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The duty of a mortgagee in possession on a sale

The issue in the recent High Court case of Aodhcon LLP v Bridgeco Ltd [1] was whether a bridging loan company had taken reasonable care to sell the property at the best price reasonably obtainable.

Aodhcon was a special purpose company established to develop a property. It sought a bridging loan from Bridgeco to complete the redevelopment of the property and to enable it to repay its bank loan. Bridgeco obtained a mortgage valuation which indicated that, as of March 2010, the value of the property with vacant possession was £1.4 million or £1.25 million on a 90-day sale.

Bridgeco advanced £750,000 over a six-month term, secured by way of a first legal charge over the property. Aodhcon proved unable to sell the property and voluntarily delivered up possession to Bridgeco. In March 2011, Bridgeco exchanged contracts with a third party for a sale price of £852,000.

Aodhcon argued that Bridgeco had breached its duty as mortgagee in possession to sell the property for the best price reasonably obtainable.

In a helpful judgment, the court listed the relevant applicable principles:

  • the mortgagee has an equitable duty to take reasonable care to sell for the best price reasonable obtainable at the date of exchange of contracts
  • this requires an informed judgment and there are no prescribed steps which the mortgagee must take generally, it is for the mortgagee to decide on the manner of the sale after having taken expert advice
  • the property should be properly advertised, i.e. sufficiently frequently and widely to reach the appropriate pool of prospective purchasers
  • the mortgagee is entitled to decide the length of marketing time, subject to the requirement that it is properly advertised
  • the mortgagee is not obliged to improve the property for sale. However, he is obliged to advise prospective purchasers of achievable potential
  • there is an acceptance that repossession can adversely impact the sale price
  • the mortgagee will not have breached his duty unless he is “plainly on the wrong side of the line”
  • the fact that a higher price might have been obtained does not mean the mortgagee has breached his duty
  • the burden of proving a breach rests on the mortgagor.

The court made very clear that the duty of a mortgagee when exercising the power of sale to take reasonable care to achieve the best price reasonably obtainable is not the same thing as a duty to obtain the best price reasonably obtainable. There was a link between the breach of the duty and the duty to act in good faith. A breach of the duty to act in good faith would be a breach of the duty to exercise reasonable care to sell the property for the best price reasonably obtainable.

The court rejected the argument that it should adopt a “margin of error” approach (10-15 per cent was proposed). The court rejected this argument, noting that it would serve only to limit the flexibility of the court and would depart from the established approach that liability would be imposed where the mortgagee was “plainly on the wrong side of the line”.

Bridgeco had not breached its duty. Whilst it had not obtained a Red Book Market Value valuation it was under no obligation to do so. There was evidence that it had obtained valuation advice from a duly qualified agent. In any event, the Red Book Market Value was inappropriate in this case as the sale was by a mortgagee in possession within a short timeframe and the property was not ready for immediate occupation.

The judgment should be welcomed by mortgagees and is relevant anytime a mortgagee exercises its power of sale (even if the mortgagee has not taken possession and receivers have been appointed). It is also guidance for receivers or other professionals on the factors that should be considered in order to fulfil their own duties to a mortgagor. The only caveat is the various references throughout the judgment to mortgagees not being in breach of duty unless they are “plainly on the wrong side of the line”.Where the line is drawn will not always be clear. So, despite this helpful judgment, grey areas will no doubt remain.

[1] [2014] EWHC 535 (Ch)