The power of sale is given to a lender for its own benefit to enable it to realise its debt. A lender may therefore look to its own interests first before those of the borrower.
However, a lender also has a duty of care to the borrower and subsequent lenders to act in good faith and deal fairly and equitably with them. Even if the lender has a right to put its own interests first, where the lender's interests conflict with the borrower's interests, it is not entitled to act in a way which unfairly prejudices or wilfully and recklessly sacrifices the interests of the borrower.
A receiver is also subject to the same duty.
Duty to obtain a proper price
The lender has a duty to exercise reasonable care to obtain the best price reasonably obtainable for the property, which will normally mean the market value of the property at the time of sale. Perfection is not required. The court will look at how the lender has carried out the sale rather than the result of the sale.
The mode of sale
It is for the lender to decide the most appropriate way to sell the property; by auction, tender or private treaty, subject to any restrictions in the mortgage deed and where appropriate seeking expert valuation advice.
Whatever the mode of sale, the lender needs to advertise the sale properly and it must make an informed judgement as to how the sale should be advertised.
A lender may sell the mortgaged property in the condition in which it stands. It is under no duty to improve the property, or take any steps to increase its value. For example, a lender is therefore under no duty to postpone exercising its power of sale until the outcome of a planning application or the grant of a lease of the mortgaged property.
Timing of sale
A lender can choose the time of sale even if it turns out to be disadvantageous to the borrower.
It is therefore irrelevant that a better price would have been obtained by deferring the sale. For example, there is no requirement on the lender to wait for a weakening market to improve, to spend more money on the property prior to the sale, or to wait for the borrower's circumstances to improve so as to enable it to discharge the mortgage debt.
This does not however release a lender's duty to fairly and properly expose the property to the market to obtain the best price reasonably obtainable.
Property included in the sale
Where the lender's security includes several properties, the lender should consider how the combined assets can be realised most profitably when exercising its power of sale. It was this question that was under consideration in Bell v Long.
Summary of Bell v Long
Mr Bell was a director and majority shareholder in a company. The company owned four properties, which were charged to its bank as security for a loan facility. The company was unable to repay the loan facility when the bank formally demanded it and the bank appointed receivers to sell the properties.
The receivers appointed selling agents to advise on the marketing and sale of the properties. The selling agents advised that the combined value of the properties was £955,000, assuming a reasonable period of marketing, and that the properties should be sold individually. The selling agents received several offers for the properties but these were rejected for being too low. As similar properties were expected to be on the market shortly, the receivers decided to sell the properties as a portfolio to provide for certainty. After a competitive bidding process, the receivers eventually sold the portfolio for £775,000.
Mr Bell claimed that the selling agents and the receivers were negligent. This is because they decided to sell the properties as a portfolio only a week after the sales particulars had been sent out. They had therefore failed to fulfil their duty to obtain the best price then reasonably obtainable for the properties in the open market. Mr Bell argued that the sale price was significantly lower than the market value of the properties at the time of the sale, and that if the properties had been sold for their true market value, only three of the four properties would have needed to be disposed of to repay the debt to the bank and meet the costs of the receivership.
The court stated that previous cases had resolved conflicts between the interest of the mortgagee in an early sale and the desire of the borrower for a longer period of marketing. Consistent with this principle, there had to be a degree of latitude given to the lenders and receivers, not only as to the timing of the sale but also as to the method of the sale to be employed.
Once the method of sale has been decided on, the property has to be properly marketed in whatever way is appropriate to that method of sale. The lender can have regard to its own interests in deciding when to sell. If that is a genuine decision, even if it is in its own favour, no breach of duty has occurred. The decision as to how and when to sell is complex and multi-faceted and the duty to obtain the best price reasonably obtainable had to be understood in that context.
On a portfolio sale, a discount was common against individual values, but there was an advantage in cost savings compared to the uncertainties of individual sales over a longer period. A portfolio sale produced a guaranteed disposal of all the properties and paid all of the borrower's liability for costs and interest. The receiver was therefore not bound to wait for an indefinite period in the hope of obtaining a higher price when they had a competitive bid for all the properties in excess of any individual offers.
The court held that the receiver's preference for the certainty of sale of the portfolio of properties over the uncertainties of a longer period of marketing, against the background of changing market conditions, was one which the receivers were entitled to adopt consistent with their right to choose the time of the sale. The duties which the receivers owed to the company did not require them to take these kinds of risks.
The receivers had not therefore breached their duty and the claim was dismissed.