Scottish Sheriff Court Decisions

SHERIFFDOM OF SOUTH STRATHCLYDE DUMFRIES AND GALLOWAY AT DUMFRIES

[2016] SC DUM 37

A69/14

JUDGMENT OF SHERIFF BRIAN A MOHAN

 

In the cause

 

GARETH DAVID PETERS

 

and

 

MRS CAROLINE ELLEN PETERS

Pursuers;

 

Against

 

BELHAVEN FINANCE LIMITED

 

Defenders:

 

Act: Pumphrey, Solicitor

Alt: Sheridan, Solicitor Advocate

 

DUMFRIES, 9 October 2015.  The Sheriff having resumed consideration of the cause

FINDS IN FACT:-

 

The pursuers’ purchase of The Townhead Hotel

 

1.    The pursuers Gareth David Peters and Caroline Ellen Peters are married. In October 2005 they purchased the property and business known as The Townhead Hotel in Lockerbie (hereinafter referred to as “the hotel” or “the subjects”). 

2.    Before the purchase Mrs Peters had some experience of working in public houses. Neither of the pursuers had owned or operated licensed premises.

3.    When they purchased The Townhead Hotel the pursuers relocated from Bolton in Lancashire to live in a flat attached to the hotel in Lockerbie. 

4.    The parties’ intention at the time of purchase was that Mrs Peters would operate and manage the hotel.  Mr Peters continued in his employment as a firefighter in the Greater Manchester area.  His shift pattern required him to be away from the hotel for a number of days each week.  He worked in the hotel when he was not on shift as a firefighter.

5.    The pursuers’ purchase of the hotel was funded by a loan from Belhaven Finance Limited, the defenders.  The pursuers granted a standard security over the subjects in favour of the defenders for all sums due.  The pursuers’ title to the subjects and the standard security in favour of the defenders were registered in the Land Register of Scotland.

6.    The pursuers paid £202,000 for the hotel.  The loan provided by the defenders was £147,000.

7.    The pursuers were not aware of the detailed trading history of the hotel prior to their purchase. 

8.    As part of their contract the pursuers had a “barrelage agreement” with the defenders.  This required the pursuers to purchase a minimum number of “wet and dry” products from the defenders.  These consisted of alcoholic and non-alcoholic drinks and other packaged snacks for sale in the hotel.    

 

Repossession Proceedings

 

9.    The pursuers’ trading in the hotel was not successful.  Their financial repayments on the secured loan from the defenders fell into arrears.  The pursuers did not adhere to the level of orders required under their barrelage agreement. 

10.  In August 2007 the defenders served calling-up notices in respect of their security over the hotel.     

11.  Following service of these notices the defenders raised court proceedings against the pursuers for repossession of the subjects and repayment of the sums due. 

12.  The parties reached agreement for repayment of the arrears. The court proceedings were sisted to allow the defenders time to try and meet their financial commitments to the defenders. The pursuers were unable to maintain payments to a level acceptable to the defenders.

13. The licence to sell alcohol from the hotel expired on 31^st August 2009.  On or around that date the pursuers ceased the sale of alcohol in the hotel bar.

14.  After closing the bar the pursuers continued to trade from the hotel as a bed and breakfast establishment.  This part of the business continued for several weeks until immediately prior to the repossession by the defenders in October 2009. 

15.  On 10^th September 2009 the defenders were granted decree at Dumfries Sheriff Court for repossession and ejection of the pursuers from the hotel. 

16.  On or about 10^th October 2009 the pursuers vacated the subjects and the defenders took possession in terms of their decree. By that date the hotel had ceased trading altogether.

17.  At the time of the repossession the pursuers owed the defenders £135,000.

 

The condition and valuation of the subjects in October 2009

 

18.  After repossessing the hotel the defenders instructed a valuation by Graham & Sibbald, Chartered Surveyors, Glasgow. The valuation inspection was carried out on 23 October 2009.

19.  At the time of inspection by Graham & Sibbald the hotel had ceased trading.  The licence to sell alcohol had expired.  There were no up to date trading accounts available to any potential purchaser.  

20.  The market value of The Townhead Hotel remained the same from the date when the defenders took possession in October 2009 until the subjects were sold by the defenders on 25^th February 2010. This is the period of time relevant for the purposes of this action.

21.  The subjects were in a reasonable state of repair at the time of repossession. 

22.  In order to operate as a hotel at the time of repossession the subjects were in need of refurbishment. The movable property within the subjects did not add to the value of the hotel.

23.  The market value of the whole subjects at the relevant time was no higher than £135,000.

 

Marketing by the pursuers

 

24.  After the defenders had begun repossession proceedings and before decree in that court action the pursuers sought to sell the hotel business on the open market. 

25.  In June 2009 on the pursuers’ instructions Bruce & Company, BusinessAgents and Valuers, began marketing and advertising the subjects.  These agents sought offers over £250,000 for the heritable property, fixtures, fittings and goodwill. 

26.  Bruce & Company prepared a schedule of particulars; listed the subjects on their own and associated websites; matched the subjects with 254 potential purchasers registered with them as being interested in the possible purchase of a hotel; sent out schedules of particulars, and advertised the subjects in the Scottish Licenced Trade News on 6^th August and 1^st October 2009. 

27.  As a result of said advertising and marketing there were expressions of interest from two parties, Mrs Laura Bryce and Mr Albert Dykes.  No formal offers to purchase the subjects were received before the defenders took repossession in October 2009. 

28.  In September 2009 Laura Bryce was advised by the pursuers that a decree for repossession had been granted.  Following that information Laura Bryce declined to pursue her interest in the property. 

 

Advertising by the defenders

 

29.  Following repossession the defenders advertised the subjects for sale.  This comprised one box advertisement in The Scotsman newspaper on 17^th November 2009.  The advertisement appeared in the commercial property classified section of the newspaper. 

30.  The box advertisement read “PUBLIC HOUSE, LOCKERBIE.  OFFERS OVER £135,000. Unlicensed and in shell condition.  For further details please contact the Belhaven Group 01368 862734”.

31.  The defenders advertised the subjects themselves and did not employ any agent to carry out this function on their behalf.

32.  No schedule of particulars was prepared by the defenders.

33.  No steps were taken by the defenders to pursue the interest shown in the subjects by Laura Bryce or Albert Dykes. 

34.  No other form of marketing was carried out beyond the advertisement referred to above. 

35.  The advertising of the subjects by the defenders did not generate any interest in the property.

36.  No buyer for the subjects was found through the defenders’ advertising. 

 

Mr Neil Montgomery

 

37.  After the defenders took repossession of the subjects Mr Neil Montgomery, a local businessman in Lockerbie, made the defenders aware of his interest in acquiring the hotel.  

38.  Mr Montgomery viewed the subjects in or around late October 2009.  The defenders thereafter permitted the said Neil Montgomery to access the hotel premises as and when he wished.

39.  From late October 2009 until 25^th February 2010 the defenders reached an agreement with Mr Neil Montgomery to enable him to restore the hotel as a business.      

40.  While the hotel was being advertised on behalf of the defenders the said Neil Montgomery made separate arrangements to resume trading in The Townhead Hotel. 

41.  From October 2009 until February 2010 Mr Montgomery carried out the following works:

a)    Stripped out the fixtures and fittings of the hotel;

b)    Engaged tradesmen to carry out of refurbishment of the premises;

c)    Applied for building warrant from the local authority to alter the internal layout of the premises

d)    Applied for and was granted a temporary alcohol licence to trade from the hotel;

e)    Opened the premises to resume trading in December 2009;

f)     Continued trading as Townhead Hotel after December 2009;

g)    Advertised the re-opening of the hotel before Christmas 2009 in a local newspaper.

42.  On 25^th February 2010 the defenders sold the subjects to Jan Elizabeth Michelle Montgomery and Zak Elliot Norman for the price of £135,000. Ms Montgomery and Mr Norman were the wife and stepson of the said Neil Montgomery.

 

FINDS IN FACT AND LAW:

 

1.    £135,000 was the best price that could be reasonably obtained by the defenders for the sale of the subjects. 

 

FINDS IN LAW:

 

1.    The defenders failed in their duty under Section 25 of the Conveyancing and Feudal Reform (Scotland) Act 1970 to advertise the sale of the subjects.

2.    The defenders took all reasonable steps to ensure that the price at which the subjects were sold was the best that could be reasonably obtained. 

 

THEREFORE sustains (in part) the pursuers’ plea in law 1; repels the pursuers’ plea in law 2; repels the defenders’ plea in law 1; sustains (in part) defenders’ plea in law 2; sustains the defenders’ plea in law 3; ASSOILZIES the defenders; meantime reserves the question of expenses and appoints parties to be heard thereon within the Sheriff Court at Dumfries on 29 October at 10am

 

 

NOTE

 

Background

 

[1] The pursuers committed themselves to a risky venture in purchasing the Townhead Hotel in Lockerbie in 2005 and relocating their family from Bolton. Neither of the pursuers had prior experience in running a business. The hotel in Lockerbie was not a success for them.  They endured the painful consequences of this.  They watched the business failing gradually. Their repayments to the defenders, their heritable creditors, fell into arrears. They made unsuccessful attempts to sell the hotel themselves. The alcohol licence for the hotel lapsed. The property ultimately was repossessed by the defenders. 

 

[2] The frustration and distress of the pursuers prior to bringing this court action was apparent. When Mr and Mrs Peters were unable to deal with the reality of the repossession decree in September 2009 Deborah Johnstone, sister of the pursuer Gareth Peters, sought to take control. She tried without success to encourage a party who had indicated an interest in the hotel to make an offer.  The pursuers’ inability to face up to the realities of the situation was evident also in the fact that they left their daughter to hand over the keys to the defenders in October 2009. 

 

[3] Against this anxious background the pursuers hoped that some of their losses would be recouped by the sale of the premises by the defenders.  When the pursuers became aware of the limited marketing and Mr Neil Montgomery’s entry to the hotel only weeks after they had surrendered the keys, their suspicions were aroused.  The pursuers were further concerned when their enquiries to the defenders about progress in marketing were met with limited information.  The pursuers strongly suspected that the defenders were interested only in recouping the sums owed to them and had no interest in recovering any equity which would have been due to the pursuers. 

 

[4] This proof before answer addressed two central matters: (1) the valuation of the Townhead Hotel, Lockerbie at the time of repossession and (2) the extent to which the defenders fulfilled the obligations incumbent on them in relation to the sale of the premises following their repossession.

 

[5] For the pursuers, evidence was heard from the following:

1. Caroline Peters, pursuer,
2. Gareth Peters, pursuer,
3. Deborah Johnstone, sister of Gareth Peters,
4. Laura Bryce, potential purchaser,
5. Laura Robb, a paralegal at the legal firm of Primrose and Gordon, Dumfries.

 

[6] For the defenders, evidence came from the following:

1. Stuart Drysdale, surveyor with Graham & Sibbald, Glasgow,
2. Alan Creevy, surveyor with CLDH, Glasgow,
3. Stuart Leslie, loans manager with the defenders,
4. Roy Knox, sales development manager for Belhaven.

 

Valuation of the hotel

 

1. Pursuers’ evidence of valuation

    

   [7] The pursuer Mrs Caroline Peters said in evidence that she and her husband had spent £60,000 on refurbishment of the hotel after it was purchased. The funds were spent on various fixtures and fittings, double glazing, plumbing and re-fitting the hotel kitchen.   

    

   [8] The pursuers did not lead any evidence from a surveyor or valuer in this case. The main documentary evidence produced in support of the pursuers’ claimed valuation of the subjects came in the form of sales particulars prepared on their behalf by Bruce & Co, business agents and valuers of Edinburgh. This report, at 5/5 of process, was spoken to by both of the pursuers in their evidence. Further clarification of the role of Bruce & Co was provided in correspondence from that firm produced at 5/6 and 5/7.

    

   [9] Bruce & Co sought offers over £250,000 following receipt of instructions in June 2009. The sales particulars provided photographs and details of the premises and indicated that “the current proprietors are in the process of applying for the new premises licence”. Correspondence from the agents dated 23 July 2009 to Mrs Peters (produced at item 5/6 of process) confirmed the steps taken by the company in addition to the preparation of sales particulars. 

    

   [10] Item 5/7 of process is a later letter from Bruce & Co dated 29 June 2011. This confirmed that the company was instructed by the defenders to remove the property from the market on 28 October 2009. By that stage they had carried out marketing since 22 July 2009 and this included advertising in the Scottish Licensed Trade News (a trade publication) on 6 August and 1 October 2009.

    

   [11] The marketing and advertising by Bruce & Co generated interest from only two parties, namely Laura Bryce and Albert Dykes.

    

   [12] Laura Bryce was called as a witness by the pursuers. She was a 52 year old individual who, at the time of giving evidence, had become the operator of a public house in Eyemouth. She confirmed that she was at one point interested in the purchase of the Townhead Hotel and became aware of it following  Bruce & Co’s advertising in 2009. She attended at the hotel and was interested. She required to sell her own home before she would have been in a position to make any offer, and she also would have required to seek specialised lending for a hotel purchase. Before any of these steps were taken, she spoke in September 2009 to a relative of the pursuers who advised that the property had been repossessed. Mrs Bryce indicated that she was “quite shocked” by that news. She could not remember what figure she had considered offering for the hotel. She had not by that stage received any concrete offer of loan from a lender. It took her until 2012 to secure finance for a public house purchase. She also stated that she had “kind of moved on” once she learned that the property had been repossessed. She was aware of the difficult market conditions in the licensed trade around this time and concluded her evidence regarding the Townhead Hotel with the comment: “I wasn’t willing to take that risk”.

    

   [13] Mr Albert Dykes had indicated an interest in the property. Mr Dykes was deceased by the time of proof but a letter provided by him at 5/17 was agreed in evidence. In this letter dated 18 September 2011 he provided detail of his interest in the subjects. His interest came to an end because he received a phone call from the local Belhaven representative “who informed me that the hotel had been sold”. Mr Dykes’ letter stated that if the hotel was still on the market “I may have pursued my interest…I am unable to say what price I may have offered due to the lack of viewing opportunity”. He later noted: “Had I known that the price of the property was £136,000 I would have regarded this as reasonable, subject to viewing and sight of accounts…”

    

   [14] On the basis of this evidence led on behalf of the pursuers I was urged to accept that the subjects were valued at £250,000.

    

2. Defenders’ evidence of valuation

    

   [15] Further evidence in relation to the valuation of the subjects came from two witnesses called by the defenders, Stuart Drysdale of Graham & Sibbald, a chartered surveyor, and Alan Creevy, a surveyor with the firm of CDLH Surveyors.

    

   [16] Mr Stuart Drysdale was a chartered surveyor employed by Graham & Sibbald. He had experience in valuing property and businesses in the licensed trade and was a commercial valuer for hotels, public houses and nightclubs. In 2009 he was conducting 100-120 valuations per annum. He provided a report following the instruction from the defenders after they had repossessed the property. This report is at 5/9 of process. This report valued the subjects at £135,000.

    

   [17] Mr Drysdale explained that his valuation depended on a number of factors. The premises were closed by the time he conducted his inspection for valuation purposes on 23 October 2009. The property was, in his view, in poor condition. Some compliance work would be required for the premises to become Disability Discrimination Act compliant. The alcohol licence for the premises had lapsed. No trading accounts were available. His view was that any purchaser would require to spend about £40-50,000 on refurbishment before the hotel could resume trading properly.

    

   [18] Mr Drysdale made reference to the ‘Red Book’, an industry publication used by valuers as a guide. Certain assumptions were made in relation to valuation and these included the assumption that an alcohol license and all relevant statutory consents for building work would be granted. These factors could affect the demand for property.

    

   [19] Mr Drysdale indicated that his valuation was based on trading potential and turnover. He calculated that likely sales of £4-5,000 per week would generate a gross income of £200-250,000 per annum. Therafter a calculation had to be made of what could be achieved as profit, which could range from 15-25% of the gross figure; he took a midpoint of 20%. This calculation resulted in a yearly profit figure of £40-50,000. Using the guidance available to valuers to reach a valuation for the whole subjects he applied a multiplier of 5-6. The lower end of this multiplier (5 x £40,000) gave a value of £200,000. The higher end of these variables (profit of £50,000 x 6) gave £300,000.  He took the midpoint of those ranges and his starting valuation was therefore £250,000.

    

   [20] According to Mr Drysdale this would have been a fair market value if the business was open, trading at the levels of turnover detailed within the range he noted, and maintaining a profit. However, he required to make adjustments because of significant factors which applied in this case. The first was that the premises were closed. This resulted in a reduction of 30% from the starting value, reaching a figure of £175,000. From that he took the cost of reinstatements into account. From his earlier noted estimate of the costs of that he again took the midpoint of £45,000. This left a net value of the subjects at £130,000. Mr Drysdale also pointed out that the market conditions of the time meant that there were very few comparators as there were very few transactions being conducted around that time.

    

   [21] When it was put to Mr Drysdale that the particulars prepared by Bruce & Co (5/5 of process) confirmed an actual trading position of £117,000 per annum he indicated that this would have reduced his valuation of the hotel. His valuation was based, therefore, not on the heritable value of the property but on the trading record and potential of the hotel. In all the circumstances he concluded that £130,000 was an optimistic valuation. The property market was very depressed in 2009 and it was very difficult to obtain bank funding. Many public houses and licensed premises were closing. There was a change to alcohol licensing laws that year which eliminated ‘grandfather rights’ where licenses could be passed on to a new owner.

    

   [22] Under cross examination Mr Drysdale accepted some errors in his report. He had indicated that the hotel was worth £135,000 at one part of the report, and £130,000 at another. He described the property in his report as in “shell condition”. It was suggested that this was a misdescription since the property was empty but not in shell condition. Mr Drysdale did not accept that analysis of the phrase. He stated that the whole property would require a substantial upgrade. Turnover was at the heart of his valuation, and his report had been generous in the estimates used. When the valuation by Bruce & Co was put to him Mr Drysdale offered the view that that firm had been acting as selling agents and not valuers. His opinion was that a valuation of £250,000 was unrealistic.

    

   [23] Alan Creevy was the other witness who gave evidence on behalf of the defenders. He had not been instructed by the defenders to carry out a valuation prior to their marketing of the subjects. He was instructed to provide a further opinion on valuation in relation to the premises concerned. His report is produced at 6/1 of process. Mr Creevy is a member of the Royal Institute of Chartered Surveyors (RICS) expert witness panel. His daily business involved providing valuations of property for banks for loan security purposes, mainly in the licensed trade. He too referred to the ‘Red Book’ which is the RICS valuation guidelines and is regarded as the ‘bible’ for any valuer. The book detailed the core rules of valuations. Mr Creevy gave an overview of the licensed trade and bank funding available for it at the relevant time – the period around October 2009. In 2007 finance was relatively easily available for licensed premises, but by 2010 this had gone into serious decline. Banks considered that they were over-exposed in the licensed trade and many of those sources were no longer interested in funding licensed premises, especially where the business had ceased trading.

    

   [24] So far as the Townhead Hotel was concerned, it was Mr Creevy’s assessment that capital expenditure of about £50,000 would be required before the hotel could reopen. This was a market ‘norm’ and was expected of any new venture of this type (reopening a small hotel with public bar and lounge facilities). Mr Creevy made reference to a formula called the Fair Maintaining Operating Profit. Like Mr Drysdale, he also made reference to various multipliers. Many of these factors were detailed in his report. His conclusion was that the Townhead Hotel in Lockerbie at the relevant time in late 2009 was valued somewhere between £95,000 to £130,000. The lower valuation was reached when he took into account the actual annual turnover of £117,000 detailed in the sale particulars provided by the pursuers to their selling agents earlier that year. Mr Creevy offered the opinion that a sale price of £135,000 achieved for the subjects represented a “good result”.

    

   [25] Under cross examination Mr Creevy agreed that the advertisement placed in The Scotsman newspaper by the defenders was “not great”. He described it as “very factual” and “not a selling type of advert”. He agreed that the advert wrongly described the premises as a public house and not a hotel. He also agreed that the property was not in ‘shell condition’ merely because it was unequipped. Mr Creevy adopted the comments in his report. He offered the view that, in market conditions at that time, ten interested parties were usually needed to reach one buyer. The fact that one or two interested parties existed at the time this property was being marketed would not of itself make him optimistic that a sale would be achieved. Mr Creevy agreed with the suggestion that the Scottish Licensed Trade News as well as the Scotsman newspaper would have been the normal way to advertise licensed premises.

    

   [26] On the question of any moveable property within the hotel Mr Creevy did not accept that any of those items added to the valuation. Mr Drysdale, the other surveyor, had reached the same conclusion.

    

3. Decision on Valuation

 

[27] The valuation figure which I have determined for the subjects includes the value of any moveable items or fixtures and fittings left by the pursuers in the hotel at the time of repossession. This includes the kitchen equipment left on the premises, the lease for which was bought out by the defenders (this is the payment to Bibby Leasing detailed on the defenders’ Settlement Statement 5/16 of process dated 8 March 2010). 

 

[28] The evidence led on behalf of the pursuers regarding the value of the subjects and the available buyers did not match the optimistic figures averred in the pleadings. I was not satisfied that Laura Bryce would have made any offer for the subjects. When the decree for repossession was obtained from this court in September 2009, Mrs Deborah Johnstone (sister of the pursuer Gareth Peters) telephoned Mrs Bryce to try and generate an offer. Mrs Bryce’s evidence, however, was that her interest tailed off at that time once she learned that court action had resulted in repossession. Even if I had been satisfied that she remained interested in the property, she qualified that interest by her evidence that she would require finance. It took her until 2012 to obtain finance for other licensed premises. None of those circumstances persuaded me that Laura Bryce was in a position to make any offer for the subjects at the relevant time, far less an offer for £210,000 as was averred.

 

[29] Mr Albert Dykes’ supposed offer of £180,000 was not proved in evidence. It appeared clear to me that Mr Dykes, had he pursued his interest, would not have been prepared to offer any more than the price ultimately achieved by the defenders. The figure of £136,000 stated in his letter was itself subject to receipt of suitable trading accounts, of which there were none. It was reasonable to conclude therefore that, in the absence of such trading accounts, he would not have made an offer as high as £136,000.

 

[30] As a matter of fact neither of these individuals did make an offer, despite their interest arising during a period when the pursuers were marketing the property. No expert or other evidence was led by the pursuers to demonstrate a valuation of the property at £250,000. In those circumstances I am unable to conclude that a price of £250,000 “ought to have been achieved”. The evidence from the two expert valuers who prepared the reports produced and spoken to in evidence, was that the property was worth, at most, £135,000. I have concluded that this was the valuation of the subjects.  

 

The Defenders’ sale of the subjects

 

[31] After they repossessed the hotel the defenders instructed the valuation of the subjects carried out by Graham & Sibbald. They did not employ agents to market the hotel. They told Bruce & Co to cease the marketing which that firm had commenced a few months before. They did not prepare any other particulars of sale and did not contact any party who had responded to Bruce & Co’s marketing. The defenders advertised the subjects on one occasion. This was done by placing a box advertisement in The Scotsman newspaper on 17 November 2009. The advertisement was worded as follows:

 

“PUBLIC HOUSE, LOCKERBIE. OFFERS OVER £135,000. Unlicensed and in shell condition. For further details please contact the Belhaven Group 01368 862734.”

 

[32] The pursuers’ position was that this advertising was both inaccurate and inadequate. The defenders’ position was that this advertisement satisfied their obligations as a repossessing creditor.

 

[33] Mr Neil Montgomery was a local businessman in Lockerbie. He previously managed another hotel in the town. While the pursuers owned and managed the Townhead Hotel he told them that he was interested in buying it, though he made no offer to do so. In October 2009, shortly after the hotel had been repossessed, Mr Montgomery approached the defenders. They allowed him access to the subjects, initially to view them. Thereafter Mr Montgomery was permitted full access to the hotel and he began to carry out building works to the subjects. He placed rubbish skips in the hotel car park. He employed tradesmen to carry out a refurbishment of the hotel. He applied for building warrant from the local authority in his own name to carry out a substantial refurbishment. He applied for and was granted a temporary licence for the sale of alcohol from the hotel. The hotel resumed trading in December 2009 under Mr Montgomery’s management. The pursuers produced local newspaper advertisement from December 2009 in which Mr Montgomery advertised the re-opening of the Townhead Hotel prior to Christmas 2009. In February 2010 the defenders sold the hotel for £135,000 to Mr Montgomery’s wife and stepson, the business partners of Mr Montgomery.

 

[34] These developments involving Mr Montgomery occurred at a time when the defenders were under a duty to advertise the hotel for sale. Against this background it was the pursuers’ unsurprising assertion that the defenders had reached an agreement with Mr Montgomery soon after repossession to allow him to operate the hotel. The pursuers’ position was that, in so doing, the defenders paid no attention to their obligations to advertise the subjects and obtain the best price available. As a consequence, the pursuers contended, the defenders were prepared to sell the subjects at below their market value, provided this cleared the pursuers’ debt to them.

 

[35] The defenders’ position was that Mr Montgomery was an individual who was enthusiastic about operating the premises as a hotel but who had not done things in the correct way. The evidence of Stuart Leslie and Roy Knox of the defenders was that they were aware of Mr Montgomery’s interest in the hotel, and that he viewed the premises as a potential purchaser. According to the defenders’ evidence, they were unaware of Mr Montgomery’s intention to reopen the hotel until his plans were at an advanced stage; he had carried out the refurbishment without their knowledge or consent. Once they were aware of his imminent re-opening of the hotel senior executive officers of the defenders made the decision to allow him to remain in the hotel on an informal basis. They concluded that the work was being carried out at Mr Montgomery’s own risk since he was not the owner. Re-opening of the hotel at the very least maintained the value of the hotel and improved the defenders’ prospects of an eventual sale.

 

[36] I did not accept that the defenders were unaware of the action taken by Neil Montgomery in refurbishing the Townhead Hotel. It was disingenuous of the defenders to maintain that they did not know of the work being carried out at a time when they were offering the subjects for sale. Someone had to allow Mr Montgomery access to the hotel and provide him with a set of keys. He applied for statutory consent for building works and a temporary alcohol license. The defenders’ business manager for the Dumfries and Galloway region, Roy Knox, himself lived in Lockerbie. In fact he lived in the same street as Mr Montgomery. 

 

[37] I concluded from the facts spoken to in evidence that the defenders reached an informal agreement with Neil Montgomery - shortly after they repossessed the subjects - to allow him to re-open the hotel business. This agreement was reached in the hope that Mr Montgomery ultimately would purchase the hotel at market value. Such an arrangement provided clear advantages to the defenders in relation to the Townhead Hotel. The subjects had to be sold following repossession. The market in licensed premises had declined significantly due to the ‘credit crunch’. The longer the hotel remained unoccupied the further was its attraction to potential buyers and sale value reduced. Mr Montgomery appeared willing to enter an arrangement which gave him the opportunity to resume trading in the hotel without security of tenure. Finally, the arrangement entered into with Mr Montgomery did result in the sale of the hotel. It was sold, however, not to Mr Montgomery but to his wife and stepson.

 

[38] Notwithstanding the arrangement entered into between the defenders and Mr Montgomery and my conclusion that the defenders’ evidence on this point was misleading, the central question in this case is whether the defenders fulfilled their obligations under section 25 of the Conveyancing and Feudal Reform (Scotland) Act 1970. 

 

The Law

 

[39] The Conveyancing and Feudal Reform (Scotland) Act 1970 Section 25 states:-

 

“A creditor in a Standard Security having right to sell the security subjects may… exercise that right either by private bargain or by exposure to sale, and in either event it shall be the duty of the creditor to advertise the sale and to take all reasonable steps to ensure that the price at which all or any of the subjects are sold is the best that can be reasonably obtained”.

 

[40] There are accordingly two parts to the duty under s.25 which are (1) to advertise and (2) to sell at the best price. The complication provided by the wording – recognised in cases and textbooks analysing this section – relates to whether the requirement to “take all reasonable steps” applies to both the duty to advertise and the duty to obtain the best price, or merely the latter.

 

 

Discussion

 

[41] The application of section 25 of the Conveyancing and Feudal Reform

(Scotland) Act 1970 to this case can be divided into two questions:

1. Did the defenders fulfil their obligation to advertise?
2. If not, did any failure to comply with such obligation affect the price achieved for the subjects?

 

1. Did the Defenders fulfil their obligation to advertise?

    

   [42] In their book Standard Securities (2^nd edition, Butterworths 2002) Sheriff DJ Cusine and Professor Robert Rennie state: “It should be noted that there are no set requirements as to how the creditor should advertise or for how long any advertisement must appear” (para 8-37, p 153). They also point out that “the obligation to advertise must be read along with the obligation to secure the best price that can reasonably be obtained” (para 8-40, p 155).

    

   [43] The learned authors’ work includes analyses of two of the cases cited by the parties in this case, Bank of Credit v Thomson 1987 GWD 10-341 and Dick v Clydesdale Bank plc 1991 SLT 678.

    

   [44] In  Bank of Credit v Thomson 1987 GWD 10-341 heritable creditors were criticised for having failed to obtain the best price. Advertising was only in a local newspaper and not nationally. The advertising did not indicate the full range of planning permission available for the premises. The sheriff held that the appellants in the case had failed to establish a breach of duty on the part of the heritable creditors. There was no evidence supplied that the premises would have been more attractive if they had been advertised more fully. The sheriff principal in the decision noted that the question of advertising “had to be weighed against the requirement that the seller must try to get the best available price.”

    

   [45] In Dick v Clydesdale Bank Plc 1991 SC 365; 1991 SLT 678 debtors successfully sued the heritable creditor claiming that a repossessed ground had been sold without regard to the ‘hope value’ of the land for redevelopment. The decision in their favour was successfully appealed, however. Lord President Hope noted at p 682:

   “In my opinion the creditor is not to be subjected to the risk of challenge simply on the theory that the subjects may have had a greater value than was realised by the sale. What matters is the reality of the market place in which the subjects are exposed at the time when he decided to sell. So long as he takes all reasonable steps to attract competition in that market it can be expected to find its own level and establish what the property is worth. The creditor is to be criticised for not taking further steps to attract an appropriate purchaser only if there is evidence to show that had these steps been taken a better bargain would have been achieved.”

    

   [46] This extract is cited in Cusine and Rennie, who describe Dick as “the leading case” (pp156-157). I should note that the authors conclude their analysis of s.25 on a note of uncertainty about the extent of advertising required. In a comment which appears relevant to the particular action before me Cusine and Rennie note:

   “If, for example the security subjects are a hotel, exposure in specialist publications and other outlets in which such properties appear would be appropriate, and a failure to advertise using one or more of these outlets may expose the creditor to the risk of criticism.”

    

   [47] A later case from 2006 addressed these points further in a Court of Session proof action. Wilson v Dunbar 2006 SLT 775 concerned the advertising of a block of six residential flats in Edinburgh repossessed from a developer. The pursuer in that litigation successfully sued the repossessing bank on the basis of inadequate advertising resulting in a quantifiable loss. The judge’s findings on this point were upheld on appeal, the decision being reversed only on the matter of the applicable rate of interest: Ronald Evans Wilson v Dunbar Bank plc [2008] CSIH 27.

    

   [48] In the litigation before me the pursuers made reference to the Wilson case in support of their position. The case analyses the appropriateness of advertising and marketing where a creditor is acting under the obligations imposed by s.25 of the 1970 Act. There is, however, one significant section of the decision at first instance which makes clear the failures in the case and the consequential loss to the pursuer. At p 793-794 Temporary Judge CJ MacAulay QC noted:

    

   “[177] In this case, DM Hall’s failures meant that the Harriers [development] was not adequately exposed for sale to either the investor market or the residential market. It was evident from the DM Hall report that both markets were markets available for the Harriers. Mr Watt made it clear that there were reasonable prospects of the flats being sold individually on the residential market. The offer made by Digrasmart was made in the context of inadequate marketing to the investor market, but in any event, the marketing to the residential market was, in practical terms, nonexistent. There was no dispute that sales on the residential market were likely to generate a larger sum than a sale of the Harriers to an investor as a unum quid.” (Wilson v Dunbar 2006 SLT 775 at 793-4.)

    

   [49] Lord Reed delivered the opinion of the Court in the appeal decision of the Inner House. Affirming the judge’s decision on the merits he observed:

    

   “As a result of the defenders’ failure the residential market was never tested, no potential individual purchasers were identified or made offers for the flats, and accordingly the market price was not established by the residential market. In those circumstances, the judge had no alternative but to proceed on the basis of expert valuation evidence as to the sum which could have been expected to be achieved if the flats had been properly marketed. It is implicit in such evidence that a market existed in which there were persons who could be expected to buy the flats at the prices estimated by the valuer. It was unnecessary, and would be unrealistic to expect, that the pursuer should prove that there were specific individuals who would have bought the flats in the residential market at particular prices.”

   (Ronald Evans Wilson v Dunbar Bank plc [2008] CSIH 27 at para 6.)

    

    

   [50] The line of authority detailed above and cited in the cases before me indicates that something more than the bare minimum of advertising is required from a heritable creditor acting under s.25 of the 1970 Act. If a party is to take all reasonable steps to obtain the best price then it follows that the related duty to advertise carries with it an obligation to advertise to a certain standard.  If advertising is inadequate then a party may be unable to demonstrate that they obtained the best price which could reasonably be obtained, since proper advertising may generate interest or even rival bids.  I therefore did not accept the assertion that the duty to advertise could be decoupled from the requirement in s.25 to take “all reasonable steps”. 

    

   [51] It was the defenders’ position in this case that the advertisement they placed once in The Scotsman newspaper was sufficient.  I did not accept that this represented a fulfilment of the defenders’ obligations, given the authorities referred to above. 

    

   [52] I therefore concluded that the defenders’ advertising fell short of what was required under the Act. The advertising was inadequate because:

   1. The advertisement in The Scotsman did not correctly identify the subjects as a hotel, instead describing them only as a “Public House”. Such a description was liable to mislead any potential purchaser as it suggested that a property costing £135,000 offered only the facilities and potential of a public house rather than the other facilities and opportunities available in a hotel business.
   2. The advertisement described the subjects as in “shell condition” which was inaccurate.
   3. There was nothing in the advertisement designed to give any positive message to a potential purchaser. It did not seek to attract interest in the property.
   4. The defenders failed to advertise the property elsewhere, and in particular ignored recommended trade publications.

       

       

2. Did the failure to advertise affect the price achieved?

 

[53] It is clear from the authorities cited above that, to succeed in a claim of this nature, the pursuers require to demonstrate that the defenders’ failure to advertise properly affected the price achieved.

 

[54] Lord Hope’s comment in the Dick case about the “reality of the market place” in which a heritable creditor is carrying out its duties under s.25 is apposite in this context. In this particular repossession the reality was that, beginning in June 2009 and up until the defenders took control in October of that year, the property had been adequately and extensively advertised by the pursuers themselves. This had not resulted in any offers being submitted. The subsequent inadequate advertising by the defenders failed to generate any interest in the property. There was no record of any response to The Scotsman advertisement. There were no steps taken by the defenders to follow up interest expressed to Bruce & Co when they had marketed the subjects on behalf of the pursuers. There was no contact with those on Bruce & Co’s client base to whom they had circulated details of the hotel.

 

[55] However, the advertising by the pursuers and then the defenders in 2009 occurred during very difficult market conditions. Many public houses and licensed premises were closing according to the valuers who gave evidence in the case. By September 2009 when the repossession decree was obtained by the defenders the market in such businesses in Scotland had all but collapsed due to the economic circumstances affecting the UK economy.  This was verified by Mr Roy Knox, the defenders’ local manager, who lived and worked in the Dumfries and Galloway area and oversaw the closure of many licensed premises with whom the defenders had business relations. These market conditions had an effect on the valuation and, in turn, the availability of finance for anyone hoping to obtain lending for the purchase of the hotel.

The two surveyors who gave evidence spoke of the formulae used to calculate the valuation. Their common conclusion was that the hotel valued between £130,000 and £135,000. When taking account of the trading difficulties which the pursuers faced in their last year of business in the hotel, the valuation may have been even lower. There was no evidence that any parties were buying hotels at a price higher than valuation in that particular market (small hotel, rural location, ceased trading) at that particular time.

 

[56] There was nothing in the evidence presented at the proof to suggest that anything further done by the defenders was likely to have generated any other offers, competing bids, a closing date, or a higher sale price.

The pursuers provided no expert or opinion evidence to dislodge the conclusion of the two experienced surveyors called by the defenders.

 

[57] In his report produced at 6/1 Mr Creevy, whom I found to be an impressive and careful witness, offered an opinion about the marketing and advertising carried out by the defenders. His report at page 13 states as follows:

“4.6.2 Would a more extensive marketing campaign have reached a different conclusion in terms of price?

Whilst the approach taken by Belhaven [the defenders] did not conform to market norms, I do recall that we were dealing with an unprecedented market at the time. Values were falling very fast and there were few buyers in the market. I recall instances where purchasers would make an offer and advise that if the offer was not accepted the offer the following week would be at a lower level. There was incredible pressure to secure a purchaser who had sufficient funds to follow through as very few purchasers existed. As such, under all the circumstances, whilst this was clearly not a textbook disposal, it is my opinion that the sale price of the property was a fair reflection of the market value of the property at the time of sale. The actions undertaken by Belhaven did not result in a sale price below market value and, indeed, extending the marketing period and allowing the property to deteriorate further could in fact have resulted in a lower level of value.”

 

[58] Mr Creevy went on to detail in his conclusions on page 13:

“5.1.3 In my opinion the fact that the marketing campaign undertaken by Belhaven Finance Limited was limited had no impact on the ultimate sale price of the property as the sale price was at an amount which reflected the market value of the subject property.”

 

[59] The pursuers in this litigation have not provided any evidence to demonstrate to an appropriate standard that a higher price could have been achieved by the defenders, or that there was an available market for the subjects which the defenders failed to reach. Accordingly I did not find it likely that, had the defenders more fully marketed and advertised the property, a higher price than £135,000 would have been achieved.  The defenders did sell the hotel for its market value.  Indeed, the sale price achieved was at the higher end of that market value. 

 

The Debt Owed By the Pursuers to the Defenders

 

[60] There appeared to be some confusion on the part of the pursuers about the sums owed by them to the defenders at the time of the repossession. I address this point because the arithmetic in the pleadings may suggest that the defenders require to account to the pursuers for a balance of £9,551.34.

 

[61] The only documentary evidence relating to the debt owed at the time of repossession was the defenders’ Settlement Statement produced at 5/16 of process. In this statement – which confirmed details of all payments made over the course of the agreement between the parties – the defenders calculated that the sum of £135,616.24 was due. The statement restricted this debt to £135,000. Part of the sum arose from a ‘barrelage shortfall payment’ amounting to £9,433.20. The pursuers appear (in Condescendence 12) erroneously to have deducted this sum (and a further ‘interest’ figure of £118.14) from the final total owed. The pursuers aver that the debt owed to the defenders is thereby reduced to £125,448.66. This is a miscalculation by the pursuers.

 

[62] According to the evidence, which was not challenged by the pursuers, the barrelage shortfall payment was part of the total debt, and does not fall to be deducted from it. At the conclusion of their own evidence and in their submissions the pursuers appeared to accept that the amount owed was £135,000. Given the averments, however, I consider it appropriate to address the point at this stage. For the avoidance of doubt, my finding is that no balance requires to be paid to the pursuers by the defenders from the sale of the hotel.

 

Decision

 

[63] The advertising of the subjects by the defenders was inadequate.  It did not fulfil the obligations incumbent on the defenders as heritable creditors exercising the power of sale after repossession. However, while I have concluded that the defenders have failed in their duty to advertise, I am unable to conclude that this failure had any practical effect on the sale price achieved by them. There was no evidence to support the pursuers’ position that a higher price could have been achieved than was secured by the defenders.

 

[64] In the whole circumstances of the case I was satisfied that the defenders obtained the best price reasonably available and therefore complied with the second part of the obligation imposed under section 25 of the Conveyancing and Feudal Reform (Scotland) Act 1970.

 

[65] This was a proof before answer and in the circumstances as detailed above I have assoilzied the defenders from the craves of the writ. I have assigned a hearing to address the matter of expenses.