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What does a mortgagee in possession need to do when marketing a property for sale?

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Posted by Susan Hopcraft on 26 June 2013

Susan Hopcraft Partner

In Meah v GE (2013) it was suggested that a lender had sold a property for less than the true value because development potential had been ignored. The case is a useful summary of how a lender can meet its obligation to take reasonable precautions to obtain the true market value of the mortgaged property. 

The borrower, Mr Meah, mortgaged a substantial but “somewhat dilapidated” detached house in Hythe, Kent. He defaulted on the mortgage and an order for possession was made in June 2004 which was executed in September 2005. The property was put on the market at the beginning of 2006 at an asking price of £185,000 through a local estate agent who had previously valued the property at between £165,000 and £185,000. Within a matter of days offers at (and then above) the asking price were received and then, after the asking price had been increased to £245,500, the property was sold at the end of March 2006 for £221,500. The buyer was a well-known local developer and the property was acquired with the intention of converting it into 5 self-contained flats and basement office space, for which planning permission was swiftly obtained.

The borrower argued that the “true market value” of the property at the date when it was sold, reflecting its ‘obvious’ development potential, was about £325,000. He relied on a “residual development assessment” made by his expert. This was around £113,500 more than the price actually achieved. On this basis the borrower sought damages against the lender equal to the difference between the price achieved and his valuation of the property.

The lender had taken comprehensive advice from qualified valuers prior to offering it for sale and there was no direct criticism of the way the lender handled the sale. The low sale price resulted from the valuers who had been consulted and the selling agent all failing to appreciate the development potential. Had they carried out a development appraisal then they might have become aware and raised the asking price significantly; but they did not.

The selling agent, in his defence, said that the asking price had been set at a level to generate a lot of interest - and that had succeeded. The property sold for well above asking price. As to why no development appraisal had been carried out he said that the sales particulars had been sent to many parties including developers and they were well aware of the development potential themselves.  

The court noted that in auctions a mortgagee is not in breach of its duty if it accepts the best price bid at an auction, even if the auction is not well attended and the bidding is exceptionally low. The judge said “I am not convinced that the obligation of a mortgagee to take reasonable care to obtain the best price reasonably achievable extends to commissioning in a case like the present a residual development assessment.” He added “Whilst there are justifiable criticisms that can be made of the way that the Property was marketed, in my judgment the Property was sufficiently exposed to the market to enable all potential purchasers for the Property to bid for it if they so wished.”  

The judge was also swayed by the thought that, whatever the paper exercise carried out to make a development assessment, which would inevitably be based on certain assumptions, it could not be said that any property would certainly achieve such a price. Thus, provided the market had been properly exposed and tested, then the lender had carried out its duty.

About the author

Susan is a disputes and professional negligence lawyer, mainly in the financial services sector.

Susan Hopcraft

Susan is a disputes and professional negligence lawyer, mainly in the financial services sector.

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