Sale at an undervalue

Sale at an undervalue

This part looks at the lender's duty to obtain the best price
on a sale of the mortgaged property
Information Sheet

What does this involve?

We are concerned here with a practical problem. What happens if a lender (or a Receiver appointed by a lender) is selling off a mortgaged property at what the borrower perceives to be an undervalue. Is there anything that can be done about it? Let’s start with the principles.


The principles

A lender (or a receiver appointed by a lender) owes an equitable duty to take reasonable care to obtain the best price reasonably obtainable on a sale of the mortgaged property. ‘Best price’ for these purposes usually means market price (Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971] Ch 949). The duties owed by a receiver are similar to those of a lender, but not entirely the same (see Silven Properties Ltd v Royal Bank of Scotland Plc [2004] 1 WLR 997 and for the particular duties of receivers, see Medforth v Blake [1999] 3 WLR 922).

 

A lender can be challenged about the sale price either (1) by injunction, before the sale proceeds (which usually means before exchange of contracts), or (2) by a claim for an account following a sale – in other words to recalculate the correct balance of the mortgage account having regard to the price which the lender ought to have obtained (Standard Chartered Bank v Walker [1982] 1 WLR 1410). This is sometimes (erroneously) referred to as an action for damages.

 

It is worth remembering that the duty is only to take reasonable care. Whether and to what extent a lender has exercised reasonable care depends on all the circumstances – see below. In addition, the court will usually allow a ‘bracket’ or margin of error when assessing the sale price, typically around 10% either way (although this may vary depending on the nature of the property) so it will be important to factor this in (Michael v Miller [2004] EWCA Civ 282). Since the claim is for a re-working of the account, it is only going to be a worthwhile exercise where there are arrears if the amount to be substituted in the account, allowing for the ‘bracket’ takes the account back into surplus, although it may at least help to reduce any shortfall debt.


How do you prove a breach of duty?

This is not particularly straightforward. The borrower usually bears the burden of proving a breach of duty (unless the lender is selling to a connected company) and either persuading a court (on a balance of convenience) to grant an injunction, or to require the lender to account. The borrower might have a general sense that the sale price is low, and might even be able to find an estate agent who says he could have got a better price, but this is unlikely to be sufficient.

Ideally, what a claimant needs is a detailed report from a suitably qualified and experienced valuation surveyor (as opposed to an estate agent) which addresses two things:
(1) Valuation – proving by reliable valuation evidence (usually ‘comparable’ valuation evidence) the correct market value for the property; and if possible
(2) Identifying errors or failings in marketing which has led to the failure to obtain the best price. 

Properly advised, a lender selling a mortgaged property will be alert to possible challenge on sale price and will usually obtain for its own protection at least two separate valuations of the property before marketing, and/or will otherwise rely on the marketing advice of its appointed selling agents. There is no reason why a valuation surveyor appointed by a claimant cannot request from the lender or its agents, full voluntary disclosure of the valuation evidence and advice it has received.
 

What else will the court consider?

Each case turns on its own particular facts, but the court may consider:

1. Whether the lender has adopted the most appropriate method of selling the property having regard to the particular type of property – for e.g. whether by sale by private treaty, tender or auction (or a combination of them) (Tse Kwong Lam v Wong Chit Sen [1983] 1 WLR 1349). 

2. Whether there has been a sufficient period of proper marketing (Bishop v Blake [2006] EWHC 831 (Ch)). 

3. Whether the lender has followed up expressions of interest and has a proper paper trail to demonstrate what it has done at each stage (particularly if it is minded to reject offers at a higher price).

4. The more unusual the property, the greater the duty to obtain specialist valuation and marketing advice and assistance (Michael v Miller [2004] EWCA Civ 282 – a 200-acre Gloucestershire Estate planted out with thousands of lavender plants giving rise to an alleged uplift in value).

What about timing - how quickly is the lender required to sell?

This is not entirely clear. As a general proposition a lender is not a trustee of its power of sale for the borrower, so in principle a lender can consult its own interests as to when and in what manner it sells, although whether and to what extent it has acted reasonably in the circumstances may depend on whether the market is rising or falling (as a general rule a lender may be ill-advised to wait until prices rise, and equally he may have to act fairly promptly if prices are falling). 

This has to be read subject to the requirements applicable to regulated mortgage contracts in MCOB 13.6.1 (the Mortgage Conduct of Business Rules in the FCA Handbook) which provide that whenever a property is repossessed a lender must ensure that steps are taken to (1) market the property for sale as soon as possible, and (2) obtain the best price that might reasonably be paid, taking account of factors such as market conditions as well as the continuing increase in the amount owed by the customer. The last requirement inevitably means that the lender may have to draw the line somewhere, and that in some cases, it may be appropriate to sell sooner, rather than continue marketing, if there is a risk of negative equity. 

What about tenanted properties - is the lender required to obtain vacant possession before selling?

The decision to terminate a tenancy and sell with vacant possession, or sell subject to a sitting tenant, will largely depend on valuation advice and timing. If a lender can obtain vacant possession reasonably quickly and which, even allowing for the costs of obtaining possession, will give rise to a material uplift in the selling price, he may be well advised to do so. Again, ultimately, this is all about whether the lender has acted reasonably. The duty is not absolute. 



What about planning permission - is the lender required to take steps to maximise the value of the property before selling it?

Ordinarily a lender is entitled to sell the mortgage property as it is and it is not usually required to take any steps or spend money (particularly speculatively) in trying to improve its value by for e.g. applying for planning permission. This does not mean that the lender is not entitled to consider the planning position, but that (depending on the mortgage terms and conditions) any costs in doing so will have to be reasonably and properly incurred if they are to be charged to the mortgage account.

However, on a slightly different point, a lender may need to be alert to unlocking an uplift in value on account of a sale to a special purchaser, for e.g. if it had a ‘ransom value’ in unlocking the development value of land on a sale to a particular purchaser (Freeguard v Royal Bank of Scotland Plc [2005] EWHC 978 (Ch)).

Selling a portfolio of properties

Lenders frequently appoint Receivers to deal with commercial or buy to let properties. They are usually surveyors or accountants who will take control of the properties, collect any rental income, and advise on the best manner of marketing for sale some or all of the property in order to recover the mortgage debt.

 

Strictly, a lender is entitled to sell all of the secured property and account to the borrower for any surplus, although in some cases, it may be prepared to adopted a phased sale, particularly with a portfolio of properties, with a view to recovering the mortgage debt and releasing any unsold properties back to the borrower. In some cases it may even be permissible to sell a portfolio, with a discount on individual prices, in order to produce a guaranteed disposal (particularly where there is an advantage in cost savings, and uncertainty in the market) (Bell v Long [2008] EWHC 1273 (Ch)). 



Is there any time limit on bringing a claim against a lender after it has sold a property?

  Yes. A claim for an account, based on a lender’s breach of its equitable duty to obtain the best price reasonably obtainable on a sale of the mortgaged property has to be brought within six years of the date of sale (Raja v Lloyds Bank Plc [2001] EWCA Civ 210). Note that the claim is in equity only. There is no co-existent duty of care at common law in tort or in contract. 

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