Does it matter if "the price is right"?
The recent case of Serene Construction Ltd v Salata and Associates Ltd has offered further insight on the Courts' approach to claims against bank-appointed receivers where they are instructed to market and sell land.
The dispute centred on Serene Construction Ltd.'s displeasure with how the receiver, Salata and Associates, handled the sale of their unbuilt residential development site on behalf of the bank.
In March 2003, Serene acquired planning permission to build 13 residential units on a piece of land they had purchased, on the basis that development must commence within five years of the date on which that permission was granted. In 2008, the bank called in a loan it had made to Serene, secured with a fixed charge over the site, and appointed Salata to act as receivers for them.
Due to the lapse of time and the minimal works done on the site since the initial planning permission, it was unclear whether the conditions of that permission had been satisfied to a sufficient extent to remain valid. The receivers submitted that, in these circumstances, they acted reasonably in consulting both the local planning authority and a separate land agent to advise on valuation.
In 2013, Salata concluded the sale of the site for £175,000. Serene believed that a sale at that level was below market value and argued that it amounted to a breach of the receiver's fiduciary duty to take reasonable steps to achieve the best price available. In their submissions, Serene relied on the evidence of an expert valuer, who had advised them that the planning permission was valid, considering the substantial sums they had already spent working on the site. Against this backdrop, their expert valued the site at £575,000.
The main allegations against Salata were that they failed to:
- engage independent expert valuers to determine the true market value of the site;
- market the site to an adequately wide pool of potential buyers; and
- market the development with a good guide price, which would incentivise potential buyers to pitch an amount closer to its true market value.
The Judge rejected these allegations. On the first point, he held that that receivers tend to have sufficient expertise to be able to determine true market value without needing to seek evidence from a valuer. On the second point, he held that the evidence demonstrated that there was insufficient interest in the site to warrant a wider marketing campaign. As to the third argument, he found that, on the facts, the receivers did their best to achieve a realistic sale.
In his judgment, Judge David Cooke considered the case law, starting with Cuckmere Brick Co v Mutual Finance, the classic case highlighting the duties owed by a mortgagee when exercising the power of sale. This duty involves taking reasonable steps to obtain "true market value" or a "proper price" at the time of sale.
Salata also relied on the case of Meah v GE Money Home Finance, in which the judge observed that simply selling below an expert's valuation is not enough to give rise to a claim. Rather, what the borrower must show is that, in failing to achieve that value, the lender has plainly breached its duty to take "reasonable precautions taken to obtain that value". The Court of Appeal case of Silven Properties v Royal Bank of Scotland confirmed that this test is applicable to receivers appointed by a lender; and that they have a duty to "take care to obtain the best price reasonably obtainable."
In light of these cases, the judge found in favour of Salata. He rejected Serene's submission that it was for the receiver to show the reasonable steps they had taken in achieving a proper price. Where there is no connection or interest in the buyer, the Judge held it was for the claimant to prove the receiver's breach of duty with reference to the specific acts or omissions giving rise to the breach.
This case is important for both the insurer and their insureds as it offers reassurance that claims against receivers are unlikely to succeed, so long as the receiver has acted reasonably. Just because the sale price did not accord with the opinion of an expert will not mean the claimant is entitled to damages. Receivers can take comfort that, if they have taken all reasonable steps, they will have a defence to any claim, even if the price achieved wasn't "right".