The price achieved by fixed charge receivers for the sale of a secured commercial property, and the methodology they used in the process, came under sharp focus in a recent decision of the English High Court.
In McDonagh v Bank of Scotland & Others, a defaulting borrower brought a number of claims, including claims against the receivers appointed by the Bank for alleged breach of duty for failing to obtain the best price reasonably obtainable.
The borrower’s case was centered on the fact that the receivers had sold the secured property as part of a portfolio of 35 properties. The borrower alleged that ‘his’ secured property was the “jewel in the crown” of the portfolio and being used as “bait” to entice potential purchasers.
The ‘portfolio approach’ – whereby receivers package together a mix of valuable and less desirable properties – is not a novel approach. However, it leaves receivers susceptible to legal challenge from disgruntled individual property owners who believe their property is then sold at an undervalue or that an insufficient amount is allocated to the property in the pro rata distribution of the proceeds.
Justice Morgan provided a detailed analysis of a receiver’s duties in such circumstances, namely:
- The key question for the receiver is whether the portfolio sale is likely to achieve the best price possible for the relevant individual property in the portfolio;
- When determining if the receiver’s judgment was exercised reasonably, the Court will consider the receiver’s own deliberations, i.e. the receiver should carefully document the process followed, including professional advice sought, before concluding that a portfolio sale is appropriate;
- Once the property has been sold, the receiver is under a duty to ensure the proceeds are correctly attributed to the individual properties; and
- Even if a receiver improperly sells a property in a portfolio sale, that doesn’t mean the mortgagor has suffered loss – the mortgagor must establish, by reference to valuation evidence, that the sum attributed to the property is less than the achievable price of the property had it been sold separately.
The factual background was typical of thousands of disputes in the UK over the past decade following the financial crash. The secured property had depreciated significantly leaving a wide gap between the moneys borrowed and the value of the property. When negotiations over a proposed restructuring of the loan had failed, the Bank enforced and appointed the receivers.