marketed. He said:
“What we did with the two agents and Adam Ward was a controlled environment. We did the best we could in the circumstances.”
92. Mr. Palumbo told me that, initially, the best way of selling the Property was by a controlled sale and that, in any event, this was his preferred route when dealing with professional purchasers. He said:
“The best way of getting investors who are interested in yield is by a controlled sale; that is, by approaching them directly. Most of the time a controlled sale is the best approach, unless you are selling retail units when you will want marketing.”
93. Mr. Palumbo was also asked about the 8th March E-mail. He suggested that what he said in that e-mail was mere sarcasm and did not represent his truly held belief. He sought to justify this position by saying that, by 8th March 2011, he had discovered that Winkworth was not involved in the sale of the Property.
94. I cannot accept that interpretation of the 8th March E-mail. There is no hint of sarcasm on its face. The tone of the e-mail is friendly. In any event it is to be remembered that, as a matter of fact, by this time Winkworth had issued a sale memorandum showing that there was a subject to contract offer to purchase the Property at £900,000. I have come to the conclusion that, by 8th March 2011, Mr. Palumbo did believe that a sale of the Property for £900,000 was “a result” “given the circumstances”. It may be that Mr. Palumbo’s tone in the e-mail was more friendly than it might otherwise been because, perhaps, he was still hoping to procure some commission on the sale but, whether or not this is so, there is nothing to suggest that I should put the interpretation on the e-mail which Mr. Palumbo invited me to do.
Mr. Bayne
95. Mr. Bayne is a builder; a sole trader trading as Cross Atlantic UK. He was introduced to Mr. McNicholl in October or November 2010 by Mr. Palumbo. Mr. McNicholl asked Mr. Bayne to quote for remedying the vandalism damage which had recently occurred and to quote for the additional cost of completing the development.
96. Mr. Bayne quoted about £12,000 to remedy the vandalism damage. He said in cross examination that he quoted an additional sum of about £3,000 to complete the development. Mr. Bayne had completed the work to remedy the vandalism damage by 18th December 2010 when he rendered an invoice for that work in the sum of £12,475.
97. Mr. Bayne said that, when he quoted for the additional sum to complete the development, he was not told about the requirements of the LBTH building control surveyor as apparently recorded in Mr. William’s 8th February 2011 e-mail to which I have referred but he told me that his quote did include for the following work:
i) Moving the communal staircase and consequent alteration of floor levels;
ii) The replacement of the entrance stairs.
Mr. Bayne told me that most of the work to complete the development was in the communal corridor.
Ms. Hung
98. Ms. Hung is a solicitor. She is a partner in the firm which Aodhcon has instructed to conduct this litigation. She was also its conveyancer in 2010 and 2011.
99. She said that she received the Palmhurst sale memorandum and, later, on instructions, issued a draft sale contract and corresponded with its solicitors.
100. Ms. Hung also received the Heads of Terms and/or sale memoranda relating to Noble House, Miriad, Mr. Roidos, Mr. Franks and Mr. Gill. She issued draft sale contracts to each of their solicitors. Ms. Hung was instructed by Mr. Sajid, on Aodhcon’s behalf, to achieve a quick sale at the highest price.
101. The position appears to have been as follows in late 2010/early 2011:
i) Until 6th January 2011, Ms. Hung, on Aodhcon’s behalf, was dealing with Miriad, Mr. Roidos and Mr. Franks;
ii) Miriad’s solicitors were told that there was a contract race;
iii) After 6th January 2011, Ms. Hung continued, for a short period, to deal with Mr. Franks and was also dealing with Noble House and Mr. Gill;
iv) Mr. Franks’ solicitors were told that there was a contract race;
v) In February Ms. Hung dealt with Mr. Roidos a second time, but, on that occasion, she did not issue a draft sale contract. She told his solicitor that there was a contract race.
102. Ms. Hung confirmed in cross examination what appeared, from her witness statement, to be the case; namely, that she understood that the prospective sales of the Property in which she was involved were genuine attempts to sell the Property. This is borne out by her e-mail, dated 18th January 2011, to Chris of Lorrells, in which she recorded her expectation that contracts were to be exchanged the following day.
103. Ms. Hung told me what she understood by the phrase, used in the sales memoranda issued by Mr. Ward, “net of grant from LBTH”. She understood this phrase to mean that, if the Grant became repayable and Aodhcon was obliged to repay it, the buyer would indemnify Aodhcon. This is borne out, for example, by the special condition I have quoted from the draft sale contract issued to Miriad.
104. Ms. Hung struck me as someone who was familiar with her professional obligations and who did her job as Aodhcon’s conveyancer in a professional manner. I do not hesitate to accept her evidence as I have recorded it here.
Mr. Williams
105. Mr. Williams was originally an estate agent. He remained an agent for about 20 years. At the relevant time he had provided property services to Bridgeco for about 2 years; mainly assessing properties for their suitability for lending purposes. Although he deals with repossessions for a number of clients, including Bridgeco, he has only dealt with about 6 repossessions for Bridgeco.
106. In cross examination he said that agents marketing properties for sale should produce sales particulars and should advertise “using the correct media”. He also said that they should expose properties to the whole of the market but he was not asked and he did not explain what he meant by “the market”.
107. On 29th March 2011, about 2 weeks after the Bridgeco contract was made, Mr. McNicholl and Mr. Williams exchanged e-mails. Mr. McNicholl had complained to Mr. Williams about the sale of the Property, having apparently only learned on that day that it had sold for £852,000. Mr. Williams responded:
“I understand your concerns and will pass them on to the lender…. The chartered surveyors (sic) valuation on possession was £950k with a 90 day sale figure of £875k. I have explained the problems we encountered with “over marketing” from last year and the number of contracts that were issued to numerous buyers at prices ranging from £825k to £940k.”
108. The facts as I have set them put above make clear that there was no valuation by a surveyor at the prices quoted in this e-mail. Nor was there any surveyor’s valuation “on possession”, or, indeed, after repossession but before exchange of contracts. Nor was there any marketing appraisal which valued the Property at £950,000.
109. Further, on the evidence I was taken to the prices offered for the Property did not range as low as £825,000 and ranged higher than £940,000.
110. Mr. Williams sought to explain away the inaccuracies in this e-mail as merely mistakes on his part. I find that explanation to be incredible. The e-mail was written almost contemporaneously to the events it related to. As I have sought to explain, there are a number of inaccuracies in the e-mail. One inaccuracy might be explained away as a mistake. In my view a number cannot; particularly, when the rest of Mr. Williams’ performance under cross examination is taken into account.
111. In paragraph 32 of his witness statement, Mr. Williams said of the August Glenny Report:
“This…valuation…fails to deal with the single most crucial issue, which is the existence of the local land charge [protecting the Grant], attached to the Property.”
112. I have formed the clear view that the point which Mr. Williams was intending to convey by this passage in his witness statement is that Glenny had ignored the existence of the Grant in its report. That is not true. The August Glenny Report refers to the Grant in a number of places. Because Mr. Williams had commented, apparently authoritatively, on the contents of the August Glenny Report he was asked about it in cross examination. It emerged that, at the time he made his witness statement in July 2013, he did not have to hand the report.
113. Mr. Williams was also asked about paragraph 7 of his witness statement in which he asserted that he only discovered about the vandalism damage to the Property on 17th December 2010. He confirmed that this assertion was wrong. At paragraph 8 of his witness statement Mr. Williams said in express terms: “I did not state that an auction would be likely to realise considerably less than I could”. In cross examination he confirmed that that statement was untrue. He confirmed that he did say that “you’d get a considerably lower price if the Property was put into auction”.
114. In re-examination Mr. Williams was asked about the following statement in paragraph 31 of his witness statement:
“[The Glenny reports] assumed the Property had buildings regulations completion certificates and complied with planning – it did not and the end buyer had to spend in the region of £70,000 to rectify those issues.”
He said that the assertion about the amount which Perfectlink had to spend was merely speculation.
115. Mr. Williams was asked in cross examination about the Aztec Valuation. He said:
“I commissioned Aztec because Cathal [McNicholl] had said we’d undersold the Properly.”
116. That statement is not borne out by the evidence to which I was taken and I do not accept it. As I have said Mr. McNicholl e-mailed Mr. Williams on 29th March 2011 (almost two weeks after the Aztec Valuation was commissioned) enquiring of the sale price.
117. Mr. Williams was apparently the original recipient of the 20th April Letter and 9th August Letter. Mr. Williams was recalled to give evidence about them. He told me that he could not say when he had received the 20th April Letter but he did recall why he had obtained it. He told me that he could not find Mr. Ward’s original appraisal letter. He said that therefore:
“I asked Adam Ward to forward me a copy of the appraisal letter he had sent. He may have sent me an appraisal letter which was in different terms to the letter I had previously received. I may have forwarded that different letter when I received it or some time after I had received it to Mr. Smith [of Bridgeco].”
118. The only letter, other than the 20th April Letter and 9th August Letter, from Mr. Ward which I have seen is the Spencers letter; that is, Mr. Ward’s appraisal letter, which is dated 4th March 2011. If that letter was generated on 4th March 2011, it was only a matter of weeks before the 20th April Letter could last have been generated. The two letters are in very different terms. If the Spencers letter was produced on 4th March 2011 then it is likely that Mr. Williams will have had it in mind on 20th April 2011 and, in such circumstances, it would not reflect well on him that he apparently provided the later letter as an appraisal letter to Bridgeco without, again apparently, alerting it to the differences in the two letters.
119. To be clear my assessment of Mr. Williams is not based on this last evidence about the appraisal letters. However, this last evidence and the absence of any full explanation from anyone else on Bridgeco’s behalf of the discrepancies between the Spencers letter, on the one hand, and the 20th April Letter and the 9th August Letter on the other or of the discrepancies between the two later letters themselves was unsatisfactory.
120. I turn to my assessment of Mr. Williams as a witness.
121. Mr. Williams gave evidence for about 4½ hours. This gave me a long time to observe him and to make an assessment of him as a witness. I have come to the clear view that I cannot accept his evidence unless it is corroborated by others in evidence or by documents which he did not make. To my mind there was no good explanation for the number of inaccuracies contained in his e-mail, dated 29th March 2011, to Mr. McNicholl. Nor did he provide me with any good explanation for the inaccuracies in his witness statement, which he told me he had read before giving evidence and the contents of which he had confirmed were true. In particular, it was clear to me that he always knew that the statement in paragraph 8 of the witness statement in relation to auctions was untrue. Yet, until he was cross examined, he did not correct it.
122. In the light of my conclusions about Mr. Williams as a witness, in this judgment I do not need to review his evidence at great length.
Mr. Samuels
123. Mr. Samuels is a fund manager employed by Octopus Investments Ltd. Bridgeco is one of the vehicles it uses in the context of a fund it offers to investors. Mr. Samuels told me that, in reality, Bridgeco is an empty shell. He also told me that, for the bridging loan to Aodhcon, he was the ultimate decision maker within Bridgeco.
124. Some criticism can be made of Mr. Samuels’ witness statement. In it Mr. Samuels says that he is employed by Bridgeco. As I have explained, that statement is not accurate. Further, a fair reading of Mr. Samuels’ witness statement suggests that he had direct knowledge of many events relevant to the claim when, in fact, he did not. The witness statement does not distinguish between matters which are within Mr. Samuels’ own knowledge and those which are matters of information or belief based on what others have told him. More than that, as Mr. Samuels freely admitted, much of his witness statement was no more than comment.
125. However, it seems to me that these criticisms are of a different order to my criticisms of Mr. Williams. In Mr. Samuels’ case there is not a contemporaneous document prepared by him which contains errors or inaccuracies. Nor are there parts of his witness statement which he must have appreciated were factually incorrect which he did not ask to correct at the beginning of his evidence. (Before confirming the contents of his witness statement, he asked to correct what was said about his employment). Whilst not amounting to an absolution of all blame, it would be unreal not to acknowledge that most witness statements are prepared by a party’s lawyer and that, whilst that lawyer should appreciate the requirements of Part 32 of the Civil Procedure Rules, a lay client is unlikely to, so, if the lawyer fails to comply with those requirements, his lay client is unlikely to detect the fault. In any event, I had the opportunity to observe Mr. Samuels giving evidence. I formed the impression that he was trying to be fair and objective and trying to assist me. I have come to the conclusion that Mr. Samuels:
i) Accurately reports what others have told him;
ii) Accurately relates those facts which are within his personal knowledge;
iii) Gives an accurate account of his own decisions and those he would have made had he been required to do so.
126. Mr. Samuels said that he was told, at about the time the Property was repossessed, that Aodhcon had issued draft sale contracts but that the sales had fallen through and that the sale prices under those contracts were £920,000 to £1 million.
127. Mr. Samuels also said that, at the time Bridgeco was contemplating the repossession of the Property, he saw the August Glenny Report which gave the opinion, in August 2010, that the value of the Property, on the assumption of a 90 day sale, was £1.15 million.
128. He said that, in January 2011, in addition to the August Glenny Report he had in mind (i) that previous sales had fallen through, (ii) the vandalism damage and (iii) that Aodhcon had gone “over term”. He was also told about the contents of the Winkworth Letter. He could not remember what information he had been given, before repossession, from Spencers. By the time immediately before the Bridgeco contract he also thought that Aodhcon’s attempts to sell were intended to lead to completion of the sale of the Property and he had been told that Aodhcon had agreed an auction reserve of £940,000. He also believed that the Property was not “straightforward” and he had in mind that a double dip recession was in contemplation at least.
129. Mr. Samuels said that Bridgeco had no incentive to accept a sale price which did not cover the bridging loan (as, in fact, has happened, on Bridgeco’s case, in relation to the Property).
130. Mr. Samuels says that, at the time, he asked how many agents Bridgeco was using. He was told that it was using two; one whom Aodhcon had used and one other, a new one. Bridgeco was aware, at the time, of the prices which they were recommending for marketing purposes.
131. Mr. Samuels conceded that the Facility Fee was really a default interest payment and that, if a borrower is a day late with payment, Bridgeco is entitled charge the Facility Fee for the whole of the loan term but it has not chosen to do so in this case.
Mr. Wise
132. Mr. Wise told me that, in about January 2011, he received a phone call from Mr. Sajid who indicated that Mr. Sajid’s client (Aodhcon) was considering placing the Property into Strettons’ February auction. Mr. Wise was told that the Property was then under offer to Noble House at £940,000 and that Aodhcon wanted to place the Property into an auction as a “back stop” in case contracts with Noble House were not exchanged.
133. I have already quoted from Mr. Wise’s e-mail dated 17th January 2011. As is apparent from that e-mail, and as Mr. Wise confirmed in evidence, the guide and reserve prices were those stipulated by Mr. Sajid and they did not reflect Mr. Wise’s own assessment of the value of the Property.
134. In cross examination Mr. Wise said that if a property is placed in an auction that fact and its details are widely circulated. Its auction particulars are circulated to Strettons’ database of about 4,000. The property is also advertised in trade papers and about 200 or more people, from all over the country, tend to attend Strettons’ auctions.
135. Mr. Wise also told me that in most cases properties in auctions, in his experience, probably just exceeded the reserve price.
Mr. Dooley
136. Mr. Dooley is a chartered surveyor. He made a report dated 5th September 2013. No doubt on instructions, he prepared a supplemental report, dated 27th November 2013. (Mr. Deckker similarly prepared a supplemental report dated 24th December 2013). Master Teverson, who case managed this claim, was neither asked to nor gave permission for supplemental expert reports. Both parties asked me to read the supplemental reports prior to the trial. I did so. At trial I did not permit those reports to form part of the experts’ evidence in chief. I formed the clear view, having read them, that the purpose of the supplemental reports was largely to provide material to counsel for cross examination purposes. More than that, it seemed to me that both supplemental reports strayed dangerously into territory that experts ought to avoid. I give one example from each supplemental report:
i) Mr. Dooley (at para.7.01): “In considering Mr. Deckker’s report and the appendices it is my opinion his Expert Witness Report falls far below the standards which one could reasonably expect in valuing the subject property for litigation purposes”;
ii) Mr. Deckker (at para.3.5): “In 5.03 [of his supplemental report] Mr. Dooley agrees with my investment approach and goes on to say that “the yield adopted is of paramount importance and this involves the identification and application of comparable evidence”. Yet in his reports, Mr. Dooley does not offer any “evidence” either, and where is his analysis of vacant possession comparables?”.
137. Mr. Dooley and Mr. Deckker belatedly had a joint discussion and produced a statement of “agreed” facts and matters in dispute on the second day of the trial. I use the word “agreed” advisedly because it became apparent that, whilst Mr. Deckker had signed the statement, the impression that it gave, that there was an agreed figure of £1.2 million which had some significance, was one to which he did not ascribe. Simply put, as it turned out the statement did not, in fact, identify any agreement between the experts and, more than that, there seemed to me to be no agreement between them on any matter of substance.
138. In his report Mr. Dooley expressed his view as to the value of the Property as at 16th March 2011. It became clear during the course of his evidence that, in so doing, Mr. Dooley was expressing his view as to the “market value” of the Property and that he took, as the definition of market value, that contained in the RICS’ Valuation Standards (the Red Book), which is as follows:
“The estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties have each acted knowledgeably, prudently and without compulsion” (“Red Book Market Value”).
139. He also assumed he explained that, consistently that definition of market value:
i) His valuation should not reflect the costs of sale and purchase;
ii) The units at the Property were fitted to a standard for immediate occupation;
iii) That all necessary certificates and approvals had been obtained and all legislative requirements complied with.
140. I did not understand Mr. Deckker to dissent from the proposition that these assumptions are to be made for Red Book Market Value purposes.
141. Mr. Dooley also assumed that the Property would be sold with vacant possession.
142. Mr. Dooley expressed the opinion that the market value of the Property, as at 16th March 2011, was £1.25 million. He reached this conclusion in the following way:
i) He valued the commercial units on the basis that the rent for them would be £30 per square foot p.a. He took, as the yield, 9%. He deducted for a 6 month rent free period. He concluded that the value of the commercial units was £174,000;
ii) He valued each of the flats separately on a comparables basis. He then added together those valuations to reach a total of £1.07 million;
iii) He then added together the value of the commercial units and the value of the flats which produced a total of £1.244 million, which he then rounded up to £1.25 million.
143. It is right that, in the statement produced during the trial, Mr. Dooley expressed the view that the market value of the Property was £1.2 million (a reduction of £50,000) but he said that he agreed the reduction out of pragmatism; to narrow the issues between the parties. The reduction seemingly (at least in part) was to take into account what Bridgeco was asserting was the sum which ought to be deducted from the sale price to reflect the cost of completing the development of the Property.
144. Prior to the trial Mr. Dooley had not been aware of the Heads of Terms and/or sale memoranda relating to Noble House, Miriad, Mr. Franks and Mr. Roidos (for a sale price of £1 million). Whilst he was giving evidence, and over a lunch adjournment, I asked Mr. Dooley to consider those documents and asked him whether his conclusions might change on the assumption that (i) each of the parties knew they were in a contract race but (ii) they did not know what the other parties had offered by way of price and also (iii) this was a forced sale situation. He concluded that, on those assumptions, the Red Book Market Value of the Property might be £1.1 million because the offers culminated in Mr. Roidos’ £1 million offer to which had to be added, because, in the circumstances, it was not going to be repayable by a likely purchaser as at 16th March 2011, £100,000 for the Grant.
145. In oral evidence Mr. Dooley made the following points:
i) Estate agents are able to get market intelligence and he uses information from agents to prepare reports;
ii) He did not know all the circumstances at the relevant time (16th March 2011) and he could not say whether he would have paid £1.2 million for the Property in March 2011;
iii) Market value is not synonymous with price. Indeed, this is a point Mr. Dooley was keen to emphasise. A further point he was keen to emphasise that his £1.2 million market value opinion was his opinion of Red Book Market Value. The risk of having to repay the Grant could affect the price but would not affect Red Book Market Value;
iv) In circumstances such as those in this case there is a real possibility that a purchaser would pay a price on the assumption that he would make a profit so that it might be said that the market value of the Property is the purchase price plus the purchaser’s profit;
v) He accepted that, in valuing the flats, an investment approach was equally as valid as his comparables approach;
vi) He accepted that a purchaser of the whole of the Property (rather than of an individual unit) would try to procure a reduction because it was buying more than one unit. Whether or not a vendor would agree to this would depend on his personal circumstances; for example, how long the vendor was prepared to hold out for a sale;
vii) He had not valued the Property on the basis of a forced sale (a 90 day sale);
viii) The repossession of a property can cause purchasers to reduce the price they are willing to pay;
ix) He thought that fixing a for sale board, sending details of a property to interested parties and advertising a property on the internet was proper marketing;
x) He accepted that a purchaser, faced with doing work to complete the development of the Property, would require a discount of more than the cost of the work itself;
xi) As a general rule, the higher the price of a property, the smaller the pool of potential purchasers;
xii) In this case the most likely purchaser would be an investor buying for yield;
xiii) It is too simplistic to say that the smaller the pool of prospective purchasers, the weaker the competition between them.
Mr. Deckker
146. Mr. Deckker is also a chartered surveyor. He was also asked to give the Red Book Market Value for the Property as at 16th March 2011. His conclusions are largely repeated in the statement produced during the trial. He concluded that the Red Book Market Value of the Property was £850,000 to £875,000 (although, in the statement, this was expressed to be the single figure of £852,000). To reach that range (and that single figure) he took into account the following deductions:
i) The Grant on the basis that it was liable to be repaid;
ii) Purchase costs;
iii) A discount of up to 20%, for aggregation; that is, to reflect that it is to be assumed, for the purposes of establishing the Red Book Market Value of the freehold interest in the Property, that the purchaser will purchase the whole Property as one lot;
iv) A sum to reflect the marketing history and the level of offers received;
v) 2 months’ rent in relation to the flats and a 1 year rent free period for the commercial units.
147. In reaching his conclusions Mr. Deckker assumed that the Property was in a poor condition so that he allowed for £50,000 for the cost of completing the development. He also appears to have assumed that the Property was marketed throughout the period beginning in May 2010, rather than then and then again from about November 2010.
148. Mr. Deckker, like Mr. Dooley, adopted an investment approach for the commercial units (in his case, in his report, applying a yield of 10% at an ITZA rate of £22.50 per square foot p.a.) but, unlike Mr. Dooley, he also adopted an investment approach for the flats (using a yield of 8.5 – 8.75%).
149. In oral evidence Mr. Deckker made the following points:
i) He said that, in his view, to reach the Red Book Market Value of the freehold interest in the Property it was not appropriate simply to aggregate the market values of its constituent parts, without then applying a discount;
ii) He would have marketed the Property on a local basis; taking a small advertisement in Estates Gazette or a similar journal and placing it on Savills’ website. (Mr. Deckker works at Savills). He said he might take an external photograph and would also include, seemingly in the sales particulars, some details about the different units. He would recommend a price and he would mention the Grant but he would not highlight the repairs. If allowed he would display a For Sale board and if he had access to a local estate agency, he would advertise the Property in the window. It is not a requirement to do all these things. Some vendors do not want a For Sale board, although a lender would not have such sensibilities;
iii) He thought that the likely purchaser would be an investor interested in buying the Properly in one lot;
iv) At the time the buy to let market was depressed because finance was limited. Prospective purchasers would be interested in a secure rental yield and they would be likely to want to retain the Property as an investment for some time;
v) Previous offers are relevant but the weight to attach to them depends on the prior marketing;
vi) A 25% drop in the price offered by a purchaser over a 7 month period would be unusual;
vii) To establish the market value of a multi-unit property, it is standard practice, when valuing, to deduct purchase costs in the case of the properly as a whole; in this case, about £50,000. It is not standard practice to do that if asked to provide the market value of a single unit. He could not explain why;
viii) The mere existence of the Grant and the potential that it might be repaid might affect the price a prospective purchaser would offer. Investors would still be wary despite a letter of comfort from LBTH. Even an investor who was aware of LBTH’s actual stance as at 16th March 2011 and, so, who did not expect to have to repay the Grant would make some discount on the price offered to reflect the risk that, nevertheless, the Grant might become repayable because his circumstances changed;
ix) Although, in reaching his conclusions, he had deducted the whole of the Grant, having been made aware of LBTH’s actual stance as at that date, he thought that only a £50,000 deduction was appropriate (so increasing the Red Book Market Value of the Property to as much as £925,000). He said that different investors would make different deductions;
x) Red Book Market Value does not assume a 90 day sale. A 90 day sale is a special assumption;
xi) He agreed that a purchaser would be likely to deduct, for completing the development, more than the actual costs involved in so doing;
xii) His deduction of up to 20% for aggregation was based on information supplied to him by Savills’ investment department but he could not say why that department suggested that figure.
Duty to take Reasonable Care to Sell for the Best Price Reasonably Obtainable
150. Mr. Innes submitted that Fisher & Lightwood’s Law of Mortgage (13th ed); paragraphs 30.22-30.33 set out the proper legal approach to Aodhcon’s claim. Mr. Caun did not dissent from that submission. Both parties also prayed in aid Michael v. Miller [2004] 2 EGLR 151. (Mr. Innes also urged on me the recent decision of Mr. Alan Steinfeld QC (sitting as a Deputy Judge of the Chancery Division) in Meah v. G.E. Money Home Finance Ltd. [2013] EWHC 20 (Ch) as being illustrative, in particular, of circumstances in which there was criticism of the way in which the repossessed property had been marketed but, nevertheless, no breach of duty was established (see, in particular, paragraph [23] of the judgment)).
151. I derive the following relevant principles from the Fisher & Lightwood extract to which I was taken:
i) If a mortgagee decides to sell the mortgaged property he has a duty, in equity, to take reasonable care to sell for the best price reasonably obtainable, at the date of exchange of contracts (subject to (iv) below);
ii) How this 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;
iii) 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;
iv) 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;
v) The mortgagee is not under a duty to improve the property for sale. The mortgagee is not under a duty to pursue or obtain a planning permission and, it seems to me, by parity of reasoning, the mortgagee is not under a duty, in a case such as this one, to remove incumbrances like the Grant 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;
vi) 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;
vii) 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;
viii) The mortgagee will not have breached his duty unless he is “plainly on the wrong side of the line”;
ix) The mere fact that a higher price might have been obtained does not inevitably mean that the duty has been breached;
x) The burden of proving a breach of duty by the mortgagee rests on the mortgagor.
152. In Miller the claimants had bought two farms from the defendants in 1993 in circumstances where 90% of the purchase price was left outstanding but secured by a legal charge in the defendants’ favour. Following the claimants’ default, the defendants repossessed the farms and sold them for £1.625 million in about September 1998. The claimants contended, at first instance, that the farms were then worth £1.8 million and that the lavender plants then being grown were separately worth £1.4 million. HH Judge Weeks QC, sitting at first instance, found largely (but not entirely) in favour of the defendants and both the claimants and defendants appealed to the Court of Appeal.
153. In the Court of Appeal the only reasoned judgment was given by Jonathan Parker LJ who said:
“Conclusions
Bracket issue
[131] It is well settled that, in exercising its power of sale over mortgaged property, a mortgagee is under a general duty to take reasonable care to obtain the best price reasonably obtainable at the time: see Fisher and Lightwood’s Law of Mortgage (11th ed.), at para.20.23. In this context, “the best price reasonably obtainable” is synonymous with “a proper price” (the expression used by Lord Templeman in Downsview Nominees, at p.315, and by Robert Walker LJ in Yorkshire Bank, at p.l728F and with “the true market value of the mortgaged property” (the expression used by Salmon LJ in Cuckmere Brick, at p966).
[132] It is a matter for the mortgagee how that general duty is to be discharged in the circumstances of any given case. Subject to any restrictions in the mortgage deed, it is for the mortgagee to decide whether the sale should be by public auction or private treaty, just as it is for it to decide how the sale should be advertised and how long the property should be left on the market. Such decisions inevitably involve an exercise of informed judgment on the part of the mortgagee, in respect of which there can, almost by definition, be no absolute requirements. Thus (as the judge recognised at p.68F of his judgment) there is no absolute duty to advertise widely. As he correctly put it, at p.69A:
“What is proper advertisement will depend on the circumstances of the case.”
[133] Similarly, in some cases, the appropriate mode of sale may be sale by public auction (in the instant case, no one has suggested that); in others, for example where there is a falling market, it may not. Moreover, 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.
[134] The need for the mortgagee to exercise informed judgment in exercising its power of sale in turn means that a prudent mortgagee will take advice, including, where appropriate, valuation advice, from a duly qualified agent.
[135] I turn, then, to the position of a mortgagee’s agent such as Mr Hextall, whose duties included the giving of valuation advice. In my judgment, just as applying the Bolam principle, a valuer will not breach its duty of care if its valuation falls within an acceptable margin of error (see, for example, Merivale Moore and Arab Bank), so a mortgagee will not breach its duty to the mortgagor if, in the exercise of its power to sell the mortgaged property, it exercises its judgment reasonably, and to the extent that that judgment involves assessing the market value of the mortgaged property the mortgagee will have acted reasonably if its assessment falls within an acceptable margin of error.
[136] As Salmon LJ said in Cuckmere Brick, at p968H:
“I…conclude, both on principle and authority, that a mortgagee in exercising his power of sale does owe a duty to take reasonable precautions to obtain the true market value of the mortgaged property at the date on which he decides to sell it. No doubt in deciding whether he has fallen short of that duty the facts must be looked at broadly, and he will not be adjudged to be in default unless he is plainly on the wrong side of the line.”
[137] To the same effect is the observation of Lord Templeman in Downsview Nominees, at p315, that:
“[I]f a mortgagee exercises power of sale in good faith and for the purpose of protecting his security, he is not liable to the mortgagor even though he might have obtained a higher price….”
[138] I accordingly reject Mr Jourdan’s submission that as a matter of principle a “bracket” approach is inappropriate in the context of the exercise of a mortgagee’s power of sale. In so far as the exercise of the mortgagee’s power of sale calls for the exercise of informed judgment by the mortgagee, whether as to market conditions, or as to market value, or as to some other matter affecting the sale, the use of a bracket or a margin of error must, in my judgment, be available to the court as a means of assessing whether the mortgagee has failed to exercise that judgment reasonably.
[139] It seems to me that Mr Jourdan’s submissions on the bracket issue confuse the issue of breach of duty with the measure of damages should a breach of duty be established. As Lord Hoffmann said, in SAAMCO, at p221F:
“Before I come to the facts of the individual cases, I must notice an argument advanced by the defendants concerning the calculation of damages. They say that the damage falling within the scope of the duty should not be the loss which flows from the valuation having been in excess of the true value, but should be limited to the excess over the highest valuation which would not have been negligent. This seems to me to confuse the standard of care with the question of the damage which falls within the scope of the duty. The valuer is not liable unless he is negligent. In deciding whether or not he has been negligent, the court must bear in mind that valuation is seldom an exact science and that within a band of figures valuers may differ without one of them being negligent. But once the valuer has been found to have been negligent, the loss for which he is responsible is that which has been caused by the valuation being wrong. For this purpose the court must form a view as to what a correct valuation would have been. This means the figure which it considers most likely that a reasonable valuer, using the information available at the relevant date, would have put forward as the amount which the property was most likely to fetch if sold upon the open market. While it is true that there would have been a range of figures which the reasonable valuer might have put forward, the figure most likely to have been put forward would have been the mean figure of that range. There is no basis for calculating damages upon the basis that it would have been a figure at one or other extreme of the range. Either of these would have been less likely than the mean….”
154. Mr. Innes urged on me the bracket approach adopted by Jonathan Parker LJ and he suggested that an appropriate bracket in this case would be 10-15%. I am conscious that a bracket approach is an approach adopted conventionally in valuers’ professional negligence claims. When discussing the bracket approach, I do not think, however, that Jonathan Parker LJ was intending to depart from the established approach which only imposes a liability on the mortgagee if he is plainly on the wrong side of the line. I do not understand the Court of Appeal in Miller to have required that the court had to mathematically fix an appropriate bracket in a particular case. Such a requirement could have the effect of limiting the flexibility afforded to the court when presented with claims of the type made in this case and the focus of the parties would then be on the width of the appropriate bracket. To my mind what Jonathan Parker LJ intended was, amongst other matters, by reference to the circumstances presented to the Court of Appeal, to reinforce the point made in earlier cases that, to be in breach, the mortgagee must be plainly on the wrong side of the line.
155. Jonathan Parker LJ continued in Miller:
“[141] In the instant case, the judge took the, to my mind, somewhat unsatisfactory course of deciding, first, what was the market value of the estate at the relevant time (concluding that it was £1.75m) and then asking himself whether the respondents, through Mr Hextall, had been negligent in achieving a price substantially less than that. The judge’s approach might perhaps be appropriate in a case where the mortgagee accepts the first offer that it receives, without the property having been exposed to the market at all. In such a case, the likelihood is that the only evidence of “market value” will be expert valuation evidence. But where, as in the instant case, the property has been exposed to the market and a number of genuine offers have been received, the more logical approach (to my mind) is to start by considering the steps that the mortgagee took to sell the property and then to consider whether, in all the circumstances, the mortgagee acted reasonably in accepting the purchaser’s offer and contracting to sell the property at that price.”
156. In this case, in their closing submissions both parties urged on me that I should consider the Red Book Market Value of the Property as one factor in my overall consideration of the more general question: did Bridgeco take reasonable care to sell for the best price reasonably obtainable? At first, I was uncertain that that was the correct approach and, instinctively, I favoured the approach which, as it turns out, was favoured by HH Judge Weeks QC in Miller but, after reflection, I think both parties were right to urge me to consider Red Book Market Value as one factor in a wider consideration of what happened. Red Book Market Value is based on a number of assumptions which, as both experts accepted in this case in their own way, do not apply in the case of a sale of the Property by Bridgeco, as mortgagee in possession, in the state it was actually in. Where, as in this case, sales activity takes place before a property is repossessed, a decision which has regard to actuality is likely to be a more accurate one than one which requires to court to do the best it can to apply an appropriate discount for the Red Book Market Value assumptions which do not or do not wholly apply.
Other Duties
157. In addition to Aodhcon’s claim that Bridgeco was in breach of its duty to sell the Property at the best price reasonably obtainable, as I have set out above Aodhcon asserts that Bridgeco breached other duties. In support of this additional claim Mr. Caun relies on a number of passages from the judgment of Salmon LJ in Cuckmere Brick Co. Ltd. v. Mutual Finance Ltd. [1971] 1 Ch 949, 966-969:
“Mr. Vinelott contends that the mortgagee’s sole obligation to the mortgagor in relation to a sale is to act in good faith; there is no duty of care, and accordingly no question of negligence by the mortgagee in the conduct of the sale can arise. If this contention is correct it follows that, even on the facts found by the judge, the defendants should have succeeded.
It is impossible to pretend that the state of the authorities on this branch of the law is entirely satisfactory. There are some dicta which suggest that unless a mortgagee acts in bad faith he is safe. His only obligation to the mortgagor is not to cheat him. There are other dicta which suggest that in addition to the duty of acting in good faith, the mortgagee is under a duty to take reasonable care to obtain whatever is the true market value of the mortgaged property at the moment he chooses to sell it: compare, for example, Kennedy v. de Trafford [1896] 1 Ch 762; [1897] AC 180 with Tomlin v. Luce (1889) 43 ChD 191, 194.
The proposition that the mortgagee owes both duties, in my judgment, represents the true view of the law. Approaching the matter first of all on principle, it is to be observed that if the sale yields a surplus over the amount owed under the mortgage, the mortgagee holds this surplus in trust for the mortgagor. If the sale shows a deficiency, the mortgagor has to make it good out of his own pocket. The mortgagor is vitally affected by the result of the sale but its preparation and conduct is left entirely in the hands of the mortgagee. The proximity between them could scarcely be closer. Surely they are “neighbours.” Given that the power of sale is for the benefit of the mortgagee and that he is entitled to choose the moment to sell which suits him, it would be strange indeed if he were under no legal obligation to take reasonable care to obtain what I call the true market value at the date of the sale. Some of the textbooks refer to the “proper price,” others to the “best price.” Vaisey J in Reliance Permanent Building Society v. Harwood-Stamper [1944] Ch 362, 364, 365, seems to have attached great importance to the difference between these two descriptions of “price.” My difficulty is that I cannot see any real difference between them. “Proper price” is perhaps a little nebulous, and “the best price” may suggest an exceptionally high price. That is why I prefer to call it “the true market value.”
In Tomlin v. Luce (1889) 41 ChD 573, (1889) 43 ChD 191, …Cotton LJ…, said at p.194:
“The defence seems really to have been…directed to this, that the first mortgagees, selling under their power, employed a competent auctioneer, and were not answerable for any blunder which the auctioneer committed. There they were wrong, and that point was not, I think, argued before us….What we think is this, – that the first mortgagees are answerable for any loss which was occasioned by the blunder made by their auctioneer at the sale.”
Bowen and Fry LJJ concurred. Although the point was not argued in the Court of Appeal, the passage in Cotton LJ’s judgment which I have read must be treated with the greatest respect. He was a master in this branch of the law, and he and the other members of the court as well as counsel treated the point as too plain for argument. Indeed it had long been so regarded by the courts: see Wolff v. Vanderzee (1869) 20 LT 353 and National Bank of Australasia v. United Hand-in-Hand and Band of Hope Co. (1879) 4 App Cas 391 in which the Privy Council expressed the clear view that a mortgagee is chargeable with the full value of the mortgaged property sold if, from want of due care and diligence, it has been sold at an undervalue. It would seem, therefore, that many years before the modern development of the law of negligence, the courts of equity had laid down a doctrine in relation to mortgages which is entirely consonant with the general principles later evolved by the common law.
Then came Kennedy v. de Trafford [1896] 1 Ch 762; [1897] AC 180 (with which I will presently deal) in which none of the authorities to which I have referred were cited. After that case came McHugh v. Union Bank of Canada [1913] AC 299, in which Kennedy v. de Trafford was not cited. In the McHugh case, Lord Moulton, in giving the opinion of an exceptionally strong Board, said, at p. 311:
“It is well settled law that it is the duty of a mortgagee when realising the mortgaged property by sale to behave in conducting such realisation as a reasonable man would behave in the realisation of his own property, so that the mortgagor may receive credit for the fair value of the property sold.”
…I now come to Kennedy v. de Trafford [1896] 1 Ch 762; [1897] AC 180 which is the linch-pin of the defendants’ [Mr. Vinelott’s] case on the law….There was no allegation of bad faith against the mortgagees and the Court of Appeal and the House of Lords concluded that there was no evidence of negligence, nor that any better price could have been obtained than the price paid…. Mr. Vinelott strongly relies, however, upon certain observations made in that case by Lindley LJ in the Court of Appeal [1896] 1 Ch. 762, 772 and by Lord Herschell in the House of Lords [1897] A.C. 180, 183. The passage in Lindley LJ’s judgment appears to me to be rather equivocal. In that passage he seems perhaps to be resiling from what he had said in Farrar v. Farrars Ltd. (1888) 40 ChD 395, 411, namely, that the duty of a mortgagee is to take reasonable precautions to obtain a proper price. I agree with Mr. Vinelott that the word “recklessly” in the context of those passages connotes something akin to bad faith and more than gross carelessness. It means not caring whether or not the interests of the mortgagors are sacrificed. I do not regard these passages, however, as overruling Tomlin v. Luce (1889) 43 ChD 141 and the earlier authorities to which I have referred. Indeed they were never cited in Kennedy v. de Trafford. Lord Herschell, in the first part of the passage relied on by Mr. Vinelott, certainly expresses grave doubt as to whether a mortgagee in exercising a power of sale is under any duty except to act in good faith. I think, however, that in the second part of that passage he expressly refrains from deciding whether or not in such circumstances a mortgagee owes a duty to take reasonable precautions as well as a duty to act in good faith. It was certainly unnecessary for him to decide that question for the purpose of the case he was considering because, as he points out, the mortgagees in that case had taken all reasonable precautions in exercising their powers of sale and no allegation of bad faith was made. In my view, therefore, Kennedy v. de Trafford does not weaken the effect of the other cases to which I have referred. I accordingly conclude, both on principle and authority, that a mortgagee in exercising his power of sale does owe a duty to take reasonable precautions to obtain the true market value of the mortgaged property at the date on which he decides to sell it. No doubt in deciding whether he has fallen short of that duty the facts must be looked at broadly, and he will not be adjudged to be in default unless he is plainly on the wrong side of the line.”
158. It seems to me that the further duties which Mr. Caun derives from these passages do not take Aodhcon’s claim any further. It may be that, in truth, what Salmon LJ was addressing and rejecting as good law in these passages was a higher hurdle than that set in Cuckmere which a claimant was said historically to have had to overcome to succeed against a selling mortgagee. Whether or not that is so, I have concluded that, in this case, the position is that, if there was a breach of Bridgeco’s general duty in equity to act in good faith, using its powers for proper purposes and requiring it to treat Aodhcon fairly, then that breach will have manifested itself in a breach of the duty to exercise reasonable care to sell the Property for the best price reasonably obtainable. I have concluded that, if Aodhcon cannot succeed in its claim that Bridgeco failed in that latter duty, in this case it cannot succeed in establishing some other breach. Mr. Caun accepted that, in this case, the additional duties pleaded do not take Aodhcon’s claim any further. Nevertheless, I should make the following further points:
i) On Mr. McNicholl’s own evidence, what Mr. Williams said was that, if the Property was repossessed, Aodhcon should not complete the development. I do not think that such a statement is objectionable. Once possession is delivered up it is outside the power of a mortgagor to carry out building work at the mortgaged premises;
ii) If Mr. Williams did misrepresent to Mr. McNicholl that he had prospective purchasers, his view of the likely sale price or the terms of his remuneration, such misrepresentations did not apparently cause Mr. McNicholl (or Aodhcon) to do or omit to do anything. Indeed, it would be surprising if Mr. McNicholl did rely on the conversation with Mr. Williams which he reports. Mr. McNicholl confirms that within a matter of weeks at most, and before repossession, he had lost confidence in Mr. Williams to a degree;
iii) Mr. Williams does not dispute that he asked for the Property not to be auctioned. I am not satisfied that he did so for any personal gain. I do not think I can make an inference to this effect as Mr. Caun asked me to make. Indeed, as I find below, there were good reasons, in my view, why the Property ought not to have been put into an auction;
iv) I do not understand what point is being made as to Mr. Williams’ supposed conflict of interests with his principal; Bridgeco. If there was a conflict of interests then, if there could be any complaint at all, it could only come from Bridgeco;
v) As I explain below, the Aztec Valuation seems to me to be an irrelevance. It assists neither party;
vi) The complaint that (i) Mr. Williams knew or must have known the sale price was unreasonably low and (ii) the Property was not properly marketed are complaints which, in truth, in the both cases, depend on a finding that Bridgeco breached its duty to take reasonable care to sell for the best price reasonably obtainable.
Market Value and Price – Terminology
159. Authorities from which I have quoted use “market value” interchangeably for “the best price reasonably obtainable”.
160. In the end neither party suggested that Bridgeco’s duty was to take reasonable care to sell for the Red Book Market Value of Property. As I have already briefly touched on, Red Book Market Value makes the following inapplicable assumptions:
i) That the Property was to be the subject of a sale other than a 90 day sale. (Both parties agreed that a 90 day sale is an appropriate sale in the case of a repossessed property; although they may not have agreed on what a 90 day sale is (that is, whether or not there had to be up to a 90 day marketing period));
ii) That the Property was fitted out for immediate occupation.
For this reason the best price reasonably obtainable is not synonymous with Red Book Market Value. As a matter of practice there is a danger in focusing too much on “market value” rather than on “price”. The danger is that too much of the parties’ focus is on Red Book Market Value because, as is clear from this case, when a surveyor is asked about “market value” he tends to think in terms of Red Book Market Value. To my mind the distinction Mr. Dooley made, between “market value” and “price”, is one which has to be kept in mind at all times and the focus of the court’s attention must be on price (that is, the best price reasonably obtainable) and whether the mortgagee took reasonable care to sell for that price.
Discussion and Conclusions – Sale Price
161. I turn then to consider whether or not Bridgeco exercised reasonable care in March 2011 to sell the Property for the best price reasonably obtainable.
162. There are a number of preliminary matters I need to address.
163. I am of the view that the most likely purchaser of the Property was an investor, buying the Property as one lot, looking for a yield and that investors of this type made up, at least substantially, the pool of prospective purchasers. I bear in mind:
i) That LBTH would not apparently have accepted a sale of a single unit without repayment of the Grant;
ii) Mr. Palumbo’s evidence on this point;
iii) Mr. Dooley’s and Mr. Deckker’s evidence on this point.
164. I have also come to the conclusion that the offering of the Property for sale on Aodhcon’s behalf, at least from the perspective of the pool of prospective purchasers, was genuine. Prospective purchasers had no reason to think that the market might only be being “tested” on Aodhcon’s behalf. That Aodhcon’s attempts to sell the Property were genuine, and something more than a mere testing of the market, is borne out by the fact that Ms. Hung was expecting to exchange contracts with Chris of Lorrells on behalf of Noble House.
165. Unlike in Miller I heard no expert evidence about marketing but I did hear from those who have experience in the property field; including Mr. Palumbo.
166. Subject to the point I make below about the consequences of offering the Property for sale and then withdrawing it, I conclude, consistently with Mr. Palumbo’s evidence, that the Property was properly marketed for sale on Aodhcon’s behalf prior to its repossession. To my mind, investors wanting to purchase the Property to obtain a yield would be in a restricted and somewhat specialist category and so likely to be known to well respected agents in the area. A targeted marketing campaign (by approaching prospective purchasers directly) rather than a more generalised one was therefore an appropriate course to take in my view.
167. To my mind also, because the marketing which was carried out on Aodhcon’s behalf continued until repossession and because Mr. Ward was involved in this earlier marketing, when Bridgeco’s conduct is being judged it is entitled to rely on this earlier marketing.
168. A consequence of a targeted marketing campaign, in my view, is that Aodhcon was heavily dependent on the agents, which were selected on its behalf, for their contacts. Those agents can only have had, as contacts, a limited number of prospective purchasers. It follows, inevitably in my view, that if offers from the pool were rejected, the pool became smaller. On the evidence I heard as to the way the property market operates, from witnesses for both parties, I think it is likely that offering a property for sale and then withdrawing it from sale, when the pool of prospective purchasers is as I have found it to be, not merely shrinks that pool but also has the further effect of leaving the property residually tainted. It will be recalled that Mr. Palumbo gave evidence that, in his view, the contract race which was run in November 2010 tainted the Property.
169. I have concluded that the Property suffered some taint when Palmhurst’s offer was accepted and then rejected in April and May 2010. More importantly I have concluded that there was some further taint to the Property when the contract race was run on Aodhcon’s behalf and when, as part of that race, multiple draft sale contracts were issued and then withdrawn.
170. If there was any further taint to the Property by Mr. Ward’s active marketing, as Mr. Palumbo alleges, that cannot be something for which Bridgeco can be held responsible. Indeed, there is no evidence that Bridgeco was aware of this criticism of Mr. Ward whilst it was trying to sell the Property.
171. I turn then to consider Bridgeco’s conduct in marketing the Property for sale.
172. I have come to the conclusion that Bridgeco did engage Winkworth to market the Property. In my view Winkworth would not have put up a board indicating that the Property was under offer unless it had been engaged. (Indeed, this may be how Mr. Kerallah became aware that the Property was for sale). Nor is it likely that Winkworth would have issued a sale memorandum if it had not been engaged. I have concluded above that there was no sarcasm in the 8th March E-mail. Mr. Palumbo had learned that Winkworth had found a prospective purchaser who was prepared to pay £900,000 for the Property. The prospective purchaser may have been Mr. Ikbal. Whether or not that is so, if Winkworth had not been engaged, Mr. Palumbo is unlikely to have learned about a prospective purchaser it had found. Whilst Mr. Ward may have acted speculatively, there is no evidence that Winkworth, which Mr. Palumbo described as “blue-chip”, too acted speculatively.
173. I also find, consistently with the Winkworth Letter, that Winkworth marketed the Property for an asking price of £1 million. In the light of my conclusions, below, as to the Red Book Market Value of the Property in January 2011, I conclude that, after repossession, the asking price was an appropriate one for marketing purposes.
174. Aodhcon levels no criticism at Winkworth. Indeed, as I have said, Mr. Palumbo spoke highly of Winkworth. It is reasonable to infer from all the evidence before me, and I do, that Winkworth properly marketed the Property.
175. I have come to the conclusion that Bridgeco also engaged Spencers to continue to market the Property. Based on what I have set out above, I view what Mr. Ward has written with a great degree of care. Nevertheless, to my mind it is highly unlikely that Spencers would not have been instructed and yet, after repossession, have still been pursuing a sale.
176. I have already said that I cannot say when Mr. Ward produced sales particulars for the Property. I think it is most likely that they were produced, at the latest, a short time after repossession. The sales particulars may not contain the detail which a residential purchaser might expect to see. The sale particulars do not contain everything that Mr. Deckker thought they should include, but they do include the basic information which, it seems to me, is of particular interest to an investor buying a property to obtain a yield. Contrary to Aodhcon’s case I do not think that the Grant was required to be referred to in the sales particulars. As I explain below, I have concluded that the Grant represented a risk not an incentive to prospective purchasers, so the Property would not have benefited from it being advertised.
177. I am satisfied that Bridgeco did obtain marketing appraisals from Winkworth and Spencers. Bridgeco did not obtain Red Book Market Value valuations but it was not an absolute requirement that it should do so. Further than that, it is notable that, in Miller, Jonathan Parker LJ said that a prudent mortgagee might obtain “valuation advice, from a duly qualified agent”. Jonathan Parker LJ did not suggest that a Red Book Market Value valuation was required. He also referred to an “agent”. This suggests to me that what he had in mind was a marketing appraisal by a duly qualified estate agent. It would be surprising if a formal Red Book Market Value valuation was required when that market value only plays one part in any consideration of the mortgagee’s duty.
178. I do not think that Mr. Williams can be criticised for not allowing the Property to go into a Strettons’ auction on the terms proposed by Mr. Sajid. By the time the Property would have been auctioned, there would already have elapsed a considerable period of time when it had already been offered for sale and, in the light of my conclusions below as to the Red Book Market Value of the Property in January 2011 and the discounts which a purchaser could be expected to take into account in fixing an offer price, I think that the Property would have been unlikely to have sold at auction on the proposed terms and would thereby have been tainted further. I do not think that Bridgeco can be criticised for not having auctioned the Property at all. The pool of prospective purchasers was likely to have been equally well alerted to the Property by the marketing activities which were in fact carried out.
179. I have concluded therefore that, by its conduct, Bridgeco was not in breach of duty.
180. I turn then to consider the Red Book Market Value of the Property in March 2011.
181. There was a dispute between the parties about whether Red Book Market Value demands the assumption that prospective purchasers had no liability in relation to the Grant. I do not need to resolve this dispute. For the purposes of this exercise, if that assumption is, in fact, a special assumption, then I make that special assumption and my view as to the Red Book Market Value of the Property must then be taken as being on that special assumption too. I do not need to resolve this dispute because the Red Book Market Value of the Property is only one factor which I have to take into account in determining whether Bridgeco breached its duty. What I am required to, and do, do is to bear in mind always that I may be determining the Red Book Market Value of the Property but subject also to a special assumption.
182. I have set out in some detail the expert valuation evidence in this case. I am troubled by the evidence of both Mr. Dooley and Mr. Deckker. Overall, the evidence of both experts as to the Red Book Market Value of the Property had an air of unreality. No offer prices, even when properly adjusted, in my view came close to Mr. Dooley’s Red Book Market Value of £1.25 million. Mr. Deckker’s Red Book Market Value of £850,000 – £875,000 suggests that, in determining the proper sale price, little, if any, discount is made for the fact and consequences of repossession, the Grant or that some work was needed to complete the development of the Property. I think that that is unreal too. By way of example, as I explain below, I do think that prospective purchasers did discount for the Grant and, in any event, the consensus is that repossession of a property is damaging to the price at which it can sell.
183. More particularly, Mr. Dooley did not allow for any discount for a sale of the Property in one lot. I think he was wrong not to make this allowance. It seems to me that there is an attraction to any vendor wanting to sell, who has a number of units to sell, that they are all sold in one go with the economies of scale that result. That a discount would be applied for the purchase of the Property in one lot is consistent with the Winkworth Letter.
184. Mr. Deckker on the other hand suggested a 20% discount for a sale of the Property in one lot. He could not explain why that was the appropriate discount. All he could say was that he had been told that that was the appropriate discount.
185. Mr. Deckker was also wrong to assume, in my view, that the Property was marketed continuously from May 2010.
186. How then ought I to proceed to determine the Red Book Market Value of the Property in March 2011?
187. In this case, in the light of my conclusions above, the Property was properly exposed to the market between November 2010 and early January 2011. It also seems to me that, bearing in mind for example that at least some of the prospective purchasers knew they were in a contract race, their offer during this period provide the best starting point for assessing the Red Book Market Value of the Property in January 2011, from which it is possible to extrapolate to reach a conclusion about the Red Book Market Value of the Property in March 2011. As I have set out above, the relevant offers were:
i) 21st November 2010 – Noble House – £915,000;
ii) 21st November 2010 – Noble House – £940,000;
iii) 29th November 2010 – Miriad – £930,000;
iv) 10th December 2010 – Mr. Roidos – £1 million;
v) 17th December 2010 – Mr. Franks – £940,000;
vi) 7th January 2011 – Mr. Gill – £920,000.
188. Contrary to Mr. Dooley’s view, I do not think that the offers from Noble House should be left out of account. There is no or no sufficient evidence that Noble House was offering a low price in order to turn an immediate profit. To the contrary, its offers are consistent with all the others, except Mr. Roidos’, which other offers themselves are consistent with each other. Contrary also to Mr. Dooley’s view, I do not think it is right to view Mr. Roidos’ offer of £1 million as a culmination of the contract race. The contemporaneous evidence is consistent only with Mr. Roidos being viewed as not a realistic purchaser. Taking these matters into account, I have concluded that a realistic offer (sale) price in early January 2011 would have been £940,000. (This conclusion is also consistent with (i) Mr. Sajid’s proposal for a reserve price for the Property in the Strettons’ auction, (ii) Mr. Wise’s evidence that most properties which sell at auction probably do not sell for much more than their reserve price and (iii) the expected sale to Noble House).
189. To establish the Red Book Market Value of the Property in January 2011 two sums have to be added.
190. At the time of the six offers I have identified, by virtue of the Grant conditions there was a real risk that LBTH would demand repayment of the Grant from Aodhcon. The prospective purchasers, as is clear from the documents recording their offers and the terms of the draft sale contracts (which I infer were, in each case, in the same terms as the draft sale contract relating to Miriad), took the risk of the repayment of the Grant into account in their offers but, in doing so, I do not think that they proceeded on the assumption that the Grant would inevitably be repaid or that they would inevitably have to indemnify Aodhcon. (That the draft sale contracts contained an indemnity is more consistent with a recognition that there was a risk of liability rather than an acceptance that the liability would definitely arise.) It is likely in my view, and I find, that the prospective purchasers discounted their offer prices to reflect a real risk, but no more than that, that repayment of the Grant would be demanded and that Aodhcon would have to be indemnified. I cannot be precise as to the amount of that discount but I do not think I need to be. The amount of the discount is one part of one factor which is relevant to the more general question about whether Bridgeco exercised reasonable care to sell for the best price reasonably obtainable. Doing the best I can, I have concluded that the prospective purchasers discounted their offers by £60,000.
191. I turn to consider the second sum which needs to be added to the figure of £940,000; namely, the cost of completing the development of the Property in January 2011 (which is likely to be the same cost as that in March 2011). I have reached the conclusion that that cost was about £15,000. In so concluding I have taken into account the following factors:
i) In April 2010 Aodhcon only apparently required a release of £50,000 of the deposit Palmhurst had agreed, subject to contract, to pay to complete the development;
ii) GB Fitzimon appears to have concluded that much of the work to complete the development which it found to be required had been carried out by November 2010;
iii) The Bridgeco contract was not conditional on the completion of the development of the Property, although Perfectlink clearly contemplated that some work was still required to be carried out;
iv) At least most of the flats were occupied shortly after completion.
In reaching my conclusion on this point, I have borne in mind also (i) Mr. Dabner’s e-mail, dated 2nd February 2011, to Mr. Sajid and (ii) the photographs in the Aztec Valuation.
192. Mr. Bayne, in cross examination, said that he quoted £3,000 to complete the development. I do not accept that it would have cost only £3,000 to complete the development. To my mind, the photographs of the entrance to the basement flat and of the bathroom in the Aztec Valuation are consistent with that sum being an underestimate; particularly taking into account that that sum was apparently to include the cost of materials. If the cost of completion of the development was so small, it is unlikely, in my view, to have troubled the eventual purchaser of the Property to the degree that a special condition in the sale contract would have been demanded, as it seems it may have been. In fairness to Mr. Bayne, he acknowledged in cross examination that, if LBTH’s building control requirements were as recorded by Mr. Williams, then the sum of £3,000 did not cover all those requirements. I think that it is unlikely that Mr. Bayne told Mr. McNicholl that it would cost only £3,000 to complete the development. If he did so, the conversation would have taken place in about November 2010. It is unlikely that Mr. McNicholl would not have instructed Mr. Bayne to do £3,000 worth of work at the same time as Mr. Bayne was instructed to remedy the vandalism damage. There was no conversation with Mr. Williams, when the latter is said to have discouraged the completion of the development, until the middle of December 2010. Even at that stage, repossession was not a certainty and, at that stage, genuine efforts were being made on Aodhcon’s behalf to sell the Property. That being so, I think it is unlikely that Mr. McNicholl would not have instructed Mr. Bayne even then to complete the development if the cost of doing so was only £3,000. In his witness statement Mr. Bayne said:
“I was asked to provide a quote for the following:-
a) assess the damage caused by vandalism, I gave…an oral quote of approximately £12,000.
b) assess the costs for completing the project….I provided an oral quotation of approximately £15,000 to complete the job and was able to start work…in or around January 2011….”
I think that a fair interpretation of this evidence is that Mr. Bayne gave two quotes; one for about £12,000 relating solely to the vandalism damage and a second for about £15,000 for additional work required in any event to complete of the development. Such an interpretation of Mr. Bayne’s evidence is consistent with my conclusion as to the cost of completing the development. I have concluded that Mr. Bayne was in error in his evidence on this point in cross examination. That is not entirely surprising, because 3 years have elapsed since he gave his oral quotes.
193. I conclude therefore that the Red Book Market Value of the Property in January 2011 (to be clear, before repossession and before all the draft sale contracts issued by Ms. Hung were withdrawn) was £1.015 million.
194. Consistent with this conclusion is Palmhurst’s offer, in April 2010, of £1.02 million (before the Property was tainted at all) on the basis that the development of the Property was completed and the Grant repaid.
195. The Red Book Market Value of the Property in March 2011 also has to take into account, in my view, the taint the Property suffered as a result of the collapse of the contract race run on behalf of Aodhcon. I cannot put a figure on this but this is a factor which I do take into account looking at the facts broadly. The result is that, in about March 2011, the Red Book Market Value of the Property was an amount less than £1.015 million.
196. This approach to the Red Book Market Value of the Property in March 2011 (principally by reference to actual offers) inevitably takes into account to the extent appropriate:
i) Any rental voids, anticipated by prospective purchasers, whilst the development was being completed;
ii) Incentives – such as rent free periods – offered to tenants of the commercial units;
iii) The discount for aggregation;
iv) Purchase costs.
197. As I have said Red Book Market Value ignores, or, at least, I have ignored, the discount that a purchaser, paying the best price reasonably obtainable, would demand to reflect the risk that the Grant would be repayable. Because such a purchaser is, ex hypothesi, paying the best price reasonably obtainable, the amount of the discount has to be deducted from the Red Book Market Value of the Property to establish that price.
198. I have come to the conclusion that a discount for the Grant would have been demanded by such a purchaser and ought to be deducted in this case as part of the exercise to determine the best price reasonably obtainable for the Property in March 2011. Such a purchaser, as I have said, is likely to have been an investor buying the Property, admittedly to obtain a yield but, nevertheless, an investor. Whilst such an investor might have realistically expected to retain the Property for sufficiently long that the Grant became no longer repayable, as an investor he would have appreciated that his circumstances might change so requiring him to sell the Property early; particularly in a somewhat volatile property market.
199. Mr. Caun suggested, in closing, that the Grant was not a risk for a prospective purchaser which would be reflected by a discount in the price offered but, rather, it was a benefit because LBTH could be expected to make tenants available for occupation of the Property so that there would be a healthy income stream producing a good return. I do not agree with this suggestion. It is not borne out by what those involved thought or by what actually happened; for example, (i) Mr. Sajid’s view was that the Grant was a “tricky” issue and (ii) the attempts, partly successful, to persuade LBTH to relax the Grant terms. Also, if LBTH tenants were so attractive to landlords, it would have been unnecessary for the Grant to impose letting conditions as it did in fact. It is also to be remembered that LBTH had no obligation to provide tenants for the Property. In my view the Grant was attractive because it was a grant for development, not because it provided a pool of prospective tenants, and so its attraction was effectively spent by March 2011.
200. I have to put a value on the discount in relation to the Grant which would have been demanded by a purchaser paying the best price reasonably obtainable in March 2011. Having regard to the stated position of LBTH at that time, I think that the discount would have been considerably less than the £60,000 discount I have applied above. But I do not think the discount would have been a nominal amount. Mr. Deckker suggested a discount of £50,000 but he recognised that different investors would demand different discounts. Bearing in mind the pool of prospective purchasers as I have found it to be, to my mind a discount of almost 50% strikes me as being far too high. I think, more realistically, that an appropriate discount for the Grant would be £25,000.
201. To determine the best price reasonably obtainable it is necessary to make a further discount from the Red Book Market Value of the Property, for the cost of completing development. Mr. Dooley said in evidence, and Mr. Caun accepted, that prospective purchasers would discount, for completing the development, a sum in excess of the actual cost of that work. I have already concluded that the actual cost was £15,000. I heard no evidence as to the amount of the extra discount which would be demanded by prospective purchasers. Not only will the prospective purchaser have incurred costs itself in bringing about the completion of the development and taken up time to bring this about, it may also have incurred supervision costs. I think a realistic discount for the cost of completing the development would be £20,000.
202. It follows therefore that, ignoring the repossession of the Property and its consequences, the best price reasonably obtainable for the Property in March 2011 in my view was an amount less than £970,000.
203. What neither this figure nor the Red Book Market Value take into account, very significantly in my view, is the taint which a property suffers by being repossessed and offered for sale by a mortgagee in possession and the taint which the Property suffered for this reason in March 2011. That the Property suffered a taint at all because of the repossession is consistent with Mr. Ikbal’s offer of £900,000 – an offer lower than the offers made prior to repossession and an offer made within days of repossession. Further, the best price reasonably obtainable, as I have found it to be above, and the Red Book Market Value of the Property also, very significantly in my view, do not allow for a 90 day sale, which Aodhcon did not dispute Bridgeco was entitled to pursue. Both these factors would significantly depress the best price reasonably obtainable in my view.
204. I should add that, bearing in mind all my other conclusions (and, in particular, that Bridgeco was entitled to take the benefit of Aodhcon’s marketing of the Property), it seems to me that Bridgeco cannot be criticised for not having rejected Perfectlink’s £852,000 offer in the expectation of a later higher offer and for not holding out for a longer period for a higher offer. In this respect I also bear in mind that the longer the Property remained unsold the greater Aodhcon’s debt to Bridgeco increased.
205. I have already indicated that the Aztec Valuation, post-dating as it does the Bridgeco contract, is not relevant, in my view, on the question of any breach of duty by Bridgeco. The Aztec Valuation is not expert evidence but, if it was, in the light of my conclusion as to the Red Book Market Value of the Property and as to the cost of completing the development, I would have rejected its conclusions.
206. I remind myself that Bridgeco’s duty was not to sell at the best price reasonably obtainable but to take reasonable care to sell for that price. I remind myself also that Bridgeco will not have breached that duty unless it is “plainly on the wrong side of the line”. As Salmon LJ enjoined the court to do in Cuckmere Brick (an approach apparently endorsed by Jonathan Parker LJ in Miller), looking at the facts broadly I have concluded that Bridgeco did not breach its duty to take reasonable care to sell the Property for the best price reasonably obtainable. I have concluded that Bridgeco does not plainly fall on the wrong side of the line or, to put it another way, Bridgeco’s selling decisions were within an acceptable margin of error. Having concluded that Bridgeco was not in breach of duty in the way it marketed the Property for sale, in this case it is difficult to see how it can have been in breach of duty at all. If there is any doubt about that, a useful check is provided by my conclusions as to the best price reasonably obtainable for the Property. As I have said, that price was something less than £970,000 ignoring the repossession and its consequences. As I have also said a significant discount has to be applied to that figure because of those matters and because a 90 day sale was not inappropriate.
207. It follows therefore that, on this aspect of the claim, Bridgeco succeeds.
The Deposit
208. It will be recalled that Aodhcon complains that Bridgeco did not credit the deposit paid by Perfectlink to the bridging loan as soon as the deposit was received by Bridgeco’s conveyancing solicitors, so that interest was charged on a sum which was more than ought to have been outstanding.
209. It is not disputed that Bridgeco’s solicitors received the deposit as stakeholders. In consequence Bridgeco was not entitled to receive the deposit from the moment it was paid by Perfectlink. A stakeholder is entitled to retain the deposit until completion as, it appears to be assumed, happened in this case. It follows therefore that Bridgeco was not at fault in not crediting the deposit to the outstanding bridging loan immediately on its receipt by its solicitors.
210. Both parties raised with me a further matter; namely, the interest which accrued on the deposit whilst it was retained by Bridgeco’s solicitors. Neither party took me to the Bridgeco contract. It seems to me that the position is governed by rule 26 of the Solicitors’ Accounts Rules 1998 which applied at the time:
“When a solicitor holds money as stakeholder, the solicitor must pay interest, or a sum in lieu of interest, on the basis set out in rule 24 to the person to whom the stake is paid.”
211. Rule 24 provided for interest payments or payments in lieu of interest depending on whether the principal was held in a separate designated or general client account. The rule also provided that, if the solicitor was otherwise required to pay a sum in lieu of interest, s/he was not required to do so if the amount which would have been payable would have been £20 or less. There were other exceptions, in the rule, to the obligation to pay interest but those exceptions do not seem to be applicable. The rule also provided for an obligation to pay interest if the principal was not held in a client account.
212. It is reasonable to, and I do, infer, absent any contrary evidence, that Bridgeco’s solicitors paid it the interest (or sum in lieu of interest) they ought to have paid it under those rules in relation to the deposit for the period that those solicitors retained the deposit. Mr. Innes did not dispute that the interest (or sum in lieu) so received was required to be credited by Bridgeco to the bridging loan. To the extent that Bridgeco has not done so, Aodhcon’s claim (or, more properly, defence to counterclaim) must succeed.
213. The sum to be credited, if no credit has already been made, is likely to be small.
214. Mr. Caun also suggested, in closing, that Bridgeco ought to credit Aodhcon a sum of money because, between the making of the Bridgeco contract and completion, Aodhcon was kept out of possession of the Property. I do not think that there is any merit in such a claim, which was not pleaded in any event. By the time of the Bridgeco contract, repossession had already taken place and it has never been suggested that, during the period in question, Bridgeco was not entitled to possession of the Property.
Construction of the Facility Fee provision
215. It will be recalled that Aodhcon asserts that, by using the expression “monthly anniversary”, the Facility Fee is uncertain or should be construed so as to refer to 6th May in every year (so substantially reducing the compounding effect of the provision).
216. As I have quoted above, the Facility Fee provision is in these terms:
“A facility fee of 1.25% per month calculated on the balance outstanding from time to time as at each monthly anniversary of the drawdown will be debited to your account and will be payable on redemption of the loan. However, we will waive our right to collect the Facility Fee if there are no arrears of interest or any other breaches of the terms and conditions set out in this offer letter or of the terms of the security including your failure to repay the loan at the end of the term”.
217. I remind myself of the approach advocated by Lord Hoffman in Investors Compensation Scheme Ltd. v. West Bromwich Building Society [1998] 1 WLR 896, 912g-913e. I have to ask myself what is the meaning which in particular the Facility Fee provision would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the agreement for the bridging loan.
218. To my mind, the proper construction of the disputed part of the Facility Fee provision is that, on the 7th day of each successive month after the bridging loan had been drawn down by Aodhcon, there was to be debited 1.25% of the balance of the loan then outstanding; Aodhcon having actually drawn down the loan on 7th May 2010 (not 6th May 2010).
219. To my mind the Facility Fee provision is neither uncertain nor, on its proper construction, is it to be interpreted as Aodhcon suggested.
220. As a matter of fact, Bridgeco has stated that it is not claiming the Facility Fee for the period before 7th November 2010 (the end of the bridging loan term).
Penalty
221. It will be recalled that Aodhcon asserts the Facility Fee is a penalty.
222. In response Mr. Innes prayed in aid Wallingford v. Mutual Society (1880) App Cas 685. Mr. Caun accepted that that decision is binding on me. In Wallingford Lord Hatherley said, at pp.702-703:
“The other question which was much argued before your Lordships was the question of penalty. I apprehend that there again the case is quite clear. The illustration of the form adopted in mortgages is a very good illustration, I think, of what the true principle is. The form adopted long since—I do not know whether it is still continued or not—in mortgages, was when you wished to reserve in reality interest at 4 per cent., to reserve the interest by contract at 5 per cent., but to mitigate the severity of that contract in the event of the money being paid by a certain day. It is not a penalty on non-payment (though it seems a fine distinction) when you say that your contract shall be made for interest at 5 per cent. to be reduced, in the event of your punctual payment, to 4 per cent.; but it is a relaxation of the terms of that original contract, not taking it by way of penalty at all, but a relaxation of your contract which you would merit and purchase by paying at a definite and fixed time. If that definite and fixed time were exceeded, then the original contract revived in all its force. Sometimes mortgage deeds, being somewhat unskilfully drawn, interest at 4 per cent. was reserved by the contract to be raised to 5 per cent. if there was non-payment at a particular day; and although that brings the case to an extremely fine and nice distinction, it all the better illustrates the rule which has been applied at all times by the Courts, with reference to this question of penalty. If there had been indulgence at any time upon given terms, as long as those terms are observed, the indulgence lasts. When those terms are departed from the indulgence at once fails, and the original contract is revived in full force.”
223. I have come to the conclusion that the Facility Fee provision is the sort of provision which Lord Hatherley concluded is not a penalty. By the terms of the provision Aodhcon had a contractual obligation at all times to pay the Facility Fee but an indulgence was granted in the absence of default. As I note below, whether or not a contractual provision is a penalty depends, at least in part, on the proper construction of the provision in question. In this case, whatever Mr. Samuels thought was the purpose of the Facility Fee provision, as properly construed, it imposed on Aodhcon the obligation I have set out above.
224. Mr. Caun sought to distinguish Wallingford; arguing that what Lord Hatherley said was limited to interest payment obligations only and that the Facility Fee provision, in terms, is not such an obligation. I do not accept that argument. Lord Hatherley pointed out that the mortgage interest provisions he was contemplating were examples of a more general principle. Nor do I accept Mr. Caun’s argument that there is a ground for distinction because, in this case, Aodhcon’s interest payment obligation is contained in a different provision to the Facility Fee provision. The fact that there are separate payment obligations to my mind does not undermine my conclusion generally on this matter or, in particular, my construction of the provision; namely, that it provides for an indulgence in the absence of default rather than imposing an additional liability in the event of default. Mr. Caun also urged on me that I should have regard to the consequences of the Facility Fee provision and the large amount claimed as the Facility Fee by Bridgeco. Whilst the amount claimed is a large one, I do not believe that the proper construction of the provision, which leads to my further conclusions in this context, can be affected by that fact.
225. Even if I have reached the wrong conclusion in this context, I remind myself that, in Lordsvale Finance plc v. Bank of Zambia [1996] QB 752, 762, Colman J said:
“…whether a provision is to be treated as a penalty is a matter of construction to be resolved by asking whether at the time the contact was entered into the predominant contractual function of the provision was to deter a party from breaking the contract or to compensate the innocent party for breach.”
226. There is nothing, in this case, to suggest that the predominant contractual function of the Facility Fee provision was to deter Aodhcon from breaking the bridging loan agreement.
227. Lordsvale was considered recently by the Court of Appeal in El Makdessi v. Cavendish Square Holdings BV [2013] EWCA Civ 1539. Mr. Caun took me to [87]-[89] where Christopher Clarke LJ said:
“[87] Colman J said this [in Lordsvale]:
“It is perfectly true that for upwards of a century the courts have been at pains to define penalties by means of distinguishing them for (sic) liquidated damages clauses. The question that has always had to be addressed is therefore whether the alleged penalty clause can pass muster as a genuine pre-estimate of loss. That is because the payment of liquidated damages is the most prevalent purpose for which an additional payment on breach might be required under the contract. However, the jurisdiction in relation to penalty clauses is concerned not primarily with the enforcement of inoffensive liquidated damages clauses but rather with protection against the effect of penalty clauses. There would therefore seem to be no reason in principle why a contractual provision the effect of which was to increase the consideration payable under an executory contract upon the happening of a default should be struck down as a penalty if the increase could in the circumstances be explained as commercially justifiable, provided always that the dominant purpose was not to deter the other party from the breach.”
[88] The situations in which a clause is commercially justifiable but its dominant purpose is to deter are not readily discernible. Colman J may have had in mind an outrageous increase in the default rate.
[89] It is apparent from this case that the fact that a payment on breach may not really be a pre-estimate of loss does not mean that it must be penal. If there is a good commercial justification for the provision that may be a ground for deducing that deterrence of breach was not the dominant purpose of the term. However, the clause in that case was sufficiently close to a pre-estimate as to cause it to be so described in Jeancharm; and it represented a modest additional compensation for the fact that the risk had turned out to be worse than anticipated and was a payment for continued use of the bank’s money on terms that properly reflected the new risk.
[89] Colman J’s approach was approved by Mance LJ in Cine Bes Filmcilik ve Yapimilil & Anor v United International Pictures & Ors [2004] 1 CLC 401. Mance LJ regarded as valuable the observation that a dichotomy between a genuine pre-estimate of damages and a penalty clause did not necessarily cover all the possibilities:
“There are clauses which may operate on breach, but which fall into neither category and they may be commercially justifiable”.”
228. I do not see how this passage from Christopher Clarke LJ’s judgment takes matters any further once it is appreciated that, at least in part, whether a provision is a penalty clause is a matter of construction and once the distinction made by Lord Hatherley is accepted as being a legitimate distinction, or, at least, one which binds me. The passage from El Makdessi which I have quoted begs the question which arises in this case; namely, whether, on the proper construction of the Facility Fee provision, it is a provision which increases the consideration payable on default or whether, instead, it is a provision which grants an indulgence in the absence of default (as, in fact, I have found it to be).
Live In Caretaker
229. Bridgeco adduced no evidence that it was entitled to debit Aodhcon’s account with the costs of employing a live in caretaker. After he had closed Bridgeco’s case and after he had made his closing submissions, Mr. Innes sought to put in evidence Bridgeco’s standard terms and conditions which, he said, were incorporated into the bridging loan. I did not permit Mr. Innes to put those terms in evidence. Aodhcon’s position as to this cost was clear from the outset. It required Bridgeco to prove its entitlement to debit its account for this cost. Bridgeco did not address this matter at all in evidence. It was too late to do so after Mr. Innes had concluded his closing submissions.
230. Aodhcon’s claim (or, more properly, defence to counterclaim) additionally must succeed to the extent of this cost.
Disposition
231. In very general terms, I have found in Aodhcon’s favour on two of the subsidiary issues it has raised; namely (i) in connection with the interest or equivalent sum in lieu attributable to the deposit whilst Bridgeco’s solicitors retained it as stakeholders and (ii) in relation to the cost of a live in caretaker. Otherwise I have found in Bridgeco’s favour.
