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Mortgages: duty of care
Medforth v. Blake (1999) 29 EG 119
The basic principle that a mortgage in exercising its power of sale must take reasonable care to obtain a proper price, is long established and well understood: see e.g. Cuckmere Brick Co Ltd v. Mutual Finance Ltd (1971) Ch 949. In the same case, however, Jenkins LJ obiter seemed to imply that no similar duty applied to a receiver appointed by the mortgage if the receiver appointed by the mortgagee if the receiver, acting in good faith, nonetheless acts (or omits to act) to the detriment of the mortgagor. This in turn would seem to have been overtaken to some extent at least by the decision of the Privy Council in Downsiver Nominees Ltd v. First City Corporation (1993) Act 295 where Lord Templeman reviewed the duties owed in equity by receivers towards debenture holders, who in effect are also mortgagees, though (at p. 315) he also stated that "... the general duty of a receiver and manager appointed by a debenture holder ... leaves no room for the imposition of a general duty of care in dealing with the assets of the company... "
In the instant case, the claimant had charged his pig farm to the bank. He fell into financial difficulties and the bank appointed receivers to manage the business. Eventually the loans were discharged, and the claimant them sued the receivers for having negligently failed to obtain discounts on the supply of pig-feed, amounting to apparently some £1,000 per week over about four years, similar to those which he had himself been able to negotiate.
The Court of Appeal considered the relevant law at considerable length before finding in favour of the farmer-mortgagor. In a very useful judgement the Vice-Chancellor, Sir Richard Scott laid down a number of general principles, as follows:
In my judgement, in principle and on the authorities, the following propositions can be stated:
A receiver managing mortgaged property owes duties to the mortgagor and anyone else with an interest in the equity of redemption.
The duties include, but are not necessarily confined to a duty of good faith.
The extent and scope of any duty additional to that of good faith will depend on the facts and circumstances of the particular case.
In exercising his powers of management the primary duty of the receiver is to try and bring about a situation in which interest on the secured debt can be paid and the debt itself repaid.
Subject to that primary duty, the receiver owes a duty to manage the property with due diligence.
Due diligence does not oblige the receiver to continue to carry on a business on the mortgaged premises previously carried on by the mortgagor.
If the receiver does carry on a business on the mortgaged premises, due to diligence requires reasonable steps to be taken in order to try to do so profitably.
In Starling v. Lloyds TSB Bank Ltd (2000) 01 EG 89, the Court of Appeal was again concerned with the duties of the mortgagee. In this case, the claimant and his wife had a residential property which was mortgaged to the bank. After the death of his wife in 1991 the claimant put the property on the market but, as it says in the law report, "it was a difficult time to be selling residential property". The claimant, who had given up work to care of his dying wife, then sought the consent of the bank to let the property so that he could move away to obtain new employment. This request, it was said, was "dismissed out of hand". The claimant brought proceedings against the bank, claiming breach of a general duty to exercise reasonable care and skill in considering such requests. Rix J had held that the claimant had an arguable case that such a duty existed. The Court of Appeal disagreed: the only such general duty on the part of the mortgagee was to act in good faith.