When a borrower defaults on a mortgage, generally the lender will repossess the secured property to sell it and recoup its costs. To do that, the lender will often appoint receivers to carry out the sale. A recent High Court case* sheds welcome light on the duties of receivers when selling repossessed properties.
In the case of Devon Commercial Property Ltd v Barnett*, the receivers had been appointed by an assignee of the lenders to sell a Devon cider factory. The appointers were a competitor of the borrower. Despite marketing the factory, there was very little interest from potential buyers. Eventually, the receivers sold the factory to their appointers.
Breach of Duty of Good Faith?
The borrowers claimed, among other things, that the receivers had breached their duty of good faith because it was a conflict of interest to sell to the appointers when they were acting under the direction of the appointers.
The Court disagreed with the borrowers.
The Court found that selling the property to the appointers was not a conflict of interest on the receivers partly because the receivers would not benefit directly by selling to the appointers as opposed to any other purchaser. To succeed in their arguments, the Court found that borrowers would have had to show bad faith or improper motive on the part of the receivers. It was not bad faith on the part of the receivers to sell to the appointers.
Nature of Transaction, not Bad Faith
As a general statement about conflicts, the Court found that the very fact of a mortgage put the lender and the borrower on opposing sides, such that there was a tension between them from the outset. A receiver acting in the interests of the lender was just doing their duty. Acting in the best interests of the lender would often result in a situation that conflicted with the interests of the borrower. This conflict merely demonstrated the nature of the transaction, not bad faith.
The Court made two practical points. First, it found that the borrowers had cherry-picked extracts from the emails to create an impression and bolster their argument. The Court was critical of this approach. This is a reminder to potential litigants not base an entire case on extracts that do not necessarily create an accurate picture of the situation as a whole. This Court will see through this approach.
Second, the Court found that it was unnecessary to adduce expert evidence in a case such as this because the Court was capable of determining whether someone sells land badly without the need for experts.
Robust Approach by Lenders is Good News for Receivers
Anybody entrusted with selling property on the behalf of a lender can take comfort in the robust approach shown by the Court. Receivers, as part of their ordinary duties, should expose a property to the market in an adequate manner and ensure that they are able to demonstrate having done so. Having done this and having carried out their other duties in the normal way, receivers will be able to sell a property to their appointers without fear.
*Devon Commercial Property Ltd v Barnett [2019] EWHC 700 (Ch).
For more information please contact Elizabeth Deyong (email: e.deyong@barrellison.co.uk) (telephone: 01223 417 267).
Disclaimer: While we do all that is possible in terms of ensuring its accuracy, this blog contains general information only. Nothing in these pages constitutes legal advice. You need to consult a suitably qualified lawyer from the firm on any specific legal problem or matter.