Mortgage – Receivers – Breach of duty – Claimant developer defaulting on loan – Bank appointing defendant fixed charge receivers – Claimant commencing proceedings against defendants – Whether defendants acting in breach of duties relating to sale and management of properties – Claim allowed in part
The claimant was a property development company which developed Warne Court in Enfield, Middlesex and 26-30 Cubitt Street, London WC1. The defendants were fixed charge receivers. They were both chartered surveyors.
The claimant obtained finance to develop the properties and gave the bank a legal mortgage over each property in standard terms as security for the loan facility. The defendants were appointed by the bank under the mortgages when the claimant defaulted on its repayment obligations. By that time the sum due to the bank from the claimant was £4,397,000.
The defendants sold Warne Court in July 2012 for £3,250,000 and sold four of the flats in the Cubitt Street development in 2013. The flats were initially offered for private sale through an estate agent but ultimately sold by public auction. Having discharged the claimant’s secured debt to the bank and returned a surplus to the claimant, the receivership ended in July 2013.
The claimant claimed that the defendants acted in breach of their duties relating to the sale and management of both properties in a number of respects causing the claimant significant losses. Some claims were disposed of at an earlier stage but the claimant sought damages of approximately £1 million.
Issues arose as to: (i) the duties which the defendants owed to the claimant as joint fixed charge receivers; (ii) whether the defendants owed a duty to obtain an indemnity policy in respect of the lack of formal consent to the change of use from commercial to residential use; (iii) whether the defendants discharged their duties of maintenance during the receivership; and (iv) whether any of the flats were sold at an undervalue as a result of a breach of duty by the defendants.
Held: The claim was allowed in part.
(1) A receiver could give priority to the interests of his appointer in deciding whether, and if so when and how, he should exercise the powers invested in him. Unlike a mortgagee, a receiver could not simply remain passive: he had a duty to preserve and protect the charged assets. The receiver’s power to manage was independent of the power to sell and, provided that the mortgagee was not prejudiced, the receiver had to be active in the preservation of the charged property over which he had been appointed. If a receiver (or mortgagee) decided to exercise a power of sale, he would generally owe a duty of care to the mortgagor in respect of the manner in which he did so. That duty was usually an obligation to obtain the best price reasonably obtainable at the time of the sale. There was no support for the proposition that the equitable duties of care in relation to management and sale required a claimant to show something akin to bad faith, not mere negligence, in order to establish breach. There was no duty on receivers only to sell so much of the charged property as was required to repay the mortgagee: Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971] Ch 949 and Silven Properties Ltd v Royal Bank of Scotland plc [2003] EWCA Civ 1409; [2003] 3 EGLR 49 applied.
Since his primary duty was to deal with and realise the security in the best interests of the mortgagee, the receiver had only a secondary duty to the mortgagor to exercise care to avoid preventable loss. In determining whether the duty to obtain the best price reasonably obtainable was satisfied, the court would apply the Bolam test: A mortgagee or receiver was only to be adjudged negligent if he had acted as no mortgagee or receiver of ordinary competence acting with ordinary care and (where appropriate) on competent advice would act. Receivers enjoyed a degree of latitude not only as to the timing of a sale but also as to the method of sale. They were entitled to sell the property in its current condition without awaiting or effecting any increase in value or improvement in the property: Silven, Bell v Long [2008] EWHC 1273 (Ch) and R (on the application of Glatt) v Sinclair [2010] EWHC 3082 (Admin) applied. Ahmad and others v Bank of Scotland plc [2016] EWCA Civ 602 followed.
(2) As the receiver’s primary duty was to bring about a situation where the secured debt was repaid, as a matter of principle the receiver had to be entitled to sell the property in the condition in which it was, in the same way as a mortgagee. The court rejected the contention that the receivers ought to have gone into the market to seek indemnity policies in an attempt to make the flats more marketable. That was a variation on attempts in cases at first instance to impose on receivers the duty to make the property more attractive, all of which had been rejected: Garland v Ralph Pay & Ransom [1984] 2 EGLR 147, Meftah v Lloyds TSB Bank plc [2001] PLSCS 79; [2001] 2 All ER (Comm) and Silven applied.
(3) The evidence adduced by the claimant came nowhere near proving a breach of the duty of maintenance by the receivers during the receivership.
(4) A degree of latitude had to be given to receivers not only as to the timing of any sale but also as to the method of sale to be employed and the court had to recognise that the mortgagee or receiver was involved in an exercise of informed judgment; if he exercised his judgment in a reasonable way, he would not be held to be in breach of duty. An error of judgment, without more, was not negligence or a breach of the relevant duty in equity. In the present case, the court was not persuaded that there was, even viewed in retrospect, any error of judgment by the receivers: Michael v Miller [2004] EWCA Civ 282; [2004] PLSCS 70, Bell v Long [2008] EWHC 1273 (Ch), One Step (Support) Ltd v Morris-Garner [2018] UKSC 20; [2018] PLSCS 77 and McDonagh v Bank of Scotland plc [2018] EWHC 3262 (Ch) applied.
Although the defendant had erroneously transferred a storage room with one of the flats, it was artificial to seek to categorise the conveyancing error as a breach of the receivers’ duty to take reasonable care to obtain the best achievable price for the property. However, that error had caused part of the freehold common parts to be transferred to a leaseholder for no consideration. The claimant’s loss would be assessed as the loss of the chance of negotiating a sale or rental of the storage room with the owners of other flats in the sum of £10,000.
Edward Bennion-Pedley (instructed by Judge Sykes Frixou) appeared for the claimant; Ivor Collett (instructed by Kennedys Law LLP) appeared for the defendants.
Eileen O’Grady, barrister
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