Selling a property for less than it is worth to settle a mortgage debt could land the parties in court.  Two recent cases show the importance of considering how to obtain the best price for a property.

In McDonagh v Bank of Scotland, Mr McDonagh bought an investment property for £7.5 million using the property as security for a loan from the bank.  During the credit crisis, the value of the property dropped below the loan to value ratio.  Mr McDonagh defaulted and the Bank of Scotland appointed receivers to recover its debt.

The receivers exercised their power to sell the property and included it in a portfolio sale of 35 properties which realised £41 million.  The amount attributed to Mr McDonagh’s property was £3.78 million.

Mr McDonagh issued a claim against the receivers, saying that they had sold his property for less than it was worth.  He argued that if they had sold it individually, rather than as part of a portfolio, it would have realised a greater value.

The court decided that the receivers had not breached their duty to Mr McDonagh.  It concluded that they had carried out a comparison between selling individually and as part of a portfolio, so had properly considered his interests.

The decision went further as it also described a duty of the receiver to particularly consider the interests of the mortgagor in a portfolio sale, which in turn could expose receivers to claims from lenders.

In Kevin Philbin v Stewart Davies, Mr Davies lent Mr Philbin money secured on two properties.  When Philbin failed to repay the loan, Davies sold the properties to a company he had set up for the purpose.  The sale proceeds did not cover the full amount of the debt, and a statutory demand was issued for the outstanding debt.

Philbin asked the court to set the demand aside.  He argued that the properties had been sold for less than they were worth and had the correct price been realised, his debt would have been wiped out.

Whilst Mr Davis had taken valuation advice and from a number of consultants, the court was concerned that there had been insufficient consideration of the best method of sale, and deciding that there was a realistic chance that the properties could have sold for more, considered that the statutory demand against Mr Philbin should be set aside.

These cases show the importance of taking both the lender’s and borrower’s interests into account when selling a property to repay a debt,” said James Burgoyne, Director – Claims & Technical, Brunel Professions.  “Selling a property for less than it is worth can expose lenders or their receivers to a court challenge. Receivers should be careful to document their decision making process in order to defend such claims, particularly where they include properties within a portfolio sale.

Reports on the cases have been published by Eversheds and Walker Morris.

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