The High Court has clarified when a secured lender must account to a junior creditor for non-monetary benefits when selling mortgaged property.
Background
As first-ranking mortgagee, Desiman Limited (Desiman) effected the sale of development land over which Brooke Homes (Bicester) Ltd (Brooke) had second-ranking charging order security obtained before the companies entered administration.
Equity of redemption
Desiman accepted it owed duties to Brooke and was liable to account to Brooke as a party interested in the "equity of redemption" (the borrower's rights in an asset after the secured debt has been repaid).
Brooke argued that Desiman failed to obtain the best price reasonably obtainable and a surcharge should be applied to the sale owing to:
- Desiman's agreement to a £2 million price reduction on the final sale price.
- Non-monetary benefits which would flow to Desiman from a road extension to be carried out by the purchaser.
Doctrine of marshalling
Desiman held first-ranking security over multiple assets where Brooke had no direct security. Brooke argued that the doctrine of marshalling should apply, which allows a junior secured creditor to benefit from a senior creditor's wider security package, when the senior creditor has been repaid.
Decision
Brooke needed to show that a better sale price would have been received "but for" the mortgagee's "wilful default". No price reduction was found on the evidence and so no surcharge applied.
Whilst a mortgagee must account for the purchase money and any non-monetary consideration, it is not obliged to account for “purely collateral advantages”. The road extension was held to be non-monetary consideration and so a £2.4 million surcharge was justified both as accounting for benefit received and on a "wilful default" basis for failing to obtain the best price.
It was recognised that Brooke may have the benefit of the doctrine of marshalling and this was to be recorded in the order.
The court adopted a three-stage approach to determine reimbursement of costs claimed by Desiman examining: (i) whether the third-party fee or cost was an activity which fell or could fall within the relevant contractual provisions, (ii) whether the fee or cost was reasonably incurred and (iii) whether it was reasonable in amount. Some costs including the administrators' fees were accepted as recoverable without assessment, others such as costs related to a winding up petition against Brooke were directed to be subject to an account and enquiry due to concerns that they were not reasonably incurred.
Key takeaways
- Senior lenders selling mortgaged property must act fairly towards junior creditors and account for all relevant proceeds.
- Junior creditors may gain access to a senior creditor's wider security package where the doctrine of marshalling applies.
- Costs claimed by secured creditors will be scrutinised, particularly litigation costs that appear motivated by improper purposes.
Brooke Homes (Bicester) Ltd v Portfolio Property Partners Ltd (In Administration) & Ors [2025] EWHC 1305 (Ch)
Find out more
To discuss the issues raised in this article in more detail, please contact a member of our Restructuring and Insolvency team in London.
