Perils Of Selling Land Without A Valuation

Without A Valuation How Will You Be Able To Show A Sale Price Obtained For Fair Value?

Overview Of The Perils Of Selling Land Without A Valuation

Perils Of Selling Land Without A Valuation is a post that arises from the case of Walker v The Official Receiver [2021] EWHC 2868 (Ch).

In that case, the Official Receiver sold a piece of land in which a bankrupt held a one-third interest with his parents holding the other two-thirds. Outside of insolvency matters, selling land without a valuation can in a whole range of matters potentially lead to litigation. So it is usually worthwhile as this case shows, obtaining a valuation where you have issued the instructions and therefore hopefully will be able to rely upon the same.

The land had not been dealt with it seems by the Trustee in Bankruptcy. Whilst it was not clear why this was the case, it was not the issue at large in this litigation.

The case in effect went back for the Official Receiver to deal with upon the release of the Trustee in Bankruptcy.

The Official Receiver at the Insolvency Service was approached by an unconnected purchaser who offered to purchase the land in question.

The story begins as follows:

Mr Walker was declared bankrupt on 20 January 1997. It was not a straightforward bankruptcy. Public examinations took place on 10 April 1997 and 22 December 1997 before an examiner. During those examinations, he disclosed the Declaration of Trust and his one third beneficial interest in the Land. He estimated the value of the Land as between £15,000 and £20,000. Between August 1997 and February1998 the Insolvency Service corresponded with Mr Walker’s parents to satisfy themselves of the parents’ two-thirds interest in the property and were sent a copy of the Declaration of Trust and other information as to Mr Walker’s parents’ financial contribution to the purchase of the Land.

The story ended as follows:

The OR believed that in view of the lapse of time the original bankruptcy file had been destroyed. The OR made enquiries of the Former Trustee, who responded that he had minimal records remaining, and as far as he could determine he had not dealt with the Land. The OR also wrote to solicitors who the OR believed had acted for Mr Walker in relation to the transfer of 163 Brookbank Road nineteen years previously, but, perhaps unsurprisingly, received no response. On the basis of this information, or rather the absence of contrary information, the OR concluded that the Land remained part of Mr Walker’s estate on bankruptcy. The OR required Mr Bell to provide two independent, professional valuations of the Land, at his own cost. The reports valued the Land at £15,000 and £23,000 respectively (together “the Valuations”). The Valuations described the Land as in an unkempt state, potentially squatted and subject to restrictive covenants and (significantly) that there was no planning permission for residential use. A sale price of £20,000 was agreed and the transfer completed on 16 July 2014 and registered on 5 August 2014. Mr Bell bore the legal costs. This resulted in a payment to creditors of 63.98p in the pound.

No notice was given by the OR to Mr Walker or his parents of the approach to purchase the Land and no enquiries made of them about the proposal, the valuations or the proposed sale price.

Five years later, in 2019, Mr Bell sold the Land for £175,000.

Mr Walker’s Application: Perils Of Selling Land Without A Valuation

Mr Walker brought an application to court referred to as follows:

Mr Walker made two principal complaints in his witness statement in support of the Application. Firstly he asserted that the Land was in fact worth £325,000 as at October 2014. He exhibited a retrospective valuation from a Mr Bradley to that effect, dated 17 December 2018. He also relied upon a historic valuation by a Mr Smith dated 25 July 2003 which had valued the site at that date as between £110,000 and £130,000. He said that the Valuations failed adequately to take into account that there had previously been planning permission benefiting the Land which had lapsed in 2007 and thus failed properly to assess the true development value. Secondly Mr Walker said that the OR ought to have contacted him or his parents when Mr Bell approached her and had she done so she would have been appraised of the previous planning permission and the fact that Mr Bell’s offers represented a significant undervalue.

6.. Mr Walker’s application for leave to bring the Application was heard on 15 December 2020, with an ex-tempore judgment being delivered on 15 January 2021. At the December hearing the Appellant’s case was put on the mistaken basis that he had owned the Land legally and beneficially and that the legal and beneficial interest in the Land had vested in the OR. He contended that she had been negligent in the exercise of her statutory duties as trustee of his estate in selling at an undervalue. The hearing therefore focussed on the duty of care owed by the OR and whether it had been breached, as well as the question of loss to the estate.

7.. Between the two hearings the OR obtained from storage, and examined, papers related to this bankruptcy. This turned out to be the original bankruptcy file and it contained details of the trust of the land, including the Declaration of Trust, the bankrupt’s evidence about it during his examinations and the Insolvency Service correspondence with Mr Walker’s parents where they confirmed their interest in the Land.

8.. Disclosure was made by the OR in Liesl Cooke’s second witness statement of 7 January 2021 and both sides addressed the disclosure in closing submissions and supplemental submissions. Both sides treated this disclosure as further evidence on the issue of negligence. Judgment was handed down just over a week later on 15 January 2021.

This application was initially unsuccessful so the bankrupt appealed it.

The Court of the first instance had reservations about a market value sale of the land by the Official Receiver (“OR”). However, it said that the OR not being a valuer was entitled to do as she had done and that there was no evidence as to whether the OR had acted contrary to the standards of the reasonably skilful and careful insolvency practitioner. That Court concluded that the OR took reasonable steps, using her discretion, to obtain a proper price for the assets that the circumstances permitted.

The appellate Court struggled with the views of the Court of the first instance:

I find it hard to reconcile the apparent views of the District Judge in paragraph 40 of her judgment that there was a failure to act reasonably on the part of the OR in failing to discover that there was lapsed planning permission on the Land and her views in paragraph 43 that the OR ought to have considered the documents in storage before selling the property with her subsequent conclusion that there was no breach of duty on the part of the OR in taking reasonable steps to obtain a proper price and therefore no meritorious claim. The District Judge had apparently concluded that had the OR been aware of the lapsed planning permission the OR ought to have considered challenging the Valuations and, had she inspected the file, it would have been appropriate for her to have contacted Mr Walker’s surviving parent.

Granting The Bankrupt’s Appeal To Continue The Claim

In granting the bankrupt the right to continue the claim the Court had this to say:

In circumstances where these proceedings may continue it is not appropriate for me to ventilate my views on the issues any more than absolutely necessary to explain my decision. I will simply say this. On the face of it something has gone wrong here. The OR had in her possession the original bankruptcy file. She failed to appreciate that she had that file. That file contained documents which showed that the correct legal analysis was that the Land was not vested in the OR, the OR had no power to sell, two-thirds of the Land was vested in third parties and an order for sale would be required for a sale of the Land. The reasons why the OR did not inspect that file before sale have not been fully explained in the second witness statement of Liesl Cook and Mr Walker has not had a chance to challenge those reasons. At this stage I cannot conclude that the OR will show that she has acted honestly and reasonably and ought fairly to be excused or that she had reasonable grounds for believing that she was entitled to dispose of the property or that she did so without negligence.

If the OR is liable to account to the beneficiaries it will be on the basis that she must reconstitute the trust fund which has been depleted by her wrongful sale of the Land in excess of her power and authority. It would be an answer to this claim, so far as it related to Mr Walker’s one third share, to show that the Land was sold at or above its true value. There is clearly a case that it was not. The Valuations did not take into account the fact that the Land had planning permission albeit planning permission which had lapsed and there is expert evidence which says that the existence of such planning permission should have had a significant impact on the values placed on the Land. The OR has not provided any satisfactory explanation for the increase of value in the Land from £20000 for which it was sold in 2014 to £175000 for which it was sold in 2019. Mr Walker also relies on the valuations of Mr Bradley and Mr Smith as suggesting the Land had an even higher value although I treat that contention with caution as it would mean that Mr Bell failed to achieve its fair market value when he sold the Land.

Although I do not believe it adds anything to a claim on trust principles, I note that there is force in Mr Walker’s contention that had the OR appreciated the true position there would have been no intermeddling. The OR would have been bound to notify Mrs Walker of her intention to apply for an order for sale and invite her consent, and to join her to the application if she did not consent. It is one of Mr Walker’s principal complaints that there was no communication at all to him or his parents, and that had there been the previous planning permission, and the alleged undervalue would have become apparent. If the OR had acted within her powers there would have been such communication and an opportunity for Mrs Walker to place the information before the court in the context of the proposed order for sale.

I therefore conclude that Mr Walker has a reasonably meritorious claim in respect of his one third interest.

…

The OR suggests that Mr Walker’s claim is at best for “a very modest” £38,000. This is on the basis of an assumed value for the Land in 2014 of £175,000 and giving credit for the £20,000 received for its sale which was paid into his bankruptcy estate (two thirds of which should have been paid to Mr Walker’s parents). I note that there would also be claims for compensation for loss flowing from the failure to realise that sum in 2014, such as interest.

A recovery of £38,000 would be a significant benefit to the estate. I am told it should discharge the unpaid creditors and produce a surplus. This Court may be used to seeing much larger claims but it remains the case that for all but a very small minority of society £38,000 is a significant sum. A just legal system requires that Mr Walker is able to invoke the court machinery to recover that sum, and it is incumbent on the courts and the parties to manage the claim in a manner which ensures that his claim is dealt with cost effectively and proportionately. Under the ordinary principles that apply to costs of proceedings such as this, if Mr Walker is successful he should recover his legal costs from the OR, in addition to any compensation.

I therefore conclude that the Application is reasonably likely, if successful, to produce a benefit for the estate.

…

Mr Walker has permission to bring his appeal out of time and is given leave to appeal. The appeal is allowed and the order made below, including as to costs, is set aside. Mr Walker has leave to continue the Application in respect of his one third interest in the Land which vested in the OR as Trustee in Bankruptcy.

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