In this month's issue we comment on a recent case in which a Bank had to pay damages after it failed to take sufficient steps to obtain the best price for a development it had repossessed. We also look at the Chancellor’s latest move in relation to SIPPS and their ability to invest in residential property.

Recent Decisions

Bank forced to pay damages after failing to obtain the “best price”

Ronald Wilson owned property at Fernieside Avenue, Edinburgh on which he carried out a development consisting of six residential flats. Dunbar Bank plc (the Bank) provided financial backing for the development in return for a standard security over the property. However, Mr Wilson ran into financial difficulties and became unable to meet the repayments. The Bank then called up the security and, when the sums due remained unpaid after the expiry of the calling up period, took possession of the property. The property was subsequently sold to a client of the Bank’s solicitors at a price which was substantially lower than the original asking price and lower than the valuation figures provided by two firms of surveyors.

In terms of the Conveyancing and Feudal Reform (Scotland) Act 1970, when a creditor exercises a right of sale under a Standard Security, it is under a duty to “advertise the sale and to take all reasonable steps to ensure that the price… is the best that can reasonably be obtained.” Mr Wilson argued that the Bank had acted in breach of that duty when selling the property.

The Bank had instructed its surveyors to put forward marketing recommendations for the sale of the development and they did so in a report recommending a number of measures including the preparation and distribution of sales particulars by means of a direct mailing campaign, the use of large advertising boards and an “aggressive” press campaign. They also recommended that if the flats were to be marketed individually then the Bank’s solicitors should assist in marketing the development in the Edinburgh Solicitors Property Guide. The Bank then instructed its surveyors to carry out the recommendations contained in the report and also instructed its solicitors to advertise the property in the Edinburgh Solicitors Property Centre (the ESPC).

However, the surveyors did not implement their recommendations and the property was sold by the Bank in the knowledge that their surveyors’ press campaign had not taken place prior to the day before the closing date on 8 November 1996. Indeed, only two adverts had been placed in the press (and somewhat unusually, in addition to an advert in the Daily Express, one of these had been placed in the Dunfermline Press). They were also aware that, as at late October, particulars could not have been circulated to prospective purchasers and that the direct mailing could not take place without the sales particulars.  In fact, the court found that, as at early November 1996, the Bank knew “that very little had been done” to implement the proposals they had instructed their surveyors to carry out. Further, there was no evidence that the property had been advertised in the ESPC.

The Court held that the Bank had failed to comply with its duty under the 1970 Act and granted damages of £66,400 to Mr Wilson which represented an estimate of the sale price the flats would have achieved if properly marketed, less the pursuers borrowings from the Bank and an estimate of costs which would have been incurred by Mr Wilson in selling the property.

Heather O'Neill, Head of our Property Finance Team comments:

There are several lessons to be learned in the circumstances surrounding this case for funders and those advising them. The statutory duties imposed on funders are well established and must be adhered to. This case quite clearly demonstrates the dangers of ignoring them.

Funders themselves must be satisfied they are obtaining the "best" price for the property. It is not sufficient to leave the matter entirely to agents. After all, the Act states it is the "duty of the" funder "to advertise the sale and to take all reasonable steps to ensure the price … is the best that can reasonably be obtained."  In order to protect themselves, funders need to be satisfied that reasonable exposure to the market place is obtained for any property.  In this particular case, quite clearly the funders had not ensured their surveyors' recommendations were adhered to and there are definite weaknesses in the advertising campaign, not least reflected by an advert and closing date on the same day! It would be interesting to see the instruction letter to the surveyors.

Case referred to: Ronald Evan Wilson v Dunbar Bank plc

The full text of the decision is available from the Scottish Courts Website here.

News

Do Two U-turns Make a SIPP?

Pensions and residential property

James Aitken, Tax Associate in our Acquisition & Development Team comments:

Can residential property be used as a pension investment? This is not a trick question. Despite what you may have heard or even read over last few months, it can.

Last December the Chancellor, despite numerous previous assurances to the contrary, decided that self-invested personal pensions (SIPPs) would not be allowed to invest in residential property. The Chancellor did this by imposing a prohibitive tax charge on this type of investment rather than an outright ban. This announcement was not unexpected as the ability to invest residential property in SIPPs would have had a detrimental effect on both the UK Government's finances and the UK housing market.

Notwithstanding the fact that the pension industry had invested millions of pounds in preparing for this and thousands of people had bought residential properties all over the world to invest in their SIPPs the general consensus was that that was the end of the matter.

However, this Chancellor, unlike one famous UK Prime Minster, is for turning! In March he announced that SIPPs could invest in residential property, but, and, yes, there is a big but, only if investors clubbed together for each purchase. The term “collective SIPPs” is being used to describe this type of investment.

So how will this work? As usual all of the detailed HMRC guidance has yet to be published.

We do, though, know the following:

1. There must be a minimum of 10 SIPP investors – this is the syndicate. It is aimed specifically at pension investors.

2. The investors cannot be related. This is presumably to ensure diversification.

3. None of the investors can make use of the property.

4. At least three properties are required and must be worth in total at least £1 million.

5. No single asset can be worth more than 40% of the total pension assets.

The main advantage of this type of investment is the tax break. Rental income is tax free and so is any capital gain made on the property. That is in addition to the tax relief already received as the investor invested in his or her SIPP.

What little has been written on this topic suggests that these may only be viable for sophisticated higher net worth investors. That said, a number of schemes that rely specifically on these new rules have recently been launched and, if what I have read is accurate, have proven to be very popular. Any potential investor also needs to look closely at the track record of the company proposing the scheme and in particular whether the scheme falls under the scrutiny of the Financial Services Authority.

Path Orders

Consultation Responses published

In terms of section 22 of the Land Reform (Scotland) Act 2003, local authorities can use compulsory powers to delineate paths. It can be done in relation to land: 

• Where access rights are exercisable;
• Where the local authority considers it expedient; and
• Where it appears to the local authority to be impracticable to enter a path agreement with the land owner.

The Act requires the form of such path orders to be prescribed in Regulations. The Scottish Executive carried out a consultation on the draft Regulations between October 2005 and January 2006 and have now published the responses to that consultation (alongside the responses to its consultation over the draft Code of Practice for Local Inquiries into Core Path Plans). The Executive advises that the Path Order Regulations will be laid before the Scottish Ministers at the Scottish Parliament “shortly”. When the regulations have been passed, local authorities will be able to exercise the new powers.

The responses to the Consultation Paper are available from the Scottish Executive’s website here.

The Consultation Paper can also be seen here.