Devon Commercial Property Ltd v Barnett & Anor

A Law of Property Act receiver owes the mortgagor a duty of good faith and must exercise management and sale powers for a proper purpose connected with protecting or realising the security. Good faith requires intentional conduct involving more than negligence, and an improper motive or element of bad faith, but need not involve dishonesty.

Where a receiver sells to an associate of the mortgagee, the receiver does not thereby have the same conflict as the mortgagee. The receiver must nevertheless take reasonable care to obtain the best price reasonably obtainable at the time of sale. There is no duty to sell at a particular time, await an increase in value, or assist the mortgagor to overcome financial difficulties.

The claimant owned an industrial property subject to a mortgage. After default, the mortgagee appointed the defendants as Law of Property Act receivers. The mortgagee’s associated company already occupied the property and later purchased it.

The claimant alleged that the receivers acted in bad faith, for an improper purpose, under the mortgagee’s direction, and in breach of their duty to obtain the best price reasonably obtainable. Particular complaints concerned the grant of a new lease, the treatment of the mortgagee as a special purchaser, marketing arrangements, and the eventual sale price.

The central issues were the scope of the receivers’ duties, the burden of proof, the admissibility of expert evidence, and whether any breach caused loss.

1. Good faith and proper purpose. A receiver owes the mortgagor a duty to act in good faith. In this context, breach requires intentional conduct involving more than negligence and encompassing an improper motive or element of bad faith, but dishonesty is not essential. The receiver must exercise management and sale powers for the purpose of protecting or realising the security and securing repayment of the debt. It is sufficient that a proper purpose is at least one purpose of the exercise of the power.
2. Conflict. The mortgagee’s interests necessarily conflict with those of the mortgagor, and the receiver may generally prefer the mortgagee’s interests when acting for a proper purpose. A different conflict arises where the mortgagee or its associate seeks to purchase the property. The mortgagee cannot purchase itself, while an associate may purchase if the sale is in good faith and reasonable care was taken to obtain a proper price. A receiver selling to the mortgagee’s associate does not itself share the mortgagee’s interest in minimising the price and is not thereby in a conflict of duty and interest.
3. Price and timing. A receiver exercising a power of sale owes the same duty as the mortgagee to take reasonable care to obtain the best price reasonably obtainable at the time of sale. There is no duty to sell at a particular time, to await or create an increase in value, or to assist the mortgagor in raising finance. The receivers were entitled to grant a new lease, investigate planning potential, market the property subject to that lease, and sell when they did.
4. Application. Aston Manor was a special purchaser because it was the sitting tenant, owned the process plant and equipment, and carried on brewing and bottling activities. The marketing campaign and negotiations nevertheless took reasonable care to obtain a proper price. The new lease was granted at a proper rent, and the eventual price exceeded the independent valuation and the recommended special-purchaser uplift.
5. Expert evidence and loss. Expert evidence from insolvency practitioners on the duties of LPA receivers was inadmissible. The issues were principally matters of law or fact, and such evidence was not reasonably required under CPR Part 35. The valuation evidence supporting the defendants was admissible and robust. The claimant established no breach and the claim was dismissed. In any event, the alleged breaches would not have caused loss.

First-instance trial judgment. No appellate history was stated.