Receivership Matters – December 2018


Do special rules apply if a property is sold by a receiver as part of a portfolio?
Where a receiver has properly considered whether including a mortgaged property in a portfolio sale […]
Where a receiver has properly considered whether including a mortgaged property in a portfolio sale was in the best interests of the mortgagor, the court has decided that the receiver would not be in breach of his duty if he decided to take advantage of such an opportunity.
Background to the case
In 2007, Mr Brian McDonagh (the Claimant) entered into a loan agreement with the Bank of Scotland plc for the sum of £7.5 million to enable him to buy an investment property (Sony House). The property was used as security for the loan. As a consequence of the credit crisis in 2008, the value of Sony House fell below the loan to value ratio stated in the loan agreement and so a second loan was entered into to refinance the first. The claimant defaulted on the loan so consequently the bank appointed receivers. The receivers exercised their power of sale and sold the property as part of a portfolio of properties apportioning £3,780,215 of the sale proceeds to Sony House. The bank gave the claimant credit for that sum. The Claimant brought proceedings (McDonagh v (1) Bank of Scotland plc) [1] against the bank in relation to the two loan agreements and against the bank’s appointed receivers alleging that they had sold Sony House at an undervalue.
Issues and judgment
It is established law that receivers are under an equitable duty to take proper care to obtain the best price reasonably possible. It was Mr McDonagh’s contention that the receivers had not obtained the best price reasonably obtainable for Sony House because they had sold it as part of a portfolio. He claimed that the proceeds of sale from the property, if it had been sold separately, would have been significantly greater than the amount that he was allocated from the sale of the portfolio.
The judge stated that when considering whether a receiver had committed a breach of the equitable duty, it had to be recognised that the receiver was involved in an exercise of informed judgement. If he went about the exercise of that judgement in a reasonable way, he would not be held to be in breach of duty. Furthermore, the judgment followed the settled law that, in the exercise of the power of sale, receivers owe the same equitable duty to the mortgagor and others interested in the equity of redemption as is owed by the mortgagee. They are both obliged to take care to obtain the best price reasonably obtainable. The usual position is that a receiver is expressly stated to be the agent of the mortgagor and has the core duty to account to the mortgagor.
Therefore a receiver owes an equitable duty to the bank and also a duty to the borrower, to take care to obtain the best price reasonably obtainable for the security. The conventional way to go about performing that duty is to sell the security separately. If a receiver takes all proper steps to market the security separately and the security is then sold in the open market, a receiver would have a very strong argument that the price obtained was the best price achievable. If that case were challenged by the borrower, the court would concentrate on the steps which the receiver had, or had not, taken to expose the property to the market, rather than on opinion evidence as to the market value of the property.
Although a separate sale of the property is the conventional way of realising the property’s value, a receiver might have the opportunity of selling the property together with other properties as part of a portfolio. That opportunity could arise, for example, where the receiver had been appointed by the same lender in relation to a number of properties. The court therefore had to consider whether special considerations were attributable to a portfolio sale.
Judgement
The court held that where a receiver had an opportunity to include a mortgaged property in a portfolio sale, it could not be said that the receiver would be in breach of his duty to the mortgagor by considering whether to take advantage of that opportunity. Because the receiver’s decision to include the property in a portfolio sale involved an exercise in judgment, an error of judgment would not be a breach of duty by the receiver.
However, the receiver should not include a mortgaged property in a portfolio sale, unless he asked himself whether that course was likely to be in the best interests of the mortgagor of that property. It was not good enough for the receiver to want to include that property in the portfolio in order to help the mortgagee or even the owners of other properties where he had been appointed receiver. Further, the receiver had to actually ask himself the relevant question. If he did not do so, then his decision not to conduct a conventional separate sale of the property would be a breach of duty.
When considering whether a receiver had committed a breach of the equitable duty to take care to obtain the best price reasonably obtainable, the court had to recognise that the receiver was involved in an exercise of informed judgment and if he went about the exercise of his judgment in a reasonable way, he would not be held to be in breach of duty. An error of judgment, without more, was not negligence or a breach of the relevant equitable duty.
WM comment
Receivers should welcome the decision as confirmation that they can include mortgaged property in a portfolio sale as long as they first ask themselves whether that course of action is likely to be in the best interests of the mortgagor. If that question is not asked, the decision not to conduct a conventional separate sale of the property would be a breach of duty.
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[1](McDonagh v (1) Bank of Scotland plc)(2) Nigel Cameron Wheeler (3) Richard James Stanley (4) Jemma Kathleen McAndrew [2018] EWHC 3262 (Ch)

When is a landlord not a landlord?
When is a landlord not a landlord? It might sound like the beginning of a […]
When is a landlord not a landlord? It might sound like the beginning of a bad joke, but the Court of Appeal had to consider that question in the case of Barrow v Kazim [1]. In so doing, it highlighted a serious point for landlords and receivers to note when they are seeking possession of sublet residential premises. Housing Management & Litigation specialists Karl Anders explains.
What happened in the case?
Kazim owned a building containing residential flats. Kazim had let the building to an agency, who had then sub-let the individual flats to residential occupiers on assured shorthold tenancies (ASTs) under the Housing Act 1988 (the Act) [2].
Kazim, as head landlord, wished to recover possession and served a notice on both the intermediate tenant (i.e. the agency) and the sub-tenants (Barrow and another). The notice was intended to terminate the intermediate tenancy and also to constitute a notice to terminate the ASTs under section 21 (1) (b) of the Act.
The sub-tenants contested the validity of Kazim’s notice, asserting that Kazim was not their landlord for the purposes of giving notice, and therefore no effective notice had been served on them.
The view of the Court of Appeal
The Court of Appeal agreed with the sub-tenants and confirmed what has, to date, generally been believed to be the position. It stated that a notice under section 21 of the Act must be served by the person who is the landlord at the date the notice is given, not the person who will be the landlord at the termination date specified in the notice given to end the intermediate tenancy. Importantly, the fact that an intermediate tenancy will come to an end by the date specified in the notice does not convert the head landlord into the ‘landlord’ for the purposes of enabling it to also serve a valid section 21 notice on the sub-tenant. Instead, the intermediate tenant will remain the sub-tenant’s landlord until such time as the intermediate tenancy ends. Kazim’s notice was therefore ineffective to terminate the ASTs.
What are the key takeaways for landlords and receivers?
The facts of this case are not uncommon. They will also be encountered by receivers upon investigating the occupational status of securities over which they have been appointed. The following key points are worth noting:
- While the common law may provide that any sublease falls away upon termination of a head lease, that is not the case where the sublease is an AST. The Housing Act 1988 intervenes in those circumstances and preserves to existence of the AST.
- Receivers and head landlords can take steps to recover possession from sub-tenants occupying residential premises under ASTs only after they have become the direct landlord of the sub-tenants. The route to possession is therefore sequential, and not concurrent.
In this case Kazim argued that it was unsatisfactory that head landlords should have to wait for an intermediate tenancy to determine and only then be in a position to serve a notice to determine an AST. That practical argument was however given short shrift by the Court of Appeal, from whom a strict legal analysis was inevitable.
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[1] [2018] EWCA Civ 2414
[2] Section 21 (1) (b) of the Act allows a landlord who has served at least two months’ notice on a tenant to recover possession without having to rely on statutory grounds for possession