UK: Insolvency Sales Of Property

Last Updated: 15 April 2013
Article by Peter Levaggi and Jessica Lorimer

The financial crisis has created turbulent sales conditions for property. The lack of supply of property (with owners and banks not selling in the hope that sales conditions improve) has artificially propped up the market maintained prices at a high rate. Now parts of the country (in particular Central London) have seen an isolated increase in prices. It has become increasingly difficult for practitioners to justify valuation and sale price.

Insolvency practitioners (acting as administrators, liquidators and trustees in bankruptcy) have a duty to take reasonable care to realise the best price on the sale of property within the insolvent estate. However, there is a discretion (or margin) as to how this duty is discharged.

This issue was rehearsed recently in the Northern Ireland case below.

McTeer v Lismore [2012] NI Ch7

In this case, a trustee in bankruptcy (acting in relation to an estate of a deceased debtor) defended an action brought by the widow of the debtor on the basis that a property had been sold at an undervalue.

Sitting in the High Court, Mr Justice Deeny set out a number of questions as guidelines as to whether the trustee had taken reasonable care to realise the best price on the sale.

These questions included:

  1. How did the trustee go about discharging his duty of reasonable care in selling the property?

  2. Was the trustee, vicariously or otherwise, in breach of the duty to take reasonable care?

  3. If the answer to 2 is yes, was the property sold at an undervalue?

  4. If the answers to 2 and 3 are both yes, did the breach of duty cause or contribute to the sale at an undervalue?

  5. Would it be just to award compensation [pursuant to Section 304(1) of the Insolvency Act 1986] if the answers to 2, 3 and 4 are all yes?

In this case the trustee had failed to take reasonable care because:

  • The property had not been advertised since 2000.

  • It had not been valued for five years at the time of the sale.

  • No sale boards had been erected for the waiting period.

  • The sale had taken place in 2005 and the price did not reflect the significant price rises from 2002 to 2005.

  • The expert witnesses in the case agreed that the property had been sold far below the professional valuation of the property.

These guidelines create a significant challenge for a trustee (or other insolvency practitioners) in marketing and selling a property.

Where a property has not been marketed in an appropriate way (with an extended marketing period on the usual marketing website/advertising or other mediums) then the onus is on the Insolvency Practitioner to demonstrate that the sale price was not outside the reasonable margin of error.

Mr Justice Coulson in K/S Lincoln v CB Richard Ellis Hotels Limited [2010] EWHC 1156 held that the margin or margins that a valuation may fall within without being negligent are:

  • For a standard residential property the margin may be as low as +/- 5%

  • For a “one off” property the margin will be +/- 10%

  • For a property with exceptional features, the margin could be +/- 50% or more

Comment

On the basis of these guidelines, the valuation margin of error can be relatively tight. However, it isn’t the breach of the margin which was the difficulty for the trustee in bankruptcy in the McAteer case. If the trustee had been able to show that he took reasonable steps to get the best price then the valuation issues would not have been material. The moral therefore is to ensure that properties are adequately marketed, a reserve price set and proper valuation/sales advice is received prior to sale. If these steps are not taken then the reasonableness of the sale will come down only to the narrow boundaries of the margin test.

Glatt v Sinclair [2011] EWCA Civ 1317

The Facts

The court appointed a receiver (Mr Sinclair) to manage a number of Mr Glatt’s properties. In November 2001, Mr Sinclair obtained the court’s authority to sell a number of Mr Sinclair’s properties and other assets in order to meet legal aid contributions (amounting to £330,000) and to meet Mr Sinclair’s own legal costs of the receivership which were, after several years, substantial (in excess of £396,000).

The subject of the case was one particular property to be sold. Mr Sinclair had obtained a valuation for the property from Smith Hodgkinson of £330,000; supported (subsequently) by an additional valuation by another firm, Colleys, which also reflected that £330,000 was the appropriate asking price. The property was subsequently sold for £330,000.

On the day of completion, the property was immediately remarketed by the purchaser for the sum of £449,950 and a sale rapidly proceeded at £455,000. Understandably, Mr Glatt took issue with Mr Sinclair’s decision to market the property (and subsequently sell it) at £330,000.

Judgment & Duties Owed

The Court of Appeal held that a receiver is under a duty to those interested in the property over which he is appointed to act in good faith and to take reasonable steps to obtain a proper price. In this context, he held that a “proper price” means the “best price reasonably obtainable at the time” (as per the ruling in Mortgage Express v Trevor Mardner [2004] EWCA Civ 1859).

The appeal judge recognised that Mr Sinclair employed Smith Hodgkinson, a reputable and independent firm of valuers with a nationwide business. Smith Hodgkinson had stated that the sum of £330,000 was the best price which the property could be sold, assuming a willing buyer and a reasonable period of proper marketing. The inspection had been carried out by a Corporate Member of the Royal Institution of Chartered Surveyors who had knowledge of the particular market and the skills and understanding to undertake the valuation competently.

In response to concerns raised by Mr Glatt as to the valuation placed on the property by Smith Hodgkinson, after the sale had taken place, Mr Sinclair had requested a second valuation from Colleys who had inspected the property to advise in relation to a mortgage. Colleys confirmed that they too believed the open market value of the property to be £330,000.

Mr Sinclair submitted that the November Court Order gave him power to immediately sell the property and, given that there were very substantial costs to be met by the sale, there was a pressing need for the additional funds to come into the receivership.

Kitchin LJ held that there was no evidence to suggest that Mr Sinclair took any steps to ascertain the state of the market or whether it was rising or falling, nor was there any suggestion that he had:

  • discussed a marketing strategy with the estate agents;

  • considered what would be an appropriate asking price;

  • ascertained whether or not the sales particulars should be produced and what form they would take; or

  • considered how long and in what manner the property should be advertised or any other aspect of the sales strategy to be adopted.

Mr Sinclair accepted that a receiver appointed by a mortgagee cannot escape liability merely by saying that they entrusted the sale to apparently competent professionals. Kitchin LJ held that the obligation on the mortgagee or receiver appointed is to ensure that the property is sold at the best price reasonably available, and this duty is not delegable (as per the ruling in Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971] Ch 949).

Kitchin LJ held that although a court appointed receiver has no interest in the property (and therefore is, in that sense, similar to a trustee), he is still under the same fiduciary duties and owes the same duties of care as a receiver appointed out of court. Lloyd LJ stated that obtaining a valuation did not necessarily dispense with the need for Mr Sinclair to obtain further advice as to the marketing of the property. It remained the duty of Mr Sinclair, as the receiver, to ensure that he obtained advice at that stage as to the asking price or guide price and the appropriate method of selling or advertising.

Mr Glatt was therefore granted leave to pursue a claim against Mr Sinclair for breach of duty.

Comment

Whilst this decision seems justified on the facts (even Mr Sinclair accepted that his duties were not delegable), it might seem unfair that a receiver cannot rely on a valuation of trusted and reputable estate agents. Perhaps the Appeal Judges felt they could not ignore a £100,000 difference in sale prices!

The duty owed by a receiver to obtain the “best price reasonably obtainable at the time” can be contrasted with the duty owed by an insolvency office holder (liquidator,administrator or trustee in bankruptcy) as set out in the McAteer v Lismore [2012] case(see above).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Jessica Lorimer
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