We all know that the borrower is under certain obligations to its Bank when it obtains a loan in relation to the purchase and development of a property. The borrower will almost always grant a Standard Security, or mortgage, over its property to secure those obligations and, if the borrower defaults, the Bank's ultimate sanction is to call up the loan and repossess the property. What is perhaps not so obvious is that the Bank must comply with statutory duties in exercising its power of sale of a repossessed property. The recent Court of Session case of Ronald Evan Wilson v Dunbar Bank PLC serves as a reminder of those duties.
The sequence of events
- Mr Wilson owned an area of land at Fernieside Avenue in Edinburgh on which he carried out a residential development known as "The Harriers".
- The Bank provided financial assistance for the development and in return Mr Wilson granted a Standard Security over the development.
- He subsequently became unable to repay the borrowing.
- After expiry of the calling up period without payment, the Bank took possession of the property and proceeded to sell it, at a price which Mr Wilson did not think was the best price achievable.
The crux of the case
The main issue in the case was whether the Bank had fulfilled its two duties under Section 25 of the Conveyancing and Feudal Reform (Scotland) Act 1970. In exercising a power of sale, a bank must:-
- advertise the property for sale; and
- take "all reasonable steps" to ensure that the sale price is the best that can be obtained.
Subject to these two duties, it is the Bank who decides when to sell, how to sell, to whom, on what terms and for what price.
How did the property sell?
Prior to the sale, the Bank instructed their surveyors to implement a marketing strategy for the Harriers. This followed the surveyors' earlier recommendations that the property particulars should be distributed by means of a direct mailing exercise to local property professionals and that the property should appear in the national press, targeting both the owner/occupier and developer/investor markets. The Bank agreed to take their surveyors' advice to contact its solicitors to ensure coverage in the Edinburgh Solicitors Property Guide (ESPC Weekly List). So far so good, it seemed.
What actually happened was that the development was advertised in the residential property section of The Scotsman on 7 November and then in the Daily Express and the Dunfermline Press the next day, but this was the day of the closing date. No attempt was made to target the west coast of Scotland and no evidence was led to suggest that the Harriers had been advertised in the ESPC. The property particulars for the Harriers were not even available until the end of October and, in the end, the court concluded that it was highly unlikely that any direct mailing exercise had taken place.
So how did the property sell? At the end of October, the surveyors informed the Bank that a client of the Bank's solicitors, Mr Daly, who had viewed the development a few days earlier, was about to submit an offer. The following day, a company of which Mr Daly later became a director made a successful offer for the property. The court came to the view that the successful offer must have been prompted not by any marketing campaign, but by the Bank informing Mr Daly of the sale.
What went wrong?
It was clear that the surveyors had done little to implement its own recommendations to ensure effective marketing of the development. It is hard to think of any circumstances where a Bank could be considered to have used "reasonable steps" to sell a property where it is only advertised the day before and the day of the closing date itself, and then to a limited audience. Indeed, the court described the press advertising exercise as a "sham" and felt that the Bank should have recognised that and done something about their surveyors' useless marketing campaign.
Why was the Bank liable for their surveyors' actions?
In considering a range of case law on the issue of whether the Bank could incur liability for their surveyors' ineffectiveness in marketing the Harriers, the court considered whether Mr Wilson could have any delictual claim against the surveyors direct. Mr Wilson did not have any contractual or statutory link with them. The statutory duties in relation to the sale of the repossessed property were those of the Bank, and therefore any claim Mr Wilson had against the surveyors would require to be a delictual one i.e. one based on the law of negligence. The court felt that the existence of any delictual claim for economic loss by Mr Wilson against the surveyors directly was uncertain and consequently felt there was a clear need to hold the organisation with whom Mr Wilson had a direct relationship, the Bank, liable for the negligence of its surveyors.
The Bank had neglected to take account of what the court felt were obvious signs that the marketing of the Harriers had not taken place as originally proposed. Ultimately, the Bank failed to satisfy its statutory duty to ensure the sale price was the best that could reasonably be achieved. Accordingly, the court found in favour of Mr Wilson. They awarded him damages against the Bank equal to a reasonable estimate of the property's true market value, less his total borrowings and a sum representing what his marketing costs might have been.
The lessons to be learned
There are two lessons to be learned here. The first is for the surveyors and the banks who instruct them. Statutory duties are there to be complied with. Reasonable steps to sell a repossessed property should, amongst other things, include advertising the property for sale one week, again the following week, with a closing date set for two weeks after the original advert appeared, or perhaps even longer depending on the property and the market circumstances. Even the fastest of purchasers would struggle to react to an advert where the closing date is the same day as the advert's publication!
The second is for the banks not to rely too heavily on the agents they employ. Instructing surveyors does not, of itself, fulfil their ultimate responsibility in terms of statute to achieve the best price for the repossessed property. They must keep a close eye on their agents, or risk being held responsible for their actions, or inaction.
The full text of the decision can be found on the Scottish Courts website at www.scotcourts.gov.uk/opinions/2006CSOH105.html