Lender advancing loan secured by mortgage and guaranteed by guarantors – Lender exercising right as mortgagee to sell property – Whether lender obtaining full market value for property – Burden of proof – Whether any breach of contract of surety releasing guarantors from all further liability – Judgment for lender – Appeal allowed
In May 1991 a company acquired a leasehold interest in commercial premises known as Plot 2, Tarran Industrial Estate, Town Way, Morton, Wirrall. The property was a purpose-built single-storey warehouse, including office accommodation, with a total gross internal area of about 6,800 sq ft. It was charged in favour of the claimant building society (Skipton) in the sum of £130,000 by a legal charge dated 28 May 1991. On the same day the defendants, the directors of the company, each signed a deed of guarantee in respect of the company’s loan. By November 1994 the company fell into financial difficulties and on 22 November 1994 Skipton appointed receivers. The receivers continued to operate the company while they attempted to sell the business as a going concern. However, the attempt was unsuccessful and the business was closed. On 9 December 1994 the occupiers of the adjoining property offered £120,000 for the interest in the property. The receivers, having obtained a valuation, refused the offer. On 12 January 1995 the offer was increased to £122,500. Skipton obtained an independent report from a chartered surveyor and accepted the offer. The sale was completed on 12 April 1995 and, after the net proceeds of sale were deducted, the outstanding debt was £17,430.58.
In January 1996 Skipton issued proceedings against the defendants. The defendants resisted the claim contending that Skipton had not complied with an implied term of the guarantee, namely the statutory duty under para 1(1)(1) of Schedule 4 of the Building Societies Act 1986, in that it had not taken reasonable care to ensure that the price at which the land was sold was the best price that could reasonably be obtained.
The judge found that Skipton had failed to take reasonable care to ensure that the price was the best that could reasonably be obtained because it had not sought further interest by placing the property on the market and it had failed to take account of the purchaser’s “special interest” as a neighbouring occupier. The judge concluded that if Skipton had exposed the property to the market, there was a real chance that another buyer would have entered the market place. The judge ascribed a valuation of £2,500 to that loss. On that basis the judge gave judgment in favour of Skipton in the sum of £14,930.58. The second defendant appealed contending that the effect of Skipton’s breach was to release the guarantors from all further liability. Alternatively, it was contended that the amount of credit that should have been given to the guarantors as a result of Skipton’s failure to obtain the best price, was sufficient to offset the amount of the claim.
Held: The appeal was allowed.
1. The judge had erred in assessing a figure to represent the value of the lost chance to achieve a better price. The market value, which corresponded with the price that could be expected to be achieved given exposure to the market for a reasonable time, was a question of historic fact, which had to be established on the evidence. There was no question as to a future uncertain event that required the court to assess the value of the loss of a chance: see Allied Maples Ltd v Simmons & Simmons [1995] 1 WLR 1602.
2. A creditor’s breach of duty in failing to obtain the current market value if he chose to sell the property did not release the surety from all further liability. Although a guarantor might be discharged by a variation in the terms of the debtor’s contract, made without his consent, the creditor’s failure to obtain the proper value of a security that he sold, reduced pro tanto the amount for which the guarantor was liable. It remained possible that a guarantor might be freed from further liability if the creditor’s breach of the contract of surety was properly regarded as repudiatory: see Chitty on Contracts (28th ed) paras 44-091 and 44-095. However, that did not apply, since the judge had concluded that Skipton’s breach had been a breach of warranty.
3. A creditor was to give credit for the current market value and therefore had to show that he had obtained it; but the guarantor might have the burden of proving that the creditor was in breach of his obligation to obtain it. In practice, however, the burden was unlikely to be difficult for the creditor to discharge, since if he had taken reasonable steps to market the property, and if his figure were challenged, then there would be evidence from both parties that could make the burden of proof academic.
4. It was wrong as a matter of principle to take only the “forced sale” valuation into account. Skipton had failed to expose the property to the market. If it had done so, even for a short though reasonable time, it could have expected to receive offers close to the market value, and those could have been increased further by the special interest factor of the neighbouring occupier. On the evidence, it could be concluded that the current market value was significantly higher than £140,500, and as Skipton had to give credit for that amount, there was no longer a balance in its favour.
Paul Brook (instructed by Walker & Foster, of Skipton) appeared for the claimant; Michael Mulholland (instructed by Farleys) appeared for the second defendant.
Thomas Elliott, barrister
