Fixed charge receiverships: good news for real estate lenders

IN-DEPTH ANALYSIS

Facts

Centenary Homes Limited (C) was a property development company which acquired two blocks of flats: one in Enfield and the other in Bloomsbury. The Bank of Scotland (BOS) extended secured finance to C for the development of the two properties.

C defaulted on its repayment obligations in 2012 and fixed charge receivers were appointed in March, when the balance outstanding was approximately £4.4 million.

The receivers were able to sell the Enfield flats in July 2012, for £3,250,000.

The Bloomsbury flats proved to be more problematical. They were originally offered for private sale, with the receivers planning to sell as many as required to discharge the debt to BOS. However, the private sales fell through. The receivers then decided to sell four of the flats by public auction. This was more than sufficient to discharge BOS's debt. The surplus was handed over to C and the receivership was concluded on 26 July 2013.

C commenced proceedings, claiming that the receivers acted in breach of their duties regarding the sale and management of the properties.

The claim

C's counsel argued that the receivers breached their duties, specifically by:

failing to buy an indemnity policy to cover a breach relating to the lack of formal consent to the change of use of the lower and ground floors of the Bloomsbury property
C estimated that the sale price of the relevant flat would have been boosted by £5 – £10,000 if this had been put in place
failing to investigate water damage which affected the flooring in two of the flats
selling the fourth flat in the Bloomsbury block when this was not necessary to discharge BOS's debt
selling the janitor's storage room in addition to flat 6, which was an error.

It was necessary to explore:

the duties owed by the receivers to the claimant, as joint fixed charge receivers appointed by BOS
whether or not the receivers owed a duty to obtain an indemnity policy, to cover the lack of formal consent to change of use from commercial to residential use of the lower and ground floors of the Bloomsbury flats
whether or not the receivers properly discharged their duties regarding maintenance of the Bloomsbury flats
whether flats 1, 2, 4 and 6 were sold at an undervalue as a result of the receivers' breaches of duty.

Judgment

The Judge summarised the three key duties owed by receivers as follows:

a duty to act in good faith and for proper purposes – ie to preserve, exploit and realise the assets comprising the security
if selling a property, a duty to take reasonable care to obtain the best price reasonably obtainable
a secondary duty (subordinate to the receiver's duty to manage the security for the benefit of the mortgagee) to exercise care to avoid preventable loss.

The Judge made the points below, which are helpful guidance for defining the ambit of receivers' powers.

General

A receiver is permitted to prioritise the interests of the mortgagee in deciding whether, when and how to exercise his powers.

Powers of sale

If a receiver decides to exercise his powers of sale, he owes a duty of care to the mortgagor to obtain the best price reasonably obtainable (see Cuckmere Brick Co. Ltd v Mutual Finance Ltd [1971] 1 Ch 949) at the time of sale. This is the same equitable duty as is owed by the mortgagee.

However, a receiver's primary duty is to deal with and realise the security, acting in the best interests of the mortgagee. He owes only a secondary duty to the mortgagor, which is to exercise care to avoid preventable loss.

It follows from this that:

He is not under a duty to wait for any increase in value.
He is at all times free to exercise his right to proceed with an immediate sale.
A receiver has to exercise his powers in good faith, but in this context, the Judge said that a breach would have to involve something more than negligence or even gross negligence. There would have to be some dishonesty, improper motive or bad faith involved.
The Judge rejected the argument that there was a duty on the receivers to sell only as much of the property required to repay the mortgagee. This would conflict with the general principle that the receiver must prioritise the mortgagee's interests. In offering the two flats up for auction, it was not unreasonable to assume that one or both sales would fall through or that the properties would achieve a lesser price.
Regarding the receivers' duty to get the best price reasonably obtainable, the Judge applied the Bolam test. A low bar applies. In order to have failed in his duty, a receiver would have to have acted "as no mortgagee or receiver of ordinary competence acting with ordinary care and (where appropriate) on competent advice would act". He will not be judged to have breached his duty "unless he is plainly on the wrong side of the line". This is so even if with hindsight, one would have chosen another course.
Receivers have flexibility as to the method as well as the timing of the sale – see Bell v Long, where receivers who sold four properties as an investment portfolio were held not to have breached their duty. This was so even though the properties had previously been marketed individually. It was not therefore a breach of duty to sell the properties by auction.
Receivers may sell the property as it is, without improving it or enhancing its value (Silven Properties Ltd v Royal Bank of Scotland [2004] 1 WLR 997). Therefore, there was no onus on the receivers to buy the indemnity policy.

Duty to maintain

The Judge stated that the receivers were not in breach of their duties in omitting to carry out investigations as to why the floor was warping in flats 3 and 5. Furthermore, they were definitely not required to replace the floor. It was reasonable for them to try to sell the flats as they were.

Error in conveyance

The receivers' lawyers mistakenly conveyed a storage room which deprived flats 1-3 of the use of this; the mistake also added value to flat 2, which was not recouped in the sale price. The Judge awarded nominal damages of £10,000 in respect of this.

Centenary Homes v Liddell [2020] EWHC 1080 (QB)