Banking law

Sale by mortgagee

(1) Alann Deakin and (2) Jillian Deakin v (1) Ian Corbett (2) Elaine Corbett and (3) Halifax Plc [2002] EWCA Civ 1849

In this case, the question for the Court of Appeal was whether a sale by a mortgagee in possession could be set aside when purchasers deceived the mortgagee to sell to them.

The Corbetts (the mortgagors) remortgaged property with the benefit of a mortgage from the Halifax (the mortgagee).

The mortgagors defaulted and the mortgagee obtained possession.

Thereafter, the mortgagee instructed estate agents to sell the property, informing them in their standard terms of engagement that 'under no circumstances may staff of the Halifax group of companies or agent's staff or their families purchase a property in possession'.

Mr Deakin was an employee of the mortgagee.

He deceived them into selling the property to him for 140,000 by using a nominee purchaser who subsequently entered into a back-to-back conveyance.

The decision of the mortgagee to accept the offer made in the name of the nominee was made in total ignorance of Mr Deakin's involvement in the purchase.

Mr Deakin told the estate agents, who knew that the mortgagee employed him, that his line manager approved the purchase.

Prior to the sale, another potential purchaser had offered 145,000 for the property.

However, the mortgagee had a rule that an offer had to be 5% better to displace an existing firm offer.

Consequently, the offer of 145,000 was not accepted.

It was accepted on appeal that the sale was at an undervalue, although the purchasers were not aware of this fact.

The mortgagors discovered the existence of the higher offer and the fact that Mr Deakin was an employee of the mortgagee and issued proceedings.

At first instance the mortgagors succeeded in setting aside the sale.

The Court of Appeal held that the first instance decision was incorrect and the sale ought not to have been set aside.

The deception of the mortgagee did not confer the right on the mortgagors to set the purchase aside.

A completed sale would not be set aside merely because of an undervalue.

To set aside a completed sale by a mortgagee in possession a purchaser was required to have knowledge of, or participate in an impropriety on the part of the mortgagee in the exercise of the power of sale.

If there was no impropriety in the exercise of the power of sale, as was the position in this case, the mortgagors were limited to a remedy in damages.

The decision in this case reinforces the view that a purchaser from a mortgagee in possession is imbued with a degree of protection against applications to set aside the transaction.

At the same time, the case emphasises that the protection given to a mortgagor, in terms of the right to impeach a transaction, is directed at the first instance towards impropriety in the exercise of the power of sale and is unaffected by whether the purchaser has acted improperly vis--vis the mortgagee.

Banks and building societies selling as mortgagees in possession now need be less concerned that transactions will be impeached as a consequence of unknown deceptions practised by a purchaser.

Where market value is growing or remains static this will not be of too much concern.

However, in a falling market, the decision affords mortgagees a degree of protection.

By Simon Sugar, barrister, 36 Bedford Row, London