A lender’s duty is to obtain the best possible price for a “ransom strip”, but a recent case sheds some light on the limitations of this duty
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Key points |
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● A mortgage lender’s duty when selling may extend beyond the borrower to another person interested in the property ● Where mortgaged land constitutes a “ransom strip”, the best price reasonably obtainable on sale by the mortgagee is what the owner of the ransomed land will pay |
When a mortgage borrower defaults on the repayment of a loan, the lender will often repossess and sell the mortgaged property. If and when it does so, the proceeds of sale will be used to reduce the outstanding debt, with any surplus being handed to the borrower. It follows that the borrower has an interest in seeing the lender achieve a proper price on the sale and, as a recent case illustrates, the law provides the borrower with some, albeit limited, assistance in this respect.
Creation of a ransom strip
Freeguard v Royal Bank of Scotland plc [2005] EWHC 978 (Ch); [2005] PLSCS 93 concerned two neighbouring properties in a Devon village, each consisting of a substantial house and grounds. The claimant had acquired one of the properties and recognised the potential for residential development of the grounds of each property. She approached the neighbours with a proposal for a joint planning application but, when her suggestion was rejected, decided to go it alone.
The claimant obtained planning consent and sold her land for development. However, she astutely retained a 0.06 acre strip that provided the only access to that part of the neighbouring land that might also be suitable for development. The land thus became a “ransom strip” and the claimant hoped to cash in if and when the neighbours decided either to develop their land or sell it for development.
For reasons that are not relevant in the context of this note, the claimant subsequently sold the land to a third party, subject to an option to repurchase at the same price. The third party charged the land to the defendant bank to secure a loan. When he defaulted in repayment, a court ruled that the bank’s interest took priority over that of the claimant.
The defendant sold the land to the claimant’s neighbours for £60,000 and they sold their development land, together with the ransom strip, to a local entrepreneur for £527,000. The claimant brought proceedings against the defendant, arguing that a proper price for the ransom strip would have ranged between £175,000 and £260,000. This was on the basis that, according to the principle in Stokes v City of Cambridge (1961) 180 EG 839, the value to be attributed to a ransom strip is normally between 33% and 50% of the development value of the ransomed land.
The claimant’s expert witness took the view that the “development value” released by the ransom strip was £500,000 and that the defendant should have been able to negotiate a deal under which it would receive one-half of this amount. The defendant’s expert, by contrast, thought that the sale at £527,000 had come out of the blue, and that that figure was approximately double the real market value of the land. He therefore argued that £60,000 was the maximum price that the defendant could have been expected to obtain.
Lender’s duty
The deputy judge noted that, although the duty of a mortgage lender to obtain the best available price for the mortgaged property is normally owed to the borrower, the parties in this case had accepted that an equivalent duty was owed to the claimant. However, he then pointed out the limits of that duty:
● The defendant, as mortgagee, is not a trustee of the power of sale for the mortgagor.
● The power of sale is conferred on the mortgagee by way of bargain for its own benefit, and it has an unfettered discretion to sell when it so wishes to achieve repayment of the debt secured by the mortgage.
● It is free to take account only of its own interests when deciding whether and when to exercise its power of sale.
● Its decision is not constrained by reason of the fact that the exercise or non-exercise of its power of sale will occasion loss or damage to the mortgagor.
● It does not matter that the time may be unpropitious and that, by waiting, a higher price could be obtained; the mortgagee is not bound to postpone the sale in the hope of obtaining a better price.
An inapplicable assumption
Having formulated the defendant’s duty in this way, it remained to be determined whether this had been fulfilled. Having listened to the arguments of the opposing expert witnesses, the judge ruled in favour of the defendant. He took the view that the valuation approach that the claimant’s expert had adopted, based as it was upon the assumption of a willing seller and a willing buyer, was inapplicable in these circumstances. As the judge put it:
Where… the mortgaged land is a ransom strip, the best price reasonably obtainable on a sale by the mortgagee is, not the open market value but is the price which can be obtained only from the person with the special interest in purchasing it – the owner of the ransomed land.
It follows that the duty of the mortgagee to secure the best price reasonably obtainable cannot be achieved without resort to that special purchaser. And whether the best price has or has not been achieved at the time when the mortgagee decides, as he is entitled to decide, that this is the time when he wants to achieve a realisation of his security, is very substantially (if not entirely) dependent on what that person is prepared to pay at that specific time.
In this case, the evidence of the negotiations that in fact took place between the defendant and the owners of the adjacent land, led to the conclusion that £60,000 was as much as could possibly have been achieved. It followed, therefore, that the defendant was not in breach of its duty towards the claimant.
John Murdoch, professor of law, Reading University
