England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM OLDHAM COUNTY COURT
(MR RECORDER FREEMAN)

		Royal Courts of Justice Strand London, WCA 2LL
		11 March 2005

Friday, 11 March 2005
1. LORD JUSTICE WARD: Lord Justice Chadwick will give the first judgment.
2. LORD JUSTICE CHADWICK: This is an appeal from an order made on 17 May 2004 by Mr Recorder Freeman, sitting as a Deputy Judge in the Oldham County Court, in proceedings brought by Bradford & Bingley Plc against the appellant, Mr Peter Leslie Ross. The proceedings had been commenced on 7 August 2003 by the issue of a claim in the Bradford County Court. The claim was for the principal sum of £29,069, said to be monies due under a legal charge following the sale of the mortgage property, together with interest calculated at £23,301-odd on the sum due from 26 July 1993 - the date of the sale - until 31 July 2003, shortly before the issue of the claim. The judge gave judgment to the claimant in the aggregate sum of £43,022-odd that was less than the sum claimed because the judge allowed interest only in respect of the period of six years and not for the full ten years claimed.
3. The action was heard on 20 April 2004. The claimant was represented by counsel. The defendant, Mr Ross, represented himself in person. The judge handed down a written judgment on 13 May 2004. He found the following facts, so far as material. In November 1990 Mr Ross had purchased a cottage known as 91 Red Lumb Street, Nordon, Rochdale, with the assistance of a mortgage advance from the claimant, then known as Bradford & Bingley Building Society. The amount advanced was £54,000. A legal charge to secure that sum with interest was executed by Mr Ross on 30 November 1990. Mr Ross fell into arrears.
4. By the middle of 1991 the claimant was threatening possession proceedings; but proceedings were not, in fact, commenced until the following year. On 17 June 1992 an order for possession was made by a district judge in the Rochdale County Court. At that date the total outstanding under the legal charge with his arrears was £65,385 or thereabouts. An appeal from that possession order was dismissed by the county court judge on 8 July 1992. Possession was given up in the course of the following week by posting the keys through the door of the claimant's Rochdale office. By early September 1992 - if not before - the claimants came to appreciate that the property was vacant. It set about obtaining valuations with a view to marketing the property.
5. On 26 July 1993 the property was sold at a price of £56,000. That was, of course, substantially less than the amount of the principal debt and arrears then payable under the legal charge and secured on the property. It is the amount of that shortfall - £29,069 - which is the subject of the principal claim in these proceedings. But, as I have said, it was not until August 2003, some ten years after that shortfall had crystallised on the sale of the property, that the claimant commenced proceedings to recover it.
6. In his pleaded defence to the claim in these proceedings, dated 13 August 2003, Mr Ross had taken the following points. First, that the property had been sold in 1993 at an undervalue. It was said that the true value was between £70,000 and £80,000; and that the claimant had been negligent in failing properly to market the property. In particular, there had been no advertisement; no "For Sale" signs; no selling agents; no sales brochures and no invitation to make sealed bids. As Mr Ross put it in his defence:

"I was totally unaware that this property had come on the market until my solicitors told me of the shortfall."

On the basis of his contention that the true value of the property was between £70,000 and £80,000, Mr Ross counterclaimed for £29,000. That is, of course, the difference between the actual sale price of £46,000 and £75,000 - a value halfway between the two figures of £70,000 and £80,000.

7. The judge recorded those contentions at paragraph 2 of his judgment. He addressed them, briefly, in paragraphs 9 to 13 of that judgment. His findings may fairly be summarised as follows. The claimant obtained a valuation from agents, Messrs Morris Dean & Co, dated 13 October 1992. They valued the property at £43,000; and advised that, to achieve a sale within three months, the asking price should be fixed at £44,950. In their report the agents commented:

"Under improved market conditions and if the property were in excellent order, we would estimate the property to have a worth approaching £60,000, but in view of the aforementioned defects [which they had spelt out] and the recessionary climate we are of the opinion that the property might reasonably be valued in its existing condition in the sum of £43,000."

8. The building society instructed General Accident Property Services, by a letter dated 4 November 1992, to market the property at £47,950. That followed advice which it had received from those agents. General Accident Property Services had inspected the property on 9 October and had advised that a maximum asking price of £49,950 should be placed on the property, to test the market for the first six to eight weeks. If the property failed to attract interest at that price, then the price should be reduced to £47,750. In the view of GA Property Services the property was probably worth £46,000, with a forced sale value of £42,000.
9. The property did not sell over the winter months 1992/93. The claimant obtained a further report in February 1993 from new agents, Messrs Mathers. They valued the property at £45,000 or, on a forced sale, at £37,500. Messrs Mathers advised a sale in the summer.
10. On 10 March 1993 the claimant withdrew instructions from GA Property Services. The building society wrote:

"As the property has now been on the market for some time and we have been unable to complete a sale, a decision has been made to enter the property into our current Business Expansion Scheme and to withdraw instructions from your firm. Please therefore arrange for your 'For Sale' board to be taken down at the property and for any sales particulars to be withdrawn from display in your office. Similarly, any newspaper advertising which has been arranged should be cancelled."

11. On 26 July 1993 the property was sold for £46,000. There was no evidence at the trial - or, if there were, the judge made no reference to it - as to the identity of the purchaser or the circumstances in which that sale took place. But it is a reasonable inference from the findings which the judge did make that the property was not being marketed to the public after 10 March 1993. It was to be entered into a business expansion scheme.
12. The judge's conclusions in relation to Mr Ross' criticism of delay and of the method of marketing are found at paragraph 19 of his judgment:

"The Defendant has criticised the delay in and method of marketing the property. In particular he alleged that there was no 'For Sale' sign put up at the property, and in his closing speech he alleged for the first time that the property should have been sold by auction. I have to conclude that it is highly unlikely that the agents failed to erect a 'For Sale' sign, but even if that were correct it is difficult to imagine what effect this would have had on the sale bearing in mind the situation of the property. As to the method of sale, the agents did not recommend sale by auction, and so the claimant cannot be criticised for offering the property to for sale by private treaty. I accept that the Claimant could have acted more urgently, and that the property could have been put on the market in August, and that the property was of a type to appeal more if viewed in the Summer. There is, however, no evidence at all to suggest that a buyer would have been found more quickly or a higher sale price achieved if the property had been marketed earlier."

13. The judge had the benefit of evidence from a jointly instructed expert, Mr Phillips, who had prepared a report and had given oral evidence at the trial. It was Mr Phillips' opinion that the market value of the property in August 1993 was £50,000. He criticised the October 1992 valuations from Morris Dean and GA Property Services and the February 1993 report from Messrs Mathers for failing to take account of additional land at the rear of the property (with access to that land) which was included in the mortgage and would be sold with the property. The judge summarised that expert evidence at paragraph 15 of his judgment:

"Mr Phillips describes the market conditions in 1992 as difficult. He told me that the market had peaked in 1989/90 but had declined from 1991 onwards through the 1990s until gradually picking up in 1997/98. In his view, a margin of 10% between asking price and selling price is reasonable, and a sale of the property at that time for £45,000 - £50,000 was not unreasonable. Nevertheless, he felt that too little emphasis had been placed on the rights of access to the land at the rear. The fact is, however, that even if the claimant is open to criticism for selling at £46,000 rather than £50,000, the margin is less than 10%."

14. So the judge went on to hold, at paragraph 20 of his judgment, that the sale price achieved of £46,000 was within a reasonable margin of the best price reasonably available at the time; and that the claimant did not act negligently or in breach of its duty to the defendant. He then said this:

"The defendant has failed to discharge the burden of proof, and indeed my judgment would be the same even if that burden had been on the claimant."

So he gave judgment for the claimant and dismissed the counterclaim.

15. At paragraph 16 of his judgment the judge had referred to what he described as "a new complaint" made by Mr Ross which had not been made in the pleadings. That complaint was that the claimant had been negligent in failing to turn off the water supply over the winter of 1992/1993, with the result that the property had suffered flood damage from a burst pipe. The judge was not satisfied that there had been a burst pipe. He said:

"There is no reference anywhere in the papers to such an event or to any costs having been incurred in cleaning/repairing the property, and none of the reports refer to the property being carpeted or having suffered any water damage. Further the Defendant's explanation for not pleading that charge was that he had told his solicitors, but that does not explain why the matter was not mentioned in a defence which was clearly not drafted by solicitors."

16. It is important, in view of the application which Mr Ross now makes to adduce further evidence, to note that the judge was satisfied that Mr Ross had admitted that there had been a sale in July 1993 and that he had admitted the amount of the shortfall arising on that sale. The judge referred to that in the first paragraph of his judgment. Mr Ross had admitted the sale in the course of his evidence (see the transcript of proceedings on 20 April 2004 at page 12G).
17. Between the oral hearing on 20 April 2004 and delivery of the written judgment on 13 May 2004, Mr Ross had written to the Manchester County Court. That letter was received by that court on 5 May 2004. It is clear, both from the transcript of the hearing on 13 May 2004 and from the note made by the judge when giving permission to appeal on 13 May, that the judge was aware of that letter before he gave judgment on 13 May. The letter was in these terms, so far as material:

"I Mr Ross have now obtained further information that I believe may be relevant to the Honourable Judge in making a decision in this case and I ask the Judge to review this correspondence and give an indication as to whether it would be preferable for myself to now make [an] application on notice to bring further evidence before the court.

I have ascertained from the HM Land Registry that the registration to Homes For Tenants 4 Plc did not disclose a company registration number. Also that the post code in 1993 did not belong to Homes For Tenants 4 Plc.

Companies House confirm that they hold no record of such a Plc Company. At page 241 of the bundle shows only two registrations. I can now confirm that this was not the case. That at all times the property was under the control of the Bradford & Bingley in view of the connection with Pinnacle Housing, See exhibit No 1.

In 1998 Pinnacle Housing C/O Black Horse Corporate Property Services sold the property to the current owner and occupier Ms K Adamson. Pinnacle Housing is a Letting Company owned by Bradford & Bingley. I have been given the proof of this by Ms K Adamson only after the Court Hearing of the 20/4/04.

My argument is that if Bradford & Bingley intended transferring the property to a connected body then the transfer could have proceeded immediately upon repossession in June 1992, which I believe would have resulted in the proceeds of sale being that of the Bradford & Bingley's own valuation of £57,500 plus the additional land. Certainly much higher than the amount obtained in August 1993. Along with the loss as a result of damage due to frost and flooding.

I have made enquiries of the owner of the adjoining property to 91 and I enclose the original letter in his hand, which supports my argument that the property was flooded and damaged by frost. I also enclose the original document in relation to damp proof works. This was denied by the Claimant when before the Court."

Accompanying that letter was a letter dated 25 February 2004 - which had, I think, been in the trial bundle - from the Lytham District Land Registry confirming that the property was transferred into the name of a company, Homes for Tenants 4 Plc, in August 1993. The point that Mr Ross was seeking to make at that stage, as it seems to me, was that Homes for Tenants 4 Plc did not exist. There was, in truth, no sale to a company of that name.

18. The judge refused to entertain that submission; as appears from the transcript of the proceedings on 13 May 2004 when he handed down his judgment. He acknowledged that there had been a covering letter asking that he should reconsider the judgment which he had made on the introduction of new evidence, and said:

"No. I cannot admit further evidence now. I have to say I think it is unlikely even if I admitted it that it would make any difference to the decision I have made, which is, as you see, long and carefully thought out. But it is not for me now to admit further evidence following conclusion of the matter."

Nevertheless, he gave permission to appeal on the basis that Mr Ross, who had been in person, sought to adduce further evidence, and that

"... although it is not clear that the admission of that further evidence would have affected the court's decision, others might take a different view, especially in view of the lapse of time between the sale in 1993 and the proceedings."

19. For my part, I have no doubt that, if the judge thought that the admission of further evidence might have affected his decision, the sensible course in the circumstances would have been to consider that evidence and deal with it. To give permission to appeal in those circumstances has the effect that an appellate court will be faced with an application to adduce further evidence but will not have had the benefit of the judge's considered view on that further evidence.
20. The documents which are now before this court - but which were not before the judge in May 2004 - include the returns filed at Companies House in respect of Homes for Tenants 4 Plc. Those documents show that a company of that name was incorporated on 18 February 1993; that it was wound up pursuant to a special resolution of 7 June 1999; and that it was dissolved on 27 June 2000. That disposes of the argument that there was no company registered under the name "Homes for Tenants 4 Plc" in July 1993 when the transfer is said to have taken place. The document shows, also, that at all material times between February 1993 and 26 May 1998 Homes for Tenants 4 Plc was a wholly owned subsidiary of Hanson Fry Nominees Limited as registered holders for BES investors. In May 1998 Homes for Tenants 4 Plc was sold to Bradford & Bingley Building Society.
21. The background to that transaction is explained in a witness statement of Mr John Stewart Inglesfield, dated 7 March 2005, and put before us this morning. Mr Inglesfield is a compliance manager for the claimant. In his witness statement he said this:

"2. From my recollection, there were twelve 'Homes For Tenants' companies such as Homes for Tenants 4 Plc, established in the early 1990s under the government regulations relating to business expansion schemes. Between them they purchased from Bradford & Bingley up to £60 million worth of properties which had been repossessed by Bradford & Bingley. The funding to purchase these properties was raised from individual investors who purchased shares in the companies. Tax relief was available to the investors and investments were typically several thousand pounds up to a maximum amount set by the government.

3. The companies rented out the properties they had purchased from Bradford & Bingley on assured shorthold tenancies. The scheme ran for a period of 5 years and at the end of this period the properties were sold. The investors had the choice between two options:

(a) they could wait for the company to be liquidated to realise the residual value of their shares; or

(b) they could transfer their shares in the company to Bradford & Bingley in return for a non-recourse loan from Bradford & Bingley: the amount of the loan was their initial investment increased by multiplication by a pre-determined factor.

4. In all cases the values of the non-recourse loans were greater than those of the shares in the companies, so the investors almost always chose to take the loans in return for transfer of their shares in the companies to Bradford & Bingley. The cost to Bradford & Bingley of granting these loans was greater than the value gained from the shares in the companies. However it had benefited earlier from being able to sell the repossessed properties to the companies at market values at a time when the property market was in a desperate condition. Those sales had also reduced the debts owed by borrowers, which were subject to the then historically high interest rates."

22. It is clear, therefore, that in 1993 the building society and Homes for Tenants 4 Plc were connected entities. They were connected because, as appears from paragraph 3(b) of Mr Inglefield's statement, the BES investors had the benefit of a put option which they were likely to exercise and under which they could require the building society to take their shares in return for a non-recourse loan. It seems clear that - although that was a reference in the letter of 10 March 1993 to the entry of the property into a business expansion scheme - the judge was never told that the transferee under that scheme and the building society were connected; and that he never addressed the evidence before him on the basis that this was a sale or transfer between connected entities.
23. The first question for the court, as it seems to me, is whether Mr Ross should be allowed to rely on that evidence on this appeal in this court. But in order to address that question it is necessary to have in mind the strict approach which a court would adopt in relation to a sale by a mortgagee which is alleged to be at an undervalue, when the sale is to a company in which the mortgagee is itself interested.
24. The principles were set out by Lord Templeman when giving the opinion of the Privy Council in Tse Kwong Lam v Wong Chit Sen [1983] 1 WLR 1349. After explaining that there was no hard and fast rule that a mortgagee may not sell to a company in which it had an interest, Lord Templeman said this at page 1355B:

"The mortgagee and the company seeking to uphold the transaction must show that the sale was in good faith and that the mortgagee took reasonable precautions to obtain the best price reasonably obtainable at the time."

He went on at 1355F to point out that, in the case before the judicial committee:

"...

the mortgagee held a large beneficial interest in the shares of the purchasing company, was a director of the company, and was entirely responsible for financing the company, the other shareholders being his wife and children, the sale must be closely examined and a heavy onus lies on the mortgagee to show that in all respects he acted fairly to the borrower and used his best endeavours to obtain the best price reasonably obtainable for the mortgaged property."

Lord Templeman to that principle at page 1356 G-H, when he said:

"In the result their Lordships consider that in the present case the company was not debarred from purchasing the mortgaged property but, in view of the close relationship between the company and the mortgagee and in view in particular of the conflict of duty and interest to which the mortgagee was subject, the sale to the company for £1.2 m can only be supported if the mortgagee proves that he took reasonable precautions to obtain the best price reasonably obtainable at the time of sale."

And, at page 1359 F-H, he pointed out that, at the trial and on the appeal, the mortgagee had adopted the attitude that a mortgagee exercising his power for sale is entitled to secure the mortgage property for a company in which his interest at a price advised by the mortgagee, provided that the property is properly advertised and sold by auction. He said this:

"A decision to this effect would expose borrowers to greater perils than those to which they are now subject as a result of decisions which enable a mortgagee to choose the date of the exercise of his power. A mortgagee who wishes to secure the mortgaged property for a company in which he is interested ought to show that he protected the interests of the borrower by taking expert advice as to the method of sale, as to the steps which ought reasonably to be taken to make the sale a success and as to the amount of the reserve. There was no difficulty in obtaining such advice orally and in writing and no good reason why a mortgagee, concerned to act fairly towards his borrower, should fail or neglect to obtain or act upon such advice in all respects as if the mortgagee were desirous of realising the best price reasonably obtainable at the date of the sale for property belonging to the mortgagee himself."

25. That approach was endorsed in this court in the recent appeal in Mortgage Express v Mardner [2004] EWCA Civ 1859. The facts in that case were not dissimilar to the facts in the present case. Possession had been taken of the mortgaged property - the transcript records 10 September 2003, but that I think must be a misprint for 1993; three valuations were obtained by the appellants; particulars of sale were prepared; they were dated 9 November 1993; there was one offer to purchase which fell through; the appellants then resolved to sell the property to a company with whom they were associated; and they did so in the sum of £68,000. In giving judgment - with which the other members of the court, Sedley and Thomas LJJ, agreed - Pill LJ referred, at paragraph 5, to the principle enunciated by Lord Templeman in Tse Kwong Lam in these terms:

"It is incumbent on the mortgagee to show that he had made the sale in good faith and that he had taken reasonable precautions to obtain the best price reasonably obtainable at the time."

That comes, of course, from page 1355B in Lord Templeman's judgment.

26. Pill LJ then explained what the difficulties for the appellant were in the Mardner case. At paragraph 7 he pointed out that the appellant was in difficulty in establishing the reasonableness of the steps taken in the absence of any evidence as to what actually happened at the time. Although the documents were available, there was no oral or other narrative of the steps taken. The court was simply invited to infer that reasonable steps were taken from such documents as had survived. No one appeared to be available who was involved in the transaction and no steps were taken at the time to set out in narrative form what had happened. That gave rise to a position comparable to that in Tse Kwong Lam. The mortgagee was simply not in a position to show that he had taken reasonable steps to obtain the best price reasonably available at the time because he could not show the court what steps he had actually taken at the time to achieve a sale. On that basis this court held that the mortgagee had not discharged the duty which was placed upon it in the case of a sale to a connected company.
27. The judge did not approach the matter in that way in his judgment in the present case. He directed himself as to the law, at paragraph 17, by citing a passage from Fisher & Lightwood's Law of Mortgages. He directed himself that the mortgagee's duty was to take reasonable care to obtain the best price reasonably available at the time, which would normally equate with market value:

"If a mortgagor claims that there has been a breach of duty, the burden of proof falls on him. The mortgagee should consider by what method to seek to sell the property ... and take advice upon the point."

The judge's approach - as there set out - is not, to my mind, cured by the sentence at the end of paragraph 20 in that judgment: that although the defendant (that is the borrower) had failed to discharge the burden of proof, the position would be the same even if the burden had been on the building society.

28. For my part, I cannot avoid the conclusion that, if the judge had appreciated that this was a case in which the burden was on the claimant to satisfy him positively that in all respects it had acted fairly to the borrower and used its best endeavours to obtain the best price reasonably obtainable for the property, he would have appreciated that there was no evidence which allowed him to find that the claimant had taken any steps between March 1993 - when the property was withdrawn from the market - and June or July 1993 - when the property was transferred to Homes for Tenants 4 Plc - in order to establish what price was the best price reasonably obtainable in July 1993.
29. It is said that £46,000 is the figure given in the GA Property Valuation of October 1992. But there is no evidence that that figure was still the best price obtainable in July 1993; and, in any event, the judge did not, in fact, rely on the GA Property Valuation of October 1992. He reached his conclusion on the basis of a discount from Mr Phillips' valuation of £50,000. The expert evidence from a jointly instructed expert (which he accepted) was that the true value of the property in July 1993 was £50,000, not £46,000.
30. So this is a case in which I find it impossible to hold that, if the judge had been informed of the true position - namely that this was a sale between connected companies - the result might well have been different.
31. I look, therefore, to see what the judge was told. That appears from the witness statement of Dawn Karen Box, a loss recoveries officer employed by the claimant, made on 30 October 2003. She said that possession of the property was taken on 29 September 1992; that she had two independent valuations obtained on 9 October and 13 October 1992; that those valuations recorded defects at the property and suggested a valuation of between £44,950 and £47,950; and that in February 1993 a more detailed valuation was obtained, which suggested a sale price of £45,000. Then comes this bald statement, at paragraph 7: "The property was eventually sold for £46,000."
32. There is no suggestion, there, that the sale at £46,000 was to a connected company, and there is no explanation as to why £46,000, rather than some other figure, was the figure that was chosen as the fair price. It may well be that Miss Box, herself, did not know that the sale was to a connected company. But her employers clearly did. It was the duty of the building society to explain the true nature of the transaction to the court, so that the judge could make an informed decision upon the facts in accordance with the applicable principle. Mr Ross could not be expected to have known that Homes for Tenants 4 Plc and the claimant had been connected entities in 1993, although, had he been represented at the time, his lawyers might have appreciated, from the letter of 10 March 1993, that this was not an ordinary arm's length sale. Nevertheless, Mr Ross had raised his suspicions at the hearing before the judge on 13 May 2004, and that gave a further opportunity to the claimant to explain to the judge what the true position was. That was an opportunity which they did not take.
33. In those circumstances it seems to me right that the evidence that the sale in July 1993 was a sale between connected entities should be admitted on this appeal. If that evidence is admitted on this appeal, it then becomes clear that the judge was led to approach the matter on a false basis and that his judgment cannot stand. The case will have to go back for a retrial.
34. It was suggested to us on behalf of Mr Ross that the claimants had behaved in a way which merited the term "abuse"; and that that abuse should lead this court simply to allow the appeal and set aside the judgment without ordering a retrial. In my view, that would not be a just outcome in this case. The building society is plainly entitled to recover the shortfall which it has sustained. The problem in this case is that the court has not yet been given the material upon which to make a proper evaluation of that loss.
35. I should add this. Had the appellant been content for us to do so I, for my part, would have thought that the sensible course in this court would be to adopt the approach taken in Mortgage Express v Mardner, to hold that there was no evidence that any better price than £50,000 could have been obtained in July 1993 and to make an order adjusting the figures so as to reflect that price. But it was made clear to us by counsel on behalf of Mr Ross - after he had had the opportunity to take express instructions on the point - that his client would prefer the matter to go back to a retrial so that he could argue, for what it was worth, that there really was no sale at all in July 1993; that, in effect, Homes for Tenants 4 Plc held the property as nominee for the claimant, Bradford & Bingley, and should be required to account as a mortgagee in possession.
36. There is not enough material to enable us to say that that claim is hopeless - whatever I may think of its chances of success - and Mr Ross should not be denied the opportunity of making that case at a retrial if that is what he wishes. But to treat what has happened as an abuse of the process so as to preclude the claimant from recovering the shortfall that it sustained on the realisation of this mortgaged property would, in my view, be quite disproportionate.
37. I would allow this appeal to the extent of setting aside the judge's order. I would direct that the matter be remitted to the county court for a retrial at which the allegations can be properly explored, with the indication that this is a case which should go before a judge with Chancery experience. That indication should, in my view, be drawn to the notice of the Vice-Chancellor of the County Palatine so that he may consider nominating a suitable judge; or, perhaps, of removing the matter into the High Court so that it can be heard by a High Court Judge. I am conscious that there may be many other cases where the building society "sold" mortgaged property into an "in house" business expansion scheme.
38. LORD JUSTICE CLARKE: I agree.
39. LORD JUSTICE WARD: I agree.

(Appeal allowed; case remitted to the county court for a retrial; Respondent do pay Appellants costs of the appeal; costs below reserved to the trial judge; detailed assessment of costs; to go before a judge with Chancery experience).