Bradford & Bingley Plc v Ross

When a mortgagee sells mortgaged property to a connected company, the sale is not automatically invalid. But the mortgagee and purchasing company must show good faith and reasonable precautions to obtain the best price reasonably obtainable. The conflict of interest places a heavy evidential burden on the mortgagee. It should obtain and act on expert advice about the method of sale, marketing steps and reserve, and prove what it did. A trial decision based on the borrower bearing that burden, without disclosure that the sale was connected, cannot stand where the evidence may affect the valuation or nature of the transaction. The proper course is ordinarily a retrial to determine the loss. The court should not simply extinguish a shortfall claim as an abuse where the lender remains entitled to have its loss properly assessed.

A mortgage lender sued for the shortfall remaining after the sale of a repossessed property. The borrower counterclaimed, alleging that the property had been sold at an undervalue and that the lender had acted negligently. The Oldham County Court gave judgment for the lender and dismissed the counterclaim, holding that the borrower had not proved breach of duty and that the sale price was within a reasonable margin of the best price reasonably available.

On appeal, the borrower sought to adduce evidence showing that the purchaser was connected with the lender through a business expansion scheme. The central issues were whether that evidence should be admitted, whether the lower court had applied the correct burden and standard to a connected-party sale, and whether the claim should be dismissed or remitted for retrial.

Disposition. Lord Justice Chadwick, with Lord Justices Clarke and Ward agreeing, allowed the appeal, set aside the county court order and remitted the matter for retrial.

1. Fresh evidence. The Companies House documents showed that the transferee existed and was connected with the lender. The evidence was material because the trial judge had assessed the transaction on an uninformed, arm’s-length basis. It was right to admit the evidence on appeal, particularly since the lender knew the true nature of the transaction and had failed to explain it.
2. Connected-party sales. The principles in Tse Kwong Lam v Wong Chit Sen [1983] 1 WLR 1349, endorsed in Mortgage Express v Mardner [2004] EWCA Civ 1859, applied. A mortgagee is not barred from selling to a company in which it has an interest, but the mortgagee and company must show good faith and reasonable precautions to obtain the best price reasonably obtainable. The conflict creates a heavy onus. The mortgagee should obtain expert advice on the method of sale, the steps required to make it successful and the reserve.
3. Error in the lower court. The recorder placed the burden on the borrower and did not know that the sale was between connected entities. There was no evidence of steps taken between withdrawal from the market and the transfer to establish the best price available in July 1993. The judgment therefore could not stand.
4. Remedy. It would be disproportionate to treat the lender’s conduct as an abuse preventing recovery of the shortfall. The lender remained entitled to have its loss assessed, while the borrower was entitled to argue that there had been no true sale and that the property was held as nominee for the lender. The retrial should take place before a judge with Chancery experience. Costs of the appeal were awarded to the appellant; costs below were reserved.

Obiter. If the borrower had agreed, the court would have considered adopting the approach in Mortgage Express v Mardner and adjusting the figures by reference to a value of £50,000. The borrower preferred a retrial.

• Court of Appeal (Civil Division) — In [2005] EWCA Civ 394, the appeal was allowed, the county court order was set aside and the matter was remitted for retrial.
• Oldham County Court — Mr Recorder Freeman gave judgment for the lender and dismissed the borrower’s counterclaim. The order under appeal was made on 17 May 2004.