For any lender, taking steps to enforce the security it holds needs careful thought, with a number or rights and duties which the lender must consider.

Lender’s duties

When a lender has taken a mortgage over property and decides it needs to sell that property, it has to make sure to act properly and in good faith and to take reasonable care to get a proper price for the sale. If the lender does not carry out these duties, there’s a risk it could be ordered to make up the difference and pay what it should have received. This is particularly important where the sale price is higher than the debt itself, leaving a pot of money left over after the loan has been repaid. This extra money can be used to pay off other creditors of the borrower and so they have a keen interest in making sure the lender selling the property is doing things properly to get the best price.

Silent Auction

Getting the best price for a sale was a key point in the decision in a recent case[1] which involved a loan for the purchase of aircraft. The lender took a charge over the aircraft as security for the loan. The borrower was unable to make the loan repayments and the lender decided to sell the aircraft at public auction and use the sale money to repay the loan.

The auction took place, however no one turned up except the lender itself, despite it being advertised. The lender bought the aircraft on behalf of a company related to it after the auction process failed to find a higher bidder. Alpstream was another creditor of the borrower and was due to receive any such excess pot of money not needed to repay the first lender’s loan. Alpstream and a number of other creditors brought a claim against the selling lender as they felt the sale was a sham. They claimed the lender had not acted in good faith or taken reasonable care to obtain the best price and that it had a duty to them as they would benefit from any remaining money after the selling lender was paid off.

I am sure any auctioneer would tell you that conducting an auction where no one turns up is unlikely to achieve the best sale price. But whilst the auction here was a failure, the process itself is sound and seen as an effective way of testing out the market. The price paid was more than any third party was willing to pay, even though it wasn’t linked to an independent valuation.

The decision is helpful as it shows that, although the lender had a duty to the borrower, it did not have the same duty to the creditors that stood behind it in the queue.

Limits of the lender’s duties?

The Court of Appeal’s decision gives reassurance to lenders over their duties to act fairly and obtain the best price. Although a lender does not have to bid at auction, if it does, it does not have to bid more than it is prepared to pay and there is no requirement for the lender to get a valuation to base their bid on.

Whilst the decision does help lenders understand where their duties start and end, a selling lender would still be well-advised to get independent, expert valuation advice, including on the best method of sale, and to follow that advice if it wants to avoid the purchase being challenged. Sales to anyone who is associated with the selling lender tend to look suspicious and the lender may have to explain and defend its actions to the borrower. Any failure by the lender to do so risks incurring costs and time to prove it has complied with its duties and the risks associated with any challenges to the process which the lender has followed.

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[1] Alpstream AG v PK Airfinance Sarl [2015] EWCA Civ 1318; [2016] 2 P. & C.R. 2 (CA (Civ Div))

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This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.