Law of Property Act receivers were not at fault

Devon Commercial Property Ltd v Barnett [2019] EWHC 700 (Ch); [2019] PLSCS 59 concerned land in Devon. The landowner had granted a lease to a connected company, for cider making, before mortgaging the freehold. In due course, the tenant went into administration and, when the administrators sold the business to another cider maker, Aston Manor, they granted it a licence to use the property. Aston Manor purchased the mortgage of the freehold interest at the same time and, when the freeholder defaulted on the mortgage a few weeks later, appointed LPA receivers. The receivers accepted a surrender of the tenant’s lease and granted Aston Manor a three-year contracted-out lease to secure an income from the property while they explored their options. The receivers offered the property for sale for more than £4m but, after extensive marketing, sold it to a subsidiary of Aston Manor for £2.75m (after persuading it to increase an earlier offer of £2.3m). This left nothing for the mortgagor, who complained that there had been a conflict of interest and that the receivers had acted in bad faith, selling to a subsidiary of Aston Manor at an undervalue. Mortgagees cannot buy properties mortgaged to them; that would breach the rule against self-dealing. And their associates can buy safely only if they can prove that the sale was in good faith and at a proper price. However, the judge decided that a receiver’s interest lies in being remunerated – and not in a sale at a lower price. So there had not been a conflict of interest, even though the freehold interest was sold to a company associated with Aston Manor. The judge explained that receivers act as agents for the borrower, but their job is to secure repayment to the lender, and not to further the borrower’s interests. They must act in good faith and exercise their powers for a proper purpose. And they cannot remain passive if that would damage the interests of either the borrower or the lender; they must protect and preserve the property. But they do not have to “nurse the market” or spend time or money increasing the value of property. They can sell whenever they choose, but must take reasonable care to obtain the best price reasonably obtainable when they do: Silven Properties Ltd v Royal Bank of Scotland plc [2003] EWCA Civ 1409. The judge ruled that a breach of a duty to act in good faith involves intentional conduct, constituting more than negligence, and encompassing an improper motive or an element of bad faith – but not necessarily dishonesty. He rejected arguments that the receivers had acted in bad faith, under the direction and control of Aston Manor, and that it had failed to treat its subsidiary company as a special purchaser. The receivers were entitled to grant the new lease and to sell the property when they did. And the valuation evidence (which the receivers refused to disclose to Aston Manor, even though it was the mortgagee, because they were concerned that it would reduce its offer for the property) confirmed that they had let at a proper rent and had sold at a price that reflected a special interest in the property. Could the receivers could have done better, by leaving the property vacant, or leasing or selling at a different time? If so, that was irrelevant. The real cause of the borrower’s losses was the financial downturn, which had caused property prices to crash.   Allyson Colby, property law consultant