The High Court’s recent decision in Brooke Homes (Bicester) Ltd v Portfolio Property Partners Ltd (In Administration) [2025] EWHC 1305 (Ch) illustrates the court’s approach in determining how to deal with property sale proceeds as between a mortgagee in possession and those parties with an interest in the equity of redemption.
The case forms a useful reminder for lenders of considerations which apply when exercising a power of sale, and for junior creditors of their potential rights in relation to security realisations.
Key takeaways
- When exercising a power of sale, a mortgagee must obtain the best price reasonably obtainable for the mortgaged property – if it fails to do so, it will have to account for the difference between the price actually received and that which should have been achieved
- Costs and expenses incurred by the mortgagee in enforcing the security must be within the scope of the contract, reasonably incurred and reasonable in amount
- Junior creditors may benefit from the doctrine of marshalling, enabling them to gain access to a senior creditor’s wider pool of security
Background
The dispute arose from a commercial relationship between Brooke Homes (Bicester) Ltd (Brooke) and three companies including Property Portfolio Partners (together the Companies), involving a failed joint venture to develop land in Bicester. The development land comprised six legal titles (the Land). The Land was subject to first ranking security in favour of lenders Desiman Ltd and Desiman 2 Ltd (collectively referred to as Desiman).
In 2021 Brooke obtained a judgment against the Companies for approximately £13.4m. The court granted charging orders in favour of Brooke (ranking behind Desiman’s security) over three of the six titles comprising the Land (the Charging Orders Land). The Charging Orders Land formed Phase 1 of the proposed development, with the remaining three titles comprising Phases 2 and 3.
Shortly after this judgment, Desiman appointed administrators to the Companies. In 2023 Desiman exercised its power of sale as mortgagee to sell the Charging Orders Land to Cala Management Limited (Cala) for £40m. Brooke’s application concerned the proper distribution of the final tranche of sale proceeds, in the sum of £10m, as between it and Desiman.
The issues
Brooke argued that Desiman had received benefits from the sale which went beyond the headline cash consideration, and therefore should be required to account for a sum greater than the £40m receipt – in other words that there should be a “surcharge” applied to the equitable account between the parties. In particular Brooke argued that there should be:
- a £2m surcharge in relation to an alleged “wilful default” by Desiman in agreeing a purchase price of £40m, as opposed to £42m which Cala had apparently (at an earlier stage in negotiations) been willing to pay; and
- a £3m surcharge on the basis of the non-monetary benefits which Desiman had received from the sale as a result of certain infrastructure works which Cala agreed to carry out.
Brooke also argued that the doctrine of marshalling should apply, giving it the benefit of Desiman’s wider security package (including the other three titles comprised in the Land). Meanwhile Desiman claimed that deductions should be made from the account in relation to further sums owed to it, including fees and costs which it had incurred.
Legal principles
Duties of mortgagee
Equity requires mortgagees to have regard to certain duties and principles when exercising their power of sale. At issue in this case were:
- the mortgagee’s duty to obtain the best price reasonably obtainable for the property; and
- the principle that a mortgagee cannot make a personal profit or reap a personal advantage beyond what is due under the mortgage.
Marshalling
This equitable doctrine applies where two creditors have taken security over the same debtor’s assets, but creditor A (typically the senior creditor) has a broader security package than creditor B. If creditor A has satisfied its claims from the assets over which both creditors have security, equity will give creditor B access to the remaining assets (over which only creditor A has security), in order to maximise the distribution of assets as between the two creditors.
The decision
The £2m “price chip”
The judge held that where a person contends that the mortgagee failed to obtain the best price reasonably obtainable, they will need to show this on a “but for” basis – i.e. that a better sale price would have been received “but for” the mortgagee’s wilful default or failure to exercise reasonable care. This will usually involve independent valuation evidence as to the true market value. The mortgagee will have to account for the difference between the price actually achieved, and that which could have been achieved . In this case, Brooke did not allege that the sale was, in general terms, at an undervalue, and the evidence did not prove that Cala were in fact willing to pay £42m. Accordingly, this claim was dismissed.
Non-monetary benefits
As part of the consideration under the sale contract, Cala had agreed to perform certain infrastructure works on the Charging Orders Land, to the benefit of the Phase 2 and 3 land which also formed part of Desiman’s security package. The court found that this was a non-monetary benefit – i.e. a benefit which could be measured in money’s worth and should be accounted for. Accordingly a surcharge was applied, with the court valuing this at £2.4m, being the lower end of the range of cost estimates for the work.
The judge also found favour in an alternative argument that Desiman had, by accepting “non-monetary benefits”, failed in its duty to obtain the best price reasonably obtainable for the Charging Orders Land. If Desiman had not agreed that the infrastructure works would form part of the consideration, the judge considered it likely that Cala would have been willing to pay more. The judge noted that Desiman were focused on maximising the value of their security as a whole, rather than obtaining the best price for the Charging Orders Land.
Marshalling
The judge recognised that Brooke may have the benefit of the doctrine of marshalling, and required this to be recorded in the order. As a consequence, Brooke would therefore ultimately also benefit from any increase in value to the Phase 2 and 3 land which was part of Desiman’s security package. This was not, however, a reason to avoid adjusting the account now. Equity required an adjustment to be made to the account to enable Brooke to be paid earlier out of the proceeds of the Charging Orders Land, rather than forcing it to wait for the Phase 2 and 3 land to be realised.
Costs
Also at issue was deductions which Desiman claimed should be made. In considering whether the various costs and expenses incurred should be deducted from the account, the judge asked whether they were (i) within contractual scope, (ii) reasonably incurred and (iii) reasonable in amount. Among other items, the administrators’ fees of 1% of realisations were found to meet these requirements, whereas certain categories of legal fees were found to be out of scope and not reasonably incurred, and therefore not eligible to be deducted.
Andrew Dodds
Helen Martin