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Duties of receivers - Serene Construction Ltd v Salata and Associates Ltd considered

In light of a recent decision in which the court assessed the decisions taken by receivers when selling property, we revisit the powers and duties of receivers and the importance of obtaining independent valuation evidence and keeping records of decisions.

Powers of receivers

There are typically two types of receivers:

  1.  administrative receivers who are appointed over the whole (or substantially the whole) of a company’s property by a floating charge holder (rarely seen due to being largely supplanted by the administration regime introduced from 2003 onwards); and
  2. receivers who are appointed to deal with specific property or assets for a specific purpose, including receivers appointed under the Law of Property Act 1925 (LPA). The term ‘LPA receiver’ is often applied to receivers appointed not just under the (relatively narrow) scope of the LPA itself, but also under the wider terms of the fixed charge documents that govern the relationship between the underlying parties.

Receivers’ specific powers are set out in the instrument or order appointing them, in addition to any statutory powers applicable (such as the powers under s 109 of LPA for LPA receivers or set out in schedule 1 of the Insolvency Act 1986 for administrative receivers).

Duties of receivers

Although appointed by the chargee (usually a lender), receivers owe a duty of care to the chargor (usually the company borrower), obligor and any guarantor of the liabilities secured by the charge.  When dealing with the sale of properties, receivers have a duty to achieve ‘true market value’ or the ‘best price reasonably obtainable‘ (Michael v Miller [2001] EWCA Civ 282). Receivers regularly face allegations of breaching this duty but the courts will generally take a pragmatic approach when assessing how receivers have exercised their powers. The Courts have previously found that receivers:

  1. are not under a duty to pursue applications for planning permission or to undertake any renovations or improvement works to properties to increase the value (Silven Properties Ltd & Anor v Royal Bank of Scotland Plc & Ors [2004] 4 All ER 484)
  2. should carefully assess the benefit of selling multiple properties as part of a portfolio or selling them individually – this may include weighing up any increase in value obtainable, ideally relying on independent valuation evidence, against any expense and delay caused as a result (Bell v Long [2008] EWHC 1273 (CH) and McDonagh v Bank of Scotland Plc [2018] EWHC 3262 (Ch))
  3. should also obtain independent advice as to the strategy for the marketing of the property and not just rely on an open market basis valuation. Advice should also be sought on the property market generally including any factors which may affect sale prices significantly (Glatt v Sinclair [2011] EWCA Civ 1317)

Ensuring that these duties are complied with (and documented) and mitigating the risk of criticism is key for receivers. For our top hints and tips, see our article here.

Serene Construction Ltd v Salata and Associates Ltd & Others

Background

Serene Construction Ltd (the Company) was set up specifically to acquire a plot of land to develop into residential properties. Planning permission was granted in 2003 to build 13 houses on the site, following an application made in 2002. During the following years the Company borrowed from Barclays Bank plc (the Bank) to finance the construction and in 2008 the Bank called in the outstanding loan in the sum of approximately £327k. The Bank spent a number of years exploring its recovery options, including requesting that Salata and Associates Ltd, surveyors and valuers (Salata) visit the site and prepare a report on the likely value of the plot of land.

There were a number of hurdles in preparing the report, as Salata struggled to obtain information from the directors of the Company and there were mixed messages from the local planning department as to whether the planning permission had lapsed (as work is required to commence within 5 years of the date of the application to prevent the permission lapsing). Salata considered that the houses included in the original planning permission were too large and upmarket for the area and would be difficult to sell and therefore advised the Bank that a smaller development might be more ‘saleable’ and suggested an architect be engaged to draw up new plans. The expected revenue would then be in the region of £350,000 - £400,000.

Mr Salata and Mr Jorden of Salata were appointed as fixed charge receivers over the development site by the Bank in January 2012 (the Receivers). Following further discussions with the planning department (whereby the planning department provisionally approved the smaller development scheme) and a valuation and marketing advice obtained from a local estate agent, the site was market to 20 local developers in September 2012. Two offers were received; one for £200,000 but with a 12 month option agreement and the offer was conditional upon planning permission being obtained, and another for £175,000 which was unconditional. The latter was accepted and the sale completed in February 2013.

Allegations

The Company issued a claim against the Receivers for breaching their duties to take reasonable steps to achieve the best price possible[1] alleging that the Receivers had:

  1. Failed to obtain an independent market valuation of the site as they had a relationship with the estate agents they used
  2. Failed to advertise the site generally or to offer it for sale by auction
  3. Only invited offers from 20 developers selected by the estate agents and by doing so failed to receive any offers reflecting the true market value of the site
  4. Erroneously marketed the site as a portfolio rather than individually
  5. Failed to market the site with a general guide price
  6. Breached their duty to obtain the best price as they had rejected the higher offer of £200,000
  7. Sold the property at an undervalue as they could have realised at least £575,000

As a result the Company claimed £400,000 plus costs.

Decision

The matter was heard by HHJ David Cooke in the High Court in August 2021.

Both parties had obtained expert evidence, but the Judge preferred the Receivers’ evidence (not least because the Company’s expert report was not CPR compliant, did not provide any basis or calculations for the valuation provided and did not provide any estimates for fees or costs of development) which provided a valuation of £200,000 without planning permission. There was also a contemporaneous and independent valuation from 2012 from a third party who provided finance for the successful purchaser, which placed the value at £175,000 without planning permission – which was the basis for the offer that was ultimately accepted.

The Judge found that the Receivers had not breached their duties in instructing the estate agent they did; they had acted reasonably in identifying a suitable person to provide advice on the value and the duty is not prescriptive about who that person should be. The agent was highly experienced and reputable and had worked with the Receivers previously in similar situations. There was no evidence before the court that using a different agent would have produced a different outcome.

The Receivers had taken specific advice from the agent regarding how best to market the property. The decision to market to a select group of developers without a guide price was a deliberate decision based on the agent’s advice, an approach which the Judge found was not unreasonable in the circumstances. There was no evidence that the Receivers had done so by way of a shortcut or without attention to the objective to achieve the best price.

Based on the expert evidence valuation of £200,000, the sale price of £175,000 was not at a significant undervalue and balanced the risk of remarketing the property causing potential costs and delay without any certainty of achieving an increased offer.

The Company’s claim was dismissed.

Our comment

This case highlights the importance of obtaining independent valuation evidence at the time of marketing a property, as well as following any advice on how to go about the marketing of the property. It emphasises the vital importance of recording  all decisions, discussions and correspondence as to how a price was reached or why a specific offer might have been accepted over another, which  may be crucial upon any challenge or allegation of a breach of duty.

For further information on this article, please contact Cathryn Butler or another member of our Restructuring & Insolvency team.

[1] The Company also issued a claim against the valuer firm Salata itself, although as receiver appointments are personal, this was later dropped.

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