The lenders duty on sale

It is established that the lender, when exercising its power of sale, is entitled to act in its own self interest and can exercise its power of sale at any time and is not bound to wait for an upturn in the market. On sale, a lender must act in good faith and must take appropriate steps to achieve the best price reasonably obtainable at the time of sale.

Although it is tolerably clear that a lender is entitled to exercise its power of sale at any time and need not await an upturn in the market cycle, with the attendant risks that any such delay might involve, the lender will be concerned to ensure that it takes appropriate steps to achieve the best price reasonably obtainable at the time of sale. In turn, this is likely to be a function of the lender’s marketing strategy.

A lender must act fairly and reasonably in terms of the actions it takes; so long as it does so, acting on considered professional advice as to its overall strategy, it is unlikely to be held to be in breach of its duty and this notwithstanding that another selling agent may have recommended an alternative strategy or even (viewed with hindsight) achieved a higher price. An element of discretion on the part of the lender is allowed in terms of methodology. No one size fits all!

It should be remembered that there is a world of difference between a commissioned “valuation” and proven “market value”. Indeed, and in the current depressed state of the market, there is a dearth of comparables in several sectors. In a lending context, practitioners will be only too aware of the present tendency for a lender’s valuer to place a valuation on assets at a level significantly below that suggested by the borrower’s valuer: of itself, this is a common cause of transactional frustration. In fact, and on any given transaction, the range of values suggested by surveyors invited to participate in the process can vary quite dramatically. This need only concern a lender, however, if it fails to comply with its basic obligation to take reasonable steps to obtain a proper price: that is, a default of process. In that event, valuation criteria (possibly pitched at the mid point within an acceptable range) will come into play in determining the extent to which the lender’s breach should be reflected in the mortgage account. To that extent, but to that extent only, “paper” valuation is relevant.

Can a lender assume that, by setting a suitable reserve, it can safely dispose of the property at auction so long as it achieves the reserve price? Clearly not. The setting of the reserve is merely a function of a paper valuation exercise. Of itself, it is not a reflection of the market. True market value can only be established by exposing the property to market factors. In some instances, no doubt, the nature and location of the property will be such that an auction sale is both sensible and appropriate. In other cases, the market will only be capable of being properly tested through a considered and targeted advertising and marketing campaign. Any lender which proceeds solely on the basis of “paper” valuation or reserve will do so at its peril – the more so if the borrower (and any guarantor) is properly advised!

Practical tips

• Take professional advice on the method of sale (what is appropriate for one property may be inappropriate for another.
• Obtain a second opinion.
• If an auction sale, establish there serve at a realistic level.
• Ensure the marketing strategy (or auction) is suitable to the type and location of the property.
• Adopt a policy of openness and candour with the borrower (and any guarantor).