Sale of hotel under mortgagee’s powers of sale–Pre-emptive bid accepted by agent prior to auction–Allegation of negligent sale at undervalue rejected–‘Very high bid from very special purchaser’ accepted on excellent advice–Nature of evidence required in valuation disputes–Fact, not opinion–‘Singularly unhelpful’ for valuer to say merely that his valuation was £x
In this action
Mrs Jean Margaret Johnson, of Fairway Farm, Adgestone, Sandown, Isle of Wight,
alleged that the Highland Hotel, Priory Road, Shanklin, of which she and two
others were co-mortgagors, was sold on March 31 1971 at an undervalue by the
mortgagee, the late Mrs Mildred Kate Ribbins, of Victoria Road, Surbiton,
Surrey. The action was commenced by writ on July 28 1971. During the course of
the proceedings Mrs Ribbins died, and was replaced by her executors, Trevor
Henry Frederick Ribbins and Iris Mildred Kate Ribbins. Down to the time at
which Walton J reserved judgment on April 17 1975, the writ had not been served
on the remaining defendants, the plaintiff’s co-mortgagors, Mr Alan Garfitt and
Mr Reginald Douglas Worswick. The mortgagee’s agents, Sir Francis Pittis &
Son, estate agents and valuers, of Regent Street, Shanklin, were joined as
third parties.
Mr J H Hames
QC and Mr J K S Denniston (instructed by Lovell, Son & Pitfield, agents for
Paris, Smith & Randall, of Southampton) appeared for the plaintiff; Mr D
Rice (instructed by Prentis, Seagrove & Co, agents for Charles D Mason
& Co, of Surbiton) for the executors; and Mr P Millett QC and Mr D Iwi
(instructed by Reynolds, Porter, Chamberlain & Co) for the third parties.
Giving
judgment, WALTON J said that the Highland Hotel was formerly owned by the
plaintiff’s mother. The plaintiff was her sole beneficiary. The actual business
of the hotel was carried on by The Highland Hotel (Shanklin) Ltd, which also
owned the bulk of the contents. The hotel had many advantages, standing in an
excellent position with spacious grounds. Either the plaintiff or her husband
saw that if only the property could be properly exploited it should be capable of
producing a very considerable income. The problem was that the plaintiff was in
a difficult financial position, and this situation was not assisted by the fact
that the company went into a creditors’ voluntary liquidation. During 1970 Mr
Johnson, acting on behalf of the plaintiff and himself, was looking for a
permanent source of finance. Planning applications were made in respect of the
necessary anticipated works, and an application for a grant was made to the
English Tourist Board under the Development of Tourism Act 1969. The project
was undertaken in the light of a feasibility study made in July 1970. The whole
of it was quite impossible for the Johnsons to carry out; at this moment in
time they were suffering from folie de grandeur. So far from being able
to raise any additional money of any magnitude, by June 1970 Mrs Johnson was
really unable to raise any money at all. About this time Mr Garfitt, a friend
trying to assist her, hit upon a scheme which would at any rate enable her to
raise some money. This was, simply, that she should sell the land–ultimately to
Mr Garfitt, Mr Worswick and herself–for £25,000, and that on the strength of
the joint and several covenants of the three of them some money should be
raised. In anticipation of the final borrowing, various sums were advanced by
the intending mortgagee, Mrs Ribbins, against memoranda of charge signed by all
three of them. The immediate purpose of the original advance was to pay off all
outstanding bills so as to enable Mrs Johnson to get the hotel into operation
as a going concern at the earliest possible moment.
Between June
and September, Mr Garfitt began to feel disenchanted with Mrs Johnson. Although
he had understood from her that he had been supplied with complete details of
all her indebtedness, more and more debts emerged which had to be paid off, so
that although the original agreed advance of £20,000 had been increased to
£25,000, there was left only £19,500, just enough to pay off the three
outstanding mortgages which Mrs Johnson had on her various properties.
Ultimately the total agreed advance by the date of completion of the legal
charge on September 4 1970 had risen to £26,500. The one thing that the
mortgage transaction certainly did not do was to provide Mrs Johnson with any
working capital at all; on the other hand, it was the best that she could
possibly hope for, and she was able to achieve that only because Mr Garfitt and
Mr Worswick were ready to lend their names to the legal charge. Almost at once
Mrs Johnson fell behind with the mortgage interest. As soon as it was two
months in arrears, Mrs Ribbins issued an originating summons in the Newport
(Isle of Wight) District Registry against Mr and Mrs Johnson asking for
possession of the property comprised in the mortgage. An order was made for
possession which was duly executed by the bailiff on March 26 1971.
A number of
planning applications had at one time or another been made in respect of the
property. Full planning permission, permission (a), was obtained in respect of
a proposed extension to the hotel entrance. This chiefly involved the
construction of a canopy over the existing entrance. Some work appeared to have
been done by way of strengthening the foundations of an existing wall to take
the additional weight of the canopy, but this was not obvious on inspection and
did not affect anything which he (his Lordship) had to decide. Also obtained
were permission (b), outline planning permission for an additional storey for
the hotel, and permission (c), outline planning permission for the erection of
holiday service flatlets on one of the building plots adjoining the hotel. From
the point of view of the present action the latter was wholly immaterial; it
affected what could be done on land which was not part of the mortgaged property,
and could therefore have no effect upon the value of the property. As regarded
both (b) and (c), no
ever refused. Finally, a quite separate planning permission was obtained for a
building plot enabling it to be developed for residential purposes quite
separate from the hotel. With regard to permission (b), the outline permission
for the addition of a storey, the question how far this might be reflected in
the value of the hotel was, to say the least, dubious in the extreme. Mr Peter
William Hearn, a partner in Sir Francis Pittis & Son, placed no value upon
it at all, and he (Walton J) saw no reason whatsoever to disagree with that
conclusion. Since detailed planning permission was never received for the sole
project for which the tourist board had stated it was willing to make a
grant–the addition of the storey to the hotel–before April 1 1971 (the board
having confirmed that the contemplated work would be eligible for a grant provided
it was started by April 1 1971), the work could not have been, as it in fact
was not, started before that date. There was therefore at that time no tourist
board grant available to an intending purchaser. Hence the prospect of such a
grant could not have enhanced the value of the property. Even assuming that
there had been a grant, the mortgagee would have sold justifiably unaware of
the fact.
The interest
still being in arrear early in 1971, Mrs Ribbins had a power of sale. She
instructed Sir Francis Pittis & Son to sell the property by auction. They
duly prepared the best particulars they could (they were unable to obtain
access to the premises prior to April 26), and prepared to hold an auction on
April 7. In passing, he (his Lordship) would observe that those particulars had
been challenged in two respects, (i) on the ground that they said nothing about
the relevant planning permissions, and (ii) on the ground that they did not in
any way refer to the alleged ‘approval by the English Tourist Board of the
hotel’s eligibility for a grant.’ But,
for the reasons he (Walton J) had already indicated, neither of these
criticisms was in his judgment in any way warranted. To continue with the
history, Mr and Mrs Johnson were not the only persons who found the prospect of
the impending sale of the hotel distasteful. From a completely different
direction and for a completely different reason, so did the bursar and deputy
headmistress of the Upper Chine School, Miss Margaret Pasmore. This school
occupied extensive premises in Shanklin, and in fact owned most of the property
on the other side of Priory Road facing the hotel entrance. It was about the
end of term, and Miss Pasmore read in the papers the advertisement of the sale
of the hotel. She heard at about the same time from two separate sources that
there was a bidder likely to be in the market who wanted to open up the
premises as a nightclub with a late night licence open until 2 o’clock in the
morning. This was an appalling prospect, as the hotel was directly opposite the
junior block. The reaction of the headmistress was that if at all possible, the
hotel must be bought by the school. But how?
Both the headmistress and Miss Pasmore were due to depart on their holidays
at the end of term, and it would have been very awkward for either of them to
have to return for the auction on April 7. So Miss Pasmore swung into action.
By great good
fortune, there was a meeting of the school governors on the following day,
either March 26 or 27, and they gave her the green light within the financial
limits which the bank could make available to them. She got the particulars of
the sale from Sir Francis Pittis & Son, and went to see what was on offer
with Mr Hearn of that firm. In fact, of course, at that stage she was not able
to see very much, but by another stroke of good fortune, she did know quite a
lot about the premises generally, since two years before that the school had
rented one wing of the hotel whilst part of its then premises was being
rebuilt. She went to see the bank; they would make up to £40,000 available. She
realised that in the time available to her she could not hope to obtain a
valuation of the premises, so she took advice as to what rough and ready
methods of valuation were available, and was told that £1,000 a bedroom was a
pretty general guide. This would have produced a figure of some £32,000. But
Miss Pasmore realised that she would have to offer a great deal more than that
if she was going to make what she wanted to make, a pre-emptive strike. Thus
she decided to offer the full £40,000. She sailed into the offices of Sir
Francis Pittis & Son and asked them whether they would accept a pre-auction
bid. Mr Hearn telephoned Mrs Ribbins’ solicitor, Mr Laikin, to say that he had
received a very generous offer for the premises in the sum of £40,000 and that
his advice was that it would not be bettered at auction and ought to be
accepted. Mr Laikin took instructions from his client and also the advice of
Chancery counsel. The advice he got was that he ought to accept the offer. He
accordingly spoke to Mr Hearn, and in effect authorised him on behalf of the
mortgagee to conclude negotiations and sign a contract.
The present
action was commenced by writ on July 28 1971. It had yielded surprise after
surprise, the crowning surprise being that after it had been completely heard
and judgment had been reserved, the plaintiff obtained the leave of the master
to extend the writ so that it could be served on Mr Garfitt and Mr Worswick, on
whom service had not been effected. When Mr Garfitt and Mr Worswick were asked
to accept service out of time, they very properly refused, and they now applied
to have the service and order for renewal set aside. He (his Lordship) proposed
to grant this application. He thought that the plaintiff’s manoeuvre was an
eleventh-hour attempt to involve parties who ought either to have been brought
into the action from the beginning or to have been left out of it completely.
He would observe that in a case such as this, although the master might have
jurisdiction to make the order that was made, the power to do so ought never to
be exercised by anybody other than the judge after the case had gone to trial
and the judge had reserved his judgment. The master could know only what he was
told about the matter, whereas the judge was by then fully seised of the case.
The effect of the plaintiff’s failure to serve two out of the three mortgagors
was to render the action defective as to parties, and although this did not now
mean that the whole action became abortive, yet, since no direct relief could
be given to one of three mortgagors suing in respect of the mortgage contract
on her own, the only relief he (Walton J) could give her, assuming he were to
find in her favour on any point, was by way of declaration.
What relief
was in fact available? The fundamental
issue in the action was whether there was or was not a sale of the hotel
premises at a negligent undervalue. That was to say, on March 30 1971, the day
when the mortgagee, being fully and undeniably entitled to sell, did sell, was
the market value of the property in excess of £40,000 to such an extent that
the sale must be considered as one made at an undervalue? Secondly, if so, was the sale at that undervalue
the result of negligence? He (his
Lordship) would not himself have had the slightest doubt but that the law
applicable in this situation was that stated by Cross LJ (as he then was) in Cuckmere
Brick Co Ltd v Mutual Finance Ltd [1971] Ch 949 at pages 972 and
973. The correctness of that decision had however been assailed, as it were,
from both sides. Mr Rice for the executors, had asked the court to say that it
stated the duty of the mortgagee when exercising a power of sale in terms which
were much too wide, and that in truth a mortgagee could be made liable only for
a reckless exercise of the power. Mr Hames, for the plaintiff, had submitted in
effect that the case understated the duty of the mortgagee very substantially,
and that in substance the mortgagee was a guarantor that the sale price would
reach not merely the market price but ‘the best price.’
So far as Mr
Rice’s submissions were concerned, in the
were differing standards of duty laid down by different cases, and the court
quite deliberately chose to prefer the ‘not negligent’ to the ‘not reckless’
standard. It also seemed to him (his Lordship) that they were manifestly
correct in coming to that conclusion. He could see no good reason in law or in
logic why the effecting of a mortgage should expose the mortgagor to the risks
of a sale taking place at a negligent undervalue. As for Mr Hames’s
contentions, these in effect amounted to saying that the mortgagee must be a
guarantor of the fact that the best price was obtained for the property. If
that were indeed so, it would effectively rule out the possibility, ever, of a
sale being made by private treaty; and in all cases the mortgagee would have to
sell by auction. This was not the law. Mr Hames’s submissions cast far too high
a duty upon the mortgagee. The correct standard was therefore that of
negligence, and the inquiry which had to be effected was, had the property been
sold at an undervalue, such sale at an undervalue being due to the negligence
of the mortgagee or her agent?
The plaintiff
relied on the evidence of four persons who said that had the property actually
been put up for auction, they would have attended and bid sums in excess of
£40,000; she also relied on expert evidence of value. None of the four
prospective purchasers had signified their interest in the property direct to
Sir Francis Pittis & Son. He (Walton J) felt that he derived no assistance
from the evidence of the first. The next two were original members of an
intended syndicate formed for the purpose of developing the whole triangle of
land on which the Highland Hotel stood. The conclusion he (his Lordship) had
formed was that neither of them would have been at all likely to attend the
auction. In saying he was willing to pay over £40,000, one member of the
syndicate was really saying that he was willing to pay over the market price
for the hotel because he thought he could eventually have done very well out of
aggregating the whole of the lands in the triangle. The witnesses’ views, while
possibly sincerely held, did not afford any guide to the true market value of
the property. The evidence of the fourth did not help, because once his
attention had been drawn to the proposed date for the auction, April 7 1971, he
at once said that no purchase so far as he was concerned was ‘on’ because it
was by then far too late to obtain a grant from the tourist board.
The only other
witness called for the plaintiff on the question of valuation was Mr D C
Blatchley FRICS, a partner in the firm of Hewitt & Co, of Lymington. He
placed a value of between £55,000 and £60,000 on the hotel at the relevant
time. He did not think it necessary to inspect the inside of the premises, as
he had the plans which showed the layout; he took the tourist board grant into
consideration, and placed a value of £5,000 thereon. He did not accept the ‘per
bedroom’ method of valuation, as he said that too many corrections had to be
made if it were adopted. He (his Lordship) fully accepted, of course, that the
figures of £50,000 and £55,000 (which he had corrected by the subtraction of
the tourist board grant from Mr Blatchley’s original figures) represented Mr
Blatchley’s view of the value of the hotel. His difficulty in deriving the
slightest assistance from Mr Blatchley’s evidence was that he (Mr Blatchley)
gave not the slightest reason for reaching these figures. One would have
expected that the witness would have produced a list of comparables of some
description, or otherwise produced some calculations on some basis known to valuers.
But he did not; he was not asked to do so in examination in chief, and Mr
Millett (upon whom devolved the burden of his cross-examination) was in the
circumstances not disposed to explore this aspect of his evidence further. He
(Walton J) did not expect mere opinion evidence from an expert called as a
valuer: he expected facts. Of course, there were many methods of valuation, and
since at bottom valuation was an art rather than a science no two valuers would
normally agree to the last £, although their evidence might well come very
close. But for a valuer merely to say that he valued at £x, without any
explanation whatever as to how he arrived at that figure, was singularly
unhelpful when one was attempting to assess whether his valuation, or some differing
valuation, was the correct one. In the result, he (his Lordship) derived only
the most marginal assistance from Mr Blatchley’s evidence.
On the other
side, Mr Hearn was clear, lucid and wholly convincing in his approach both to
the question of valuation and to the actual valuation itself. Mr Hearn started
by confessing that the question of valuation was, in the end, a matter of the
trained ‘feel’ of the valuer; but that ‘feel’ was in his case the product of
long years of experience in selling hotels in the Isle of Wight itself, and was
backed up by a formidable list of comparables. At the end of the day, Mr Hearn
had concluded that the reserve ought to be £30,000, and prodded by Mr Laikin,
who naturally wished for a figure which would leave his client in the clear on
this one sale if at all possible, he raised this to £31,000. At this time, he
actually thought that the building plots were included in the sale. When he
learned as a result of a letter of March 24 from Mr Laikin that this was not
the case, he seriously wondered whether he ought not to recommend a lower
reserve price: but he decided to let the matter run, since he was, in any
event, so close to the auction. Then came Miss Pasmore and her offer of
£40,000. Mr Hearn at once recognised this bid for what it was: she was
attempting, he said, to ‘kill’ the sale. It was a very high bid from a very
special purchaser, and he recommended it as such. Mr Hearn’s approach and
valuation were supported by Mr P K Wallis FRICS, a partner in the firm of Way Riddett
& Co, of Ryde, Isle of Wight. Mr Wallis had had 40 years’ experience on the
Isle of Wight, 23 of those years being as a principal. His valuation, again
backed-up by proper comparables, was £32,500. There was no reason for rejecting
either Mr Wallis’s approach or his conclusions.
The upshot of
the matter was that at the end of the day it emerged most clearly that the
market price, or fair price, or whatever be the right description of the price
that the mortgagee ought to have realised on a sale, was in the neighbourhood
of between £30,000 and £32,500; that if such a price had been realised the
mortgagor would have not had the slightest cause for complaint; and that in
fact Mr Hearn’s advice to accept the offer of £40,000 forthwith was not only
not negligent but was unquestionably correct. He (Walton J) would add that if
he were to have asked first the question whether there was any negligence on Mr
Hearn’s part — since there could certainly have been none on Mrs Ribbins’ part
in having selected as her agents what was on all hands admitted to be one of
the most reputable firms on the island — the answer must in fact, irrespective
of any question of the market value of the property, have been in the negative,
and emphatically in the negative. Even if he (Mr Hearn) was in fact wrong as to
his advice to accept £40,000 for the property, nobody had said that that advice
was in any way negligent. He (his Lordship) could, therefore, simply have
decided the case on that basis, but so to do would have been to do much less
than justice to Mr Hearn, who had at all stages given Mrs Ribbins excellent and
accurate advice.
There was just
one claim, out of the mass of allegations, which was a good one, namely, that
the mortgagee’s personal representatives had not properly accounted in respect
of the surplus. On a close examination, some of the alleged deductions
totalling £2,438.93 beyond the repayment of principal and arrears of interest
would fall to be disallowed. As already indicated, however, in the absence of
two of the three proper parties all he (his Lordship) could give Mrs Johnson by
way of relief was a declaration to the effect that the mortgagors were entitled
to a proper account. Beyond this declaration
dismissed. Mrs Johnson had been legally aided since March 8 1974, and it was
obvious that the bulk of the costs incurred in the action had been incurred
since that date; a sum of £1,500 retained by the mortgagee out of the surplus
proceeds of sale as a security for costs would be obviously woefully
inadequate. The certificate given as to the length of time of the case said
that the case would occupy four days. In fact (exclusive of judgment) it
occupied ten full days of the court and another day on which the evidence of a
witness was taken on commission. This was a truly startling discrepancy. It was
impossible for any listing officer to fit together the mosaic that was the work
of the courts if reliable information as to the likely duration of cases was
not furnished to him at the earliest opportunity.
The salve
which healed all the ills of procedural mistakes and omissions was the award of
costs. In such a case as the present, where the plaintiff was financed by legal
aid, such a balm was not available, making it all the more imperative that the
attention of the court should be directed to any possible procedural defects in
the proceedings at the earliest possible moment. The information that the writ
had never been served on either Mr Garfitt or Mr Worswick only emerged as a
complete afterthought, after the case had been in progress for some little time
and at a stage when it was, as a realistic matter, impossible for the court to
take any other course than to proceed with the action as it stood. There would
be a direction that down to the date of the legal aid certificate the plaintiff
should pay the costs of both the executors and the third party; she should pay
such costs thereafter, but that part of the order was not to be enforced without
the leave of the court. In respect of anything shown to be still due from the
mortgagee to the plaintiff on the taking of any accounts, the mortgagee was to
be entitled to retain that sum as part of the security for costs. The executors
would be granted liberty to apply for payment of costs out of the legal aid
fund.
