Meah v GE Money Home Finance Ltd.

This is an action by which a mortgagor claims compensation from his mortgagee for having sold the mortgaged property at allegedly an undervalue. He bases his claim on the allegation that in so doing the mortgagee breached the duty recognised by the Court of Appeal in Cuckmere Brick Co. v Mutual Finance Ltd [1971] 1 Ch. 949 that “a mortgagee in exercising his power of sale does owe a duty to take reasonable precautions to obtain the true market value of the mortgaged property at the date on which he decides to sell it” (per Salmon LJ at p. 968-9). The learned Lord Justice went on in the next sentence to observe “ No doubt in deciding whether he has fallen short of that duty the facts must be looked at broadly, and he will not be adjudged to be in default unless he is plainly on the wrong side of the line”.

The mortgagor in this case is the Claimant, Mr Kayul Meah, represented by MrCharles Douthwaite. The mortgagee is the Defendant, G E Money Finance Limited, represented by Mr William Hibbert. The mortgaged property (“the Property”) was a substantial but somewhat dilapidated detached house situate in the centre of Hythe in Kent at 15 Douglas Avenue. The Claimant defaulted on the mortgage and an order for possession was made in June 2004 which was executed on 29^th September 2005. The Property was put onto the market at the beginning of 2006 at an asking price of £185,000 through a local firm of estate agents and valuers called Fell Reynolds 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 eventually, after the asking price had been increased to £245,500, the Property was sold at the end of March 2006 for the sum of £221,500 to a company called Champion & Bushell Limited. Mr Bushell, the principal or one of the principals behind this company, was a well known local developer and the Property was bought with the intention of converting it into 5 self contained flats and basement office space, for which planning permission was swiftly obtained.

The Claimant contends that the “true market value” of the Property at the date when itwas sold having regard to its obvious development potential was about £325,000. For this he relies upon a so called “residual development assessment” made by his expert, Mr Anthony Meire, whose evidence I heard, who calculates that on the basis of the development of the Property actually carried out by the purchaser and various assumptions which he made, there could reasonably be attributed to the Property at the date of its sale a value of £325,000. This is therefore just under £113,500 more than the price actually achieved. On this basis the Claimant seeks an order that the Defendant do account to him for the difference between the price achieved and the true value of the Property.

Mr Douthwaite naturally concedes that the mere fact that a property is sold by amortgagee at less than a valuer believes was its true market value is not in itself sufficient to give rise to a claim. What the mortgagor has to show is that in failing to achieve that value the mortgagee breached, and as Salmon LJ put it plainly breached, its duty to take reasonable precautions to obtain that value. In Cuckmere Brick Salmon LJ at p. 965 specifically observed “Nor, in my view, is there anything to prevent a mortgagee from accepting the best bid he can get at an auction, even though the auction is badly attended and the bidding is exceptionally low.” Furthermore it was the view of two of their Lordships in that case (Cross and Cairns LJJ) that, even where the duty has been breached, the measure of compensation isnot measured automatically by the difference between the price paid and what the expert assesses to have been the true market value of the property. Rather the compensation must be assessed on the difference between the price paid and the price at which the property would probably have sold had the duty been discharged, which is not necessarily the market value attributed to the property by an expert.

In this case it can scarcely be said that the Defendant itself was in any way personallyat fault in the way the Property was marketed and ultimately sold for £221,500. It relied for these purposes upon a whole string of apparently well qualified valuers. In July 2005 (thus before possession had been obtained) a Mr Foster of a company specialising in valuations called eSure Limited had placed a “drive by” value of £235,000 on the Property but with a projected market value on the basis of a 90 days’ sale of £215,000. Subsequently in October after possession had been obtained a Mr Hickmott of the same company thought that the Property would fetch no more than £175,000 and recommended an asking price of £180,000. Just before Fell Reynolds were instructed Mr Mallet, who handled this matter on behalf of that firm and whose evidence I heard, thought that the Property would fetch about £165,000 and recommended the asking price of £185,000 referred to above. Later just before Christmas the Defendant consulted a Mr Buckhurst of a firm called Ward & Partners. He placed a value of £200,000 on the Property but thought it would fetch about £190,000. Later in early February 2006 and at the suggestion of the Claimant, who had been complaining that the asking price for the Property was too low, the Defendant consulted a Mr Simms of a firm called Countrywide Surveyors. He placed a value of £235,000 on the Property and suggested raising the asking price to £245,000, which the Defendant instructed Fell Reynolds to do and with which instruction Mr Mallett complied but with some reluctance, because he thought that raising the asking price might result in his losing an offer of £218,500 which had just been made. Subsequently at the end of February Mr Simms expressly endorsed the recommendation of Mr Mallet to accept that offer. In fact the Property fetched £3,000 more.

One might have thought that by consulting all these well qualified valuers and relyingon their advice the Defendant had discharged its duty to take “reasonable precautions” to obtain the “true market value” of the Property and, indeed, Mr Hibbert in his skeleton argument put this at the forefront of his submissions. However, in Cuckmere Brick itself the Court of Appeal had expressed the view obiter (because the matter had not been argued below) that a mortgagee does not discharge its duties by leaving the sale in the hands of reputable estate agents (see, ibid, per Salmon LJ at p. 969) and in Raja v Austin Gray [2002] EWCA Civ 1965 the Court of Appeal declined to extend the duty of care owed by valuers employed by a receiver to the borrower on the ground that there was no need so to extend that duty as, if the valuers were negligent, the borrower had a good claim against the receiver who did not discharge his duty of care to the borrower (which was the same as that owed by a mortgagee) by entrusting the sale to apparently competent professionals (see per Clarke LJ at paras. 29 to 35). Mr Hibbert realistically accepted that I, as would any judge at first instance, would be likely to follow these observations of the Court of Appeal, even if strictly obiter, and so did not press this contention before me whilst reserving the point for possible argument in the Court of Appeal in the event of an appeal.

In Cuckmere the duty was put by Salmon LJ in terms of a duty to use reasonable“precautions” to obtain the “true market value” of the property. In the same case and in others that have been decided subsequently the duty has been put in terms of a duty to use “reasonable care” to obtain a “proper price” for the property. In argument it has been conceded by Counsel that there is no difference between these formulations and that the duty is essentially a duty to use reasonable care to obtain the best price reasonably achievable for the property at the date of sale. This, it seems to me, reflects the very point referred to by me above that Salmon LJ made in Cuckmere, namely that 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. Ex hypothesi the highest price bid is the best price reasonably achievable at that auction.

It seems to me that there are essentially three issues which I have to determine which Iwould describe as follows

Whilst I have put these as separate issues, they cannot be examined solely in isolation. Thus a view as to what I might be persuaded was truly the market value of the Property at the relevant time may have a bearing upon whether what the Defendant by its agents did or omitted to do in relation to the marketing of the Property was compliant with its duty to take reasonable care to achieve the best price. It has perhaps an even greater bearing upon whether any deficiencies in what the agents did or omitted to do did indeed result in the best price not being achieved. The converse is also the case. The view that I take as to what the agents did in the way of marketing the Property and the extent to which all those who might have been interested in acquiring the Property had an opportunity to bid for it may well have a bearing on what should truly be regarded as the market value of the Property at the relevant time.

Dealing with the first issue the particular respects in which the Claimant alleges the Defendants by its agents fell short of the required standard are set out at length in his Particulars of Claim. I do not think it is necessary for me to examine each of them in turn. Mr Douthwaite in his closing submissions helpfully summarised the principal matters upon which his client relies as follows

There were two other factors relied upon, but I do not believe that they add anything to the complaint. It was complained that Fell Reynolds had not widened the catchment area for their advertising so as to appeal to more developers. However, as this was not explored with Mr Mallett in cross examination I do not think that any reliance can be had on this. It was also the Claimant’s evidence, which Mr Mallett was not in a position to challenge, that the Property had been taken off the internet after 10^th January. Mr Mallett’s evidence, which I accept, was that in 2006 inquiries from internet advertising were relatively small in number and that the best way of advertising the property was by way of circulating the sale particulars to his firm’s mailing list, which included many developers, which he had done at the outset of the marketing campaign. I do not think that anything turns on why the Property was taken off the internet although there is no explanation for this having been done.

At first blush there would appear to be considerable force in the criticisms which are made of the way through Mr Mallett the Property was marketed. Having heard all the evidence, including the expert evidence, it seems to me that it is correct to say that there was at the time no real comparable that could be justifiably relied upon by any of the estate agents or valuers to assess the market value of the Property. Furthermore it is self-evident that the original asking price for the Property was fixed at a much too low a figure. It was fixed at a figure of £185,000 on Mr Mallett’s assessment that the Property would fetch a little under that figure. In fact almost as soon as the Property was put on the market, offers above the asking price were being received and eventually the property sold well above this initial asking price for £221,500. It is furthermore on the face of it surprising that neither the sales particulars nor the advertisements placed in local newspapers made any mention of the potential for the Property to be converted into flats.

As to the asking price, intuitively I, like I suspect most lay persons with only limited experience of buying and selling properties, would regard the placing of a property on the market at an inadequate asking price as being something likely to depress the price which the property will fetch. After all the asking price is on the face of it the price which the vendor is telling the market it is prepared to accept for the property and, accordingly, it indicates what the vendor on advice believes to be the maximumamount that the property is worth. A prospective purchaser who has made an offer at the asking price thus reasonably, it might be thought, would expect that offer to be accepted and would be reluctant to raise its offer much, if at all, above that price. Furthermore, if there was the potential for the Property to be converted into flats for which, on the evidence, it was likely that planning permission would readily be obtained, I would have thought that this would be something that ought to have been specifically mentioned in the sale particulars, as indeed it was in the sale particulars relating to 16 Douglas Avenue, notwithstanding that that property had been completely refurbished as a single dwelling house and its development potential was more limited.

However, I am not an estate agent and the only estate agency evidence which I heard was that of Mr Mallett. His evidence, which was not contradicted by any contrary evidence, was that, when one is dealing with a sale by a mortgagee, everyone in the market to buy appreciates that the asking price is not necessarily the price which the vendor will accept as they all appreciate that, even if an offer at the asking price is accepted subject to contract, the mortgagee will as a matter of established practice for its own protection place a so called “public notice” in a local newspaper which will invite further offers above the price accepted. So all prospective purchasers are aware that when dealing with a mortgagee sale in effect a bidding war is likely to occur whatever the asking price may have been. That is not to say that the asking price is unimportant. However, what Mr Mallet said, which is again not contradicted by any evidence to the contrary, is that the important thing is to set the asking price at a level which will generate a good level of interest. On that score he expressed the view that the asking price which he had set was a correct one as it generated a huge amount of interest which led to a price well above the asking price being achieved.

On the question of why no mention was made of the development potential for the Property Mr Mallett’s evidence was that the persons to whom the sales particulars were circulated included many developers and the development potential of the Property would have been obvious to them. This is borne out by the fact that many of the persons who inspected the Property were developers and many of them put in offers, including of course the ultimate purchaser. What he did not want to do, so he told me in evidence, was by making specific mention of the development potential for flats, to put off other potential purchasers who may have been interested in purchasing the Property for other purposes, e.g for single occupancy (and there was at least one such person who put in an offer) or for some non residential development (indeed the under bidders were a couple interested in purchasing the Property for some form of commercial development).

A major criticism of Mr Mallett in cross examination was that, particularly in the absence of any real comparables to rely upon, Mr Mallett should have commissioned or advised his client to commission a residual development assessment of the kind carried out by Mr Meire so as to arrive at an appropriate asking price. I deal with the significance of Mr Meire’s assessment below. For present purposes it suffices to note that such an assessment, which is a relatively expensive exercise, requires the making of a whole host of assumptions, such as the nature of the proposed development, the assumed cost, the time it would take to complete and the value of the completed development. 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. Such an assessment is a useful tool for a developer as it tells him the maximum price which he can bid for a property being acquired with a view to development with a reasonable prospect of achieving a satisfactory profit. But it is not something which, so far as the evidence before me goes, is habitually or ever done by or on behalf of a vendor. I can see that it might be something that could usefully be done by a vendor when a property is being sold with the benefit of a particular planning consent. But here there was no such consent and although, perhaps with at least some measure of hindsight, it might be said that the Property was ripe for conversion into 5 flats, that could not be said to have been necessarily the only likely potential use for the Property. Indeed Mr Mallett’s evidence was that his understanding was that the ultimate purchaser intended to convert the Property into 3 flats and, as I have already mentioned, the immediate under bidder intended to develop the Property for commercial use. In those circumstances it does not seem to me that it was either necessary or feasible for the mortgagee to have commissioned a residual development assessment. It was suggested to Mr Mallett that armed with such an assessment he would have been in a position to encourage a developer interested in acquiring the Property to increase its offer. Mr Mallett rejected this suggestion and there has been no evidence adduced to me to suggest that this is the sort of thing that any estate agent would do. It seems to me that any experienced developer is perfectly capable of making his own assessment and is not going to be influenced by an assessment commissioned by the vendor. What will influence him is if, having made his own assessment and put in an offer, there is a counter offer from another potential purchaser.

By February/March 2006 two potential serious bidders for the Property had emerged. A couple, Mr and Mrs de Haan, had put in an offer of £218,250 which was accepted subject to contract. On 6^th March Champion & Bushell, the ultimate purchaser, put in an offer of £221,500. By this time Mr Mallet had been instructed based on the advice of another agent to increase the asking price to £245,500, which his firm reluctantly did. It is recorded in Mr Mallett’s firm’s attendance sheets that Mr & Mrs de Haan at this stage refused to increase their offer to match this offer as they were reluctant to become involve in a “bidding war”. On the basis of this it was put to Mr Mallet that he should have advised the tendering of so called sealed bids. Mr Mallett accepted that sometimes sealed bids are an appropriate way to market a property but (a) he did not think that it could be done where the sale was by a mortgagee because, as he understood the position, even after the tendering process was complete the mortgagee would have to publish a “public notice” inviting further offers and (b) he did not think that sealed bids would have persuaded the de Haans to increase their offer. In the absence of evidence to the contrary I am prepared to accept this evidence.

Another potential criticism of Mr Mallet was that in recommending to the mortgagee the acceptance of the offer from the ultimate purchaser he was “preferring” their interests above the interests of his client because they were valuable clients of his firm. This is a serious allegation to make against an estate agent which was wholly denied by Mr Mallett. In the end it was rightly abandoned. I simply record that there was no evidence to support this allegation.

I have, however, I must confess, serious misgivings about the way Mr Mallet went about marketing the Property. I am not wholly convinced that it is sensible, even in the case of a sale by a mortgagee, to put a property on the market at a grossly inadequate asking price simply to “generate interest”. Furthermore Mr Mallet did not recommend the initial asking price on this basis. Rather he did so on the basis that he thought that the Property was worth and would be likely to fetch less than the asking price - and on this he was clearly mistaken. Nor am I entirely convinced that it was sensible not even to mention the potential for development into flats in the sales particulars whilst mentioning that the Property was in need of refurbishment. I also have a serious concern about the conduct of Mr Mallet’s firm after, following advice from another agent, the asking price was raised to £245,500. Mr Mallett disagreed with this advice and in his firm’s attendance sheets it is recorded that one of his firm’s negotiators at a meeting with the de Haans stated that the firm had advised the client that the revised asking price was unrealistic. Mr Mallett explained that this was done in an endeavour to encourage the de Haans to increase their offer above their then offer of £218,500. Whilst I understand the point being made, I have to say that I find it surprising, not to say startling, that an estate agent should be telling a third party that the price which he has been instructed by his client to seek for a property was in his view unrealistically high and that he had so advised his client. This is, after all, confidential information which on the face of it should not be conveyed to a third party as it acts as a direct deterrent to the third party from offering at or near the asking price, whatever view the agent may have as to how realistic that price is.

That said the essential question which I have to determine is whether by their agents the Defendant failed to exercise reasonable care to achieve the best price reasonably obtainable for the Property in the first quarter of 2006. This in turn, as it seems to me, entails considering whether, whatever the shortcomings may appear to have been in the marketing of the Property, nevertheless the Property was sufficiently exposed to the market at this time to ensure that all possible potential purchasers were given notice of the sale and an opportunity to put in an offer for it if they wanted to purchase. The resolution of this needs to bring into consideration the other two issues which I have mentioned above, namely was the best price actually achieved and what was the “true value” of the Property at the time?

On the evidence the Property was extensively advertised both by advertisements in local newspapers and by the sales particulars being sent to numerous persons on Fell Reynolds’ mailing list. These included many developers. In addition a “For Sale” notice was erected at the Property itself and the sales particulars were displayed in the window of Fells Reynolds’ offices. The absence of any reference to development potential in the sales particulars does not appear to have had any deterrent effect on persons who might have been interested in acquiring the Property for development as many, if not most, of the persons who viewed the Property and some of whom put in bids were themselves developers. Likewise the low asking price did not deter potential purchasers from making offers above the asking price and in essence a sort of bidding war akin to an auction in fact developed. In all no less than three “public notices” were published indicating that subject to contract an offer had been accepted and inviting higher offers, the last such notice being published on 3^rd March 2006 giving notice of the acceptance subject to contract of the offer from the de Haans of £218,250.

The linchpin of the Claimant’s case is the expert evidence of Mr Meire. In what I entirely accept is a very carefully drafted report Mr Meire has calculated that based on the development which was actually carried out there could reasonably be attributed to the Property a residual development value of £325,000 and that, in the absence of reliable comparables (and I accept that there were none) that sum represented the true market value of the Property at the date of its sale. I do not doubt the quality of Mr Meire’s expert evidence nor the care and objectivity with which he has approached his task. But like the majority of the Court of Appeal in Cuckmere (supra) I cannot accept that the value which he attributes to the Property truly represents the price which could and should have been achieved for the Property in March 2006. There are, as it seems to me the following fundamental difficulties in this regard:

In the result the conclusion which I have reached on the three issues which I have to decide can be summarised as follows:-

I should add that in Cuckmere two of their Lordships adopted the same approach to a residual development assessment as I have done and declined to hold that compensation could properly be determined by reference to such an assessment. Their solution in that case was to direct an inquiry as to what price could have been achieved for the property had the auction particulars not omitted to mention the planning permission. When in the course of his closing submissions I pointed out to Mr Douthwaite that in this case too there was no evidence to show what price could actually have been achieved for the Property even if the Defendant had not been in breach of its duty, he suggested that I too could direct an inquiry. However, Mr Douthwaite was unable to identify any evidence which could possibly be adduced on that inquiry which would take the matter any further and accordingly such an inquiry would, in my view, be pointless. In the event, even if I had otherwise held in favour of the Claimant, in my judgment the Claimant has failed to establish the price above £221,500 which on his case could have been achieved for the Property had the Defendant discharged its duty and thus has failed to establish that there is any compensation for which the Defendant is liable to account to him.

In the result I must dismiss this claim.