Duties Of Fixed Charge Receivers – Centenary Homes v Liddell

The recent High Court case of Centenary Homes v Liddell [2020] EWHC 1080 has provided a welcome reminder of the extent of the duties owed by fixed charge receivers.

Background Facts

The claimant in the proceedings (“CHL”) was a property development company. Two of its developments were charged to Royal Bank of Scotland (“the Bank”), who appointed receivers in March 2012 when CHL defaulted in its repayment obligations, owing the Bank almost £4.5 million.

The receivers sold one of the developments for £3.25 million and four out of six of the flats remaining in the other development (“Cubitt Street”). The Cubitt Street sales were fraught with problems: the flats did not have formal planning consent and several of them had been plagued with damp problems. After two abortive private treaty sales and two failed auction sales, two of the flats were successfully sold at auction in April 2013, leaving a remaining debt of £485,000.

A further two flats were entered into auction in May 2013 with guide prices of £400-450,000 and reserves of £475,000. They sold for £589,000 and £595,000 respectively, the Bank was fully repaid and a surplus of over £700,000 was returned to CHL.

CHL pursued a claim against the receivers for breach of duty in relation to the sale and management of both properties. This case concerned claims of various breaches in relation to the Cubitt Street property, totalling £1 million.

The list of issues in the case was agreed between the parties, the first being what duties the receivers owed to CHL as joint fixed charge receivers appointed by the Bank. CHL argued that these duties were as follows:

• A duty to act in good faith and for proper purposes, namely for the purpose of preserving, exploiting and realising the assets comprised in the security.
• If selling a property, a duty to take reasonable care to obtain the best price reasonably obtainable.
• A secondary duty (which is to say a duty that is subordinate to a receiver’s primary duty to manage the security for the benefit of the mortgagee) to exercise care to avoid preventable loss.

Counsel for CHL argued that the effect of these duties was that a receiver who sells property in circumstances where no sale is required to discharge the borrowing acts either in excess of his powers or in breach of his duty of good faith or in breach of his duty to exercise care to avoid preventable loss.

Counsel for the receivers argued that their primary duty was to act in good faith, that the other two duties were secondary and would only be breached if the receivers could be shown to have acted in bad faith.

Court’s Findings

The following findings of the court will be of interest (and comfort) to those accepting appointments as fixed charge receivers:

The receiver’s primary duty is a duty to the mortgagee to exercise his powers to deal with and realise the charged property in the best interests of the mortgagee.

There is no duty only to sell so much of the charged property as is necessary to repay the mortgage – the receiver is entitled and obliged when deciding whether and, if so, how to exercise his powers to give priority to the interests of the mortgagee in securing payment. In this case the receivers found themselves having to dispose of flats which did not have planning consent and two of which had damp issues. With four sales having fallen through the receivers acted perfectly reasonable in selling the four flats at auction rather than private sale. Given the outstanding debt and the previous failed sales it was reasonable for the receivers to enter two properties in the auction in May 2013 and the fact that the prices achieved were higher than expected was not sufficient to show that the receivers acted unreasonably in entering two flats in the auction rather than one.

The receiver has only a secondary duty to the mortgagor to avoid preventable loss.

Unlike a mortgagee a receiver cannot simply remain passive if that course would be damaging to the interests of the mortgagor or mortgagee. He must be active in the protection and preservation of the charged property, but this does not require the receiver to take steps to improve or increase the value of the property: a receiver is free to sell the property in the condition it is in. For this reason, the court decisively rejected CHL’s arguments that the receiver should have obtained an indemnity policy in respect of the lack of formal planning consent for the flats, even though this might have increased the price achievable. It also rejected arguments that it should have done more to investigate and rectify the damp issues affecting some of the flats.

If a receiver decides to exercise his power of sale he will generally owe a duty to the mortgagor to take reasonable care to obtain the best price reasonably obtainable at the time of sale.

He will only be adjudged to be in breach of this duty if he has acted as no competent receiver acting with ordinary care and competent advice would have done and enjoys a degree of latitude not only as to the timing of the sale but also to the method of the sale to be used. In deciding whether the receiver is in breach of his duty the facts must be looked at broadly and he will not be found to be in default unless he is plainly on the wrong side of the line. Where there are two or more alternative courses available there is no negligence if the course taken might have commended itself to a competent mortgagee or receiver, even though subsequent events show that it was in fact the “wrong” course.

In this case CHL argued that, had the four flats been sold by private treaty with all repair and planning issues dealt with the flats would have sold for in excess of half a million more than they did. Again, the court rejected this argument as misplaced, based on the findings they had already made – the receivers were under no duty to improve or increase the value of the property and had, in the circumstances acted reasonably in deciding to sell by auction.

Whilst the case contains no new law, it provides welcome clarification of a receiver’s duties to both mortgagee and mortgagor and confirms that, provided that a receiver acts in good faith, based on competent advice and as a reasonable receiver might be expected to act he will not be found to be in breach of duty simply because in retrospect other alternative courses might have been available and achieved results more favourable to the mortgagor.