The law on receiverships perseveres

Centenary Homes Ltd v (1) Victoria Liddell (2) Jon Gershinson [06.05.20]

Judgment was handed down in the above case on 6 May 2020. The outcome, in which Kennedys acted on behalf of the defendants, is a timely reminder of the duties of receivers.

Background

The claimant, Centenary Homes Limited (CHL), is a property development company. The defendants are fixed charge receivers (the Receivers). CHL obtained finance from the Bank of Scotland to develop two properties - Warne Court and 26-30 Cubitt Street, London - using those two properties as security for the loan facility.

The Receivers were appointed by the bank when CHL defaulted on its repayment obligations owing £4.4 million.

The Receivers sold Warne Court in its entirety and four of the flats in Cubitt Street to discharge the debt owed to the bank, and with surplus proceeds being returned to CHL.

The claim

The claim in respect of Cubitt Street arises out of the alleged sale at an undervalue of the Cubitt Street flats, the unnecessary sale of one of those flats, failure to maintain the properties and their common parts whilst under the Receivers’ management and failure to obtain indemnity insurance for the lack of planning permission for a change of use in 2007/2008.  

The issues and decision

The issues put to the judge were:

1. What duties did the Receivers owe to the claimant as joint fixed charge receivers appointed by the bank?

The Receivers owed CHL the following duties:

(i) A duty to act in good faith and for proper purposes, namely for the purpose of preserving, exploiting and realising the assets comprised in the security

(ii) If selling a property, a duty to take reasonable care to obtain the best price reasonably obtainable

(iii) A secondary duty (subordinate to a receiver’s primary duty to manage the security for the benefit of the mortgagee) to exercise care to avoid preventable loss.

(i) and (ii) are ‘discrete’ and independent of a receiver’s duty to act in good faith and for a proper purpose. The judge rejected the submission that there is a duty on receivers only to sell so much of the charged property as is required to repay the mortgagee. This would conflict with the principle that when exercising the powers vested in him, a receiver is obliged to give priority to the interests of the mortgagee. He accepted that receivers enjoy a degree of latitude not only as to the timing of a sale but also as to the method of sale to employ. In determining whether the best price was reasonably obtained, the court should apply the “Bolam test”.

2. Did the Receivers owe a duty to obtain an indemnity policy in respect of the lack of formal planning consent to the change of use?

In support of this submission, CHL relied on the fact that both valuation experts opined the lack of formal planning consent could have attributed a 5–10% reduction against market value for flats in the property. Therefore the Receivers could and should have purchased an indemnity policy to give buyers security and avoid this predictable loss. This was rejected by the judge who held that the Receivers were entitled to sell the property in the condition it was in when appointed without effecting any increase in value or improvement to the property.

3. Did the Receivers discharge their duties of maintenance during the receivership?

The judge found that it was not a breach of a receiver’s duty to fail to carry out extensive and intrusive investigations or to carry out the expensive process of rectifying a problem (in this case the replacement of the floor in flats 3 and 5). He found that it was reasonable for the Receivers to concentrate on selling the flat in its current condition or to concentrate on selling the other less problematic flats. Accordingly, they could not be fixed with the costs of the floor rectification works later carried out by CHL.

4. Were flats 1, 2, 4 and 6 (or any of them) sold at an undervalue as a result of a breach of duty by the Receivers?

CHL relied on valuation evidence which was based on a property without problems. It is well established that Cubitt Street had problems (including damp issues and lack of planning consent) and that the Receivers had not breached any duty by failing to rectify them. With four sales having fallen through (two private sales and two at auction), the Judge considered it completely unsurprising that the Receivers ended up selling flats at auction rather than private sale.

In respect of the alleged “unnecessary” sale of Flat 2, he went on the find that the Receivers were entitled to consider it necessary to place both flats into auction in order to discharge the outstanding debt to the Bank and bring the Receivership to an end. Further, the use of registered bidders for the auctioned properties was considered reasonable given the chequered history with fallen through sales to ensure genuine buyers.

The final consideration was the mistaken transfer of a janitor’s storeroom to the purchaser of Flat 2. The flat was found to have been properly marketed without reference to the storeroom. However the title plan drawn up by the Receivers’ conveyancing solicitors mistakenly included the storeroom in the demise. After completion, the owners of Flat 2 lay claim to the storeroom. Although considered to have not been properly pleaded (it should have been pleaded as a loss of chance to negotiate the sale of the storeroom), both experts considered that CHL had lost something of value – despite disagreeing on what that value might be. The judge therefore awarded CHL £10,000 in damages as the value that CHL had been deprived of as a result of the conveyancing error.

Comment

CHL was awarded a total of £10,000 in a claim quantified at being over £1 million (including interest) and which had taken over four years to come to trial at significant cost to both parties.

It is a useful case to reiterate established case law on the duties of receivers (such as Silven Properties Limited v Royal Bank of Scotland [2004] and Bell v Long [2008]). Further, receivers should act reasonably in deciding how to exercise its vested powers to secure a debt to the bank. They should focus on effecting sales at the best price reasonably obtainable and not incur time or expense in bettering the property.

Read others items in Professions and Financial Lines Brief - May 2020