Mortgagee duty to take reasonable care to sell for best price reasonably obtainable

The recent case of Aodhcon LLP v Bridgeco Ltd [2014] All ER (D) 50 (Mar) considered the mortgage's duty to take reasonable care to sell a mortgaged property for the best price reasonably obtainable.

What happened in the case?

The claimant company, Aodhcon, was a special purpose vehicle created for the acquisition and development of a property. In March 2008, it purchased the property for £640,000. Part of the money used for the purchase came from a loan from the Bank of Scotland, secured by a first legal charge over the property. The development did not proceed quickly and, because the loan was about to expire, Aodhcon took out a bridging loan from the defendant company, Bridgeco. The bridging loan was originally to be repaid by April 2010, but that was extended to the 7 November 2010. In late November 2010, when the bridging loan had run out, the question of selling the property was raised. The property was sold in March 2011 for £852,000. Aodhcon issued proceedings against Bridgeco.

Aodhcon submitted that, first, Bridgeco had been in breach of duty as a mortgagee to sell the property for the best price reasonably obtainable, since it had obtained a substantially lower price than the one that it ought to have obtained on sale. It contended that, had Bridgeco not breached its duties, the property would have sold for £1.25m instead of £852,000. Secondly, it submitted that Bridgeco had not credited a deposit to the loan as soon as the deposit had been received by its conveyancing solicitors, so that interest had been charged on an outstanding sum, which had been more than it ought to have been. Thirdly, it submitted that, by using the expression 'monthly anniversary', the facility fee was uncertain or ought to be construed so as to refer to the 6 May in every year, rather than the 7 May. Fourthly, it submitted that the facility fee was a penalty.

What did the court decide?

The court ruled:

(1) Bridgeco's duty had not been to sell at the best price reasonably obtainable, but to take reasonable care to sell for that price. Further, on the caselaw, Bridgeco would not have breached that duty unless it was plainly on the wrong side of the line. Looking at the facts broadly, Bridgeco did not breach its duty to take reasonable care to sell the property for the best price reasonably obtainable. Bridgeco did not plainly fall on the wrong side of the line, and its selling decisions had been within an acceptable margin of error. Having concluded that Bridgeco had not been in breach of duty in the way that it had marketed the property for sale, it was difficult to see how it could be said to have been in breach of duty at all (see [206] of the judgment).

Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971] 2 All ER 633 applied; Michael v Miller [2004] All ER (D) 399 (Mar) applied; Meah v GE Money Home Finance Ltd [2013] All ER (D) 124 (Jan) considered.

(2) Regarding the deposit, to the extent that Bridgeco had not credited it to the bridging loan, Aodhcon's claim would succeed (see [212] of the judgment).

(3) On the true construction of the disputed part of the facility fee, on the seventh day of each successive month after the bridging loan had been drawn down by Aodhcon, there was to be debited 1.25% of the balance of the loan then outstanding; Aodhcon having actually drawn down the loan on the 7 May 2010 (see [218] of the judgment).

(4) The facility fee was not the sort of provision that was a penalty. By terms of the provision, Aodhcon had had a contractual obligation at all times to pay the facility fee, but an indulgence had been granted in the absence of default. The fact that there were separate payment obligations did not undermine that conclusion. There was nothing in the case law to suggest that the predominant contractual function of the facility fee had been to deter Aodhcon from breaking the bridging loan agreement (see [223], [226] of the judgment).

Wallingford v Mutual Society and Official Liquidator [1874-80] All ER Rep Ext 1386 applied; Lordsvale Finance plc v Bank of Zambia [1996] 3 All ER 156 applied; Cavendish Square Holdings BV v Makdessi [2013] All ER (D) 290 (Nov) considered.

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