Sale of land – Consideration – Bridging loan – Claimant company seeking to redevelop and sell property – Claimant obtaining bridging loan from defendant company – Loan running out – Defendant selling property – Claimant alleging breach of duty by defendant – Whether defendant selling property at too low a price – Whether deposit being properly credited – Whether facility fee being properly calculated – Whether facility fee amounting to penalty – Claim dismissed – Counterclaim allowed in part
A property developer registered the claimant company as a special purpose vehicle to acquire and develop a property in London E3. The claimant purchased the property for £640,000. The purchase price was raised in part by a loan of £437,267 from a bank, secured by a first legal charge over the property. Planning permission was granted for the development of the property into a complex of six flats and two ground floor commercial units. The development proceeded slowly and, as the loan was about to expire, the claimant took out a bridging loan from the defendant company. The property had a projected value of £1.25m. When the bridging loan ran out, the question of selling the property was raised. After several unsuccessful attempts, the property was sold by the defendant as mortgagee in possession for £852,000.
The claimant subsequently issued proceedings against the defendant, contending that the defendant was in breach of its duty as mortgagee to sell the property at the best price reasonably obtainable. The court was asked to infer that the defendant 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). Moreover, the defendant had not credited a deposit to the loan as soon as it had been received by its conveyancing solicitors, so that interest had been charged on an outstanding sum which was more than it ought to have been. Furthermore, by using the expression “monthly anniversary”, the facility fee was uncertain and the facility fee was a penalty. The defendant counterclaimed for what it alleged were outstanding sums under the bridging loan agreement because the sale of the property left a shortfall on the sums due to it from the claimant.
Held: The claim was dismissed.
(1) The defendant’s duty had not been to sell at the best price reasonably obtainable, but to take reasonable care to sell for that price. The defendant would not have breached that duty unless it was plainly on the wrong side of the line. Looking at the facts broadly, the defendant had not breached its duty to take reasonable care to sell the property for the best price reasonably obtainable. On the evidence, ignoring the repossession of the property and its consequences, the best price reasonably obtainable for the property at the relevant time was an amount less than £970,000. A significant discount had to be applied to that figure because of those matters and because a 90 day sale was not inappropriate. Accordingly, the defendant had not plainly fallen on the wrong side of the line. Its selling decisions had been within an acceptable margin of error. Having concluded that the defendant had not been in breach of duty in the way that it had marketed the property for sale, it was difficult to see how it could be said to have been in breach of duty at all: It followed that, on breach of duty, the defendant had succeeded: Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971] Ch 949 and Michael v Miller [2004] EWCA Civ 282; [2004] PLSCS 70 applied.
(2) It was not disputed that the defendant’s solicitors had received the deposit as stakeholders and, as such, were entitled to retain the deposit until completion. On the assumption that that happened in the present case, the defendant was not at fault in not crediting the deposit to the outstanding bridging loan immediately on its receipt by its solicitors. The interest which had accrued on the deposit whilst it was retained by the defendant’s solicitors was governed by rule 26 of the Solicitors’ Accounts Rules 1998 which applied at the time and provided: “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.” 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 was also an obligation to pay interest if the principal was not held in a client account. It was reasonable to infer, absent any contrary evidence, that the defendant’s solicitors had paid the interest they ought to have paid under those rules for the period that they retained the deposit. The interest so received was required to be credited by the defendant to the bridging loan. To the extent that it had not done so, the claimant’s defence to the counterclaim succeeded.
(3) On the proper construction of the disputed part of the facility fee provision, on the seventh day of each successive month after the bridging loan had been drawn down by the claimant, there was to be debited 1.25% of the balance of the loan then outstanding; the claimant having actually drawn down the loan on 7 May 2010. That provision was not uncertain. As a matter of fact, the defendant had stated that it was not claiming the facility fee for the period before the end of the bridging loan term: Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 applied.
(4) The facility fee provision was not the sort of provision which constituted a penalty. By the terms of the provision, the claimant had a contractual obligation at all times to pay the facility fee but an indulgence was granted in the absence of default. Whether or not a contractual provision was a penalty depended, at least in part, on the proper construction of the provision in question. There was nothing, in this case, to suggest that the predominant contractual function of the facility fee provision was to deter the claimant from breaking the bridging loan agreement: Wallingford v Mutual Society and Official Liquidator (1880) App Cas 685 and Lordsvale Finance plc v Bank of Zambia [1996] QB 752 applied; El Makdessi v Cavendish Square Holdings BV [2013] EWCA Civ 1539 considered.
Lawrence Caun (instructed by Ronald Fletcher Baker LLP) appeared for the claimant; Stephen Innes (instructed by Brightstone Law LLP, of Elstree, Hertfordshire) appeared for the defendant.
Eileen O’Grady, barrister