As expert witnesses in the lending sector we tend to see certain common issues in the instructions we receive. An issue which has reappeared in an increasing number of cases in the past year has been the conduct of the lender and its professional advisers in dealing with and disposing of repossessed properties.
A case which Expert Evidence provided a banking expert on behalf of the Defendant and which deals with this issue was McDonagh v Bank Of Scotland Plc & Ors [2018] EWHC 3262 (Ch) (30 November 2018). In that case, the court reaffirmed the principle that, where receivers are appointed, provided that their actions are reasonable in the circumstances, taking into account information available to them, there will be no breach of duty. The receivers have a duty to both the mortgagor and the mortgagee and must consider what is in the best interests of the mortgagor, when taking any decision to sell. If they do not do so and, for example, if they accept an instruction from the mortgagee to sell a property as part of a portfolio, then there is a breach of duty and the court will need to assess what price the property would have achieved if it had been sold separately in order to decide whether there has been a loss.
The major fortunes in America have been made in land.”
John D. Rockefeller
In the McDonough case, the court noted that, in accepting the instruction to sell the properties as a portfolio it was a key consideration that the receivers should make sure that none of the individual properties was discounted. The receivers also received legal advice as to their duties and had RICS valuation reports on each of the properties in the portfolio. The court concluded that the receivers’ actions in disposing of the properties was, therefore, reasonable and that the interests of the mortgagor had been properly considered.
The expert opinion provided by Expert Evidence related to the lending market at the time of the sale of the properties and what level of funding was available to prospective purchasers at the time.
The burden of proof is much greater where the lender sells a repossessed property to a connected company, as illustrated by the decision in Philbin v Davies [2018] EWHC 3472 (Ch) (22 June 2018). In this case, the mortgagee set up a company to buy two properties which had been repossessed. The lender decided the purchase price by taking the average of a range of valuation advice it had received, all based on the special assumption of a 90 day marketing period – what used to be referred to as “forced sale value”. The properties were not exposed to the market and there was no advice as to the best method of sale.
In this case, the court found in favour of the mortgagor because the lender had not taken reasonable steps to achieve the best price for the properties. The determining principle is that the presence of a connected sale imposes a higher burden of proof on the mortgagee to show that it had acted reasonably and taken into account the interests of the mortgagor.
The McDonough and Philbin cases show the importance of having a diligent and reasonable process when dealing with and disposing of repossessed properties.
Link: McDonagh v Bank Of Scotland Plc & Ors [2018] EWHC 3262 (Ch) (30 November 2018)
Link: Philbin v Davies [2018] EWHC 3472 (Ch) (22 June 2018)
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