Example of countries where banks are liable if they sell for two little

1.    Selling for close to market price: incentives in law

(5000 words/ 11 double spaced pages, separated from thesis 21/8/2018)

Even after considering all the alternatives to auctions, there may occasionally be cases where auctions must occur. At that stage the key issue becomes ensuring that the property is sold for as close as possible to the market price. In a World Bank paper on forelcosrue auctions, Dr Heike Gramckow states that the purpose of court auctions are to achieve a price close to that which would have been achieved under normal market conditions.[1] However, she notes that, internationally, auctions organised by public officials generally fail to do so. For example, in Chile, public auctions yield prices 18-33% below those of private auctions.[2] In Hungary during the foreign exchange  crisis, properties were sold for a 20-25% discount.[3]  This much higher than in non-crisis South Africa.

She also holds that (public) auctions will “rarely, if ever” sell properties for prices equal to the fair market value of the property. The fair market value is defined as the price a willing buyer and seller would agree upon when neither is being compelled to buy or sell, which[4] suggests that auctions should not be the default method, but instead default should be a normal sale through estate agents such as is normal in Sweden[5], Australia and New Zeland. However, even where auctions are used, banks in other countries are expected to obtain reasonable price in a wide variety of countries.

1.1.  Liability: the direct incentive to obtain close to market price

Furthermore, there is a legal requirement to achieve a “fair market price” (amongst other terms) in most systems. In England[6], homelessness charity Shelter says the following on its website:

Your home may be sold for less than its full value. Your lender is unlikely to get as much for your home as you would if you sold it privately. This is because many lenders sell repossessed properties at auction. However, if your lender sells your home for much less than it is worth, you may be able to take legal action.[7]

Thus, the borrower who house is sold for less can receive legal relief.[8]

The relevant Australian act[9] provide that if the auction is not successful, the court may order a sale by private agreement, public tender or a sale for less than fair value.[10] Thus, unlike in South Africa, a special court order has to be granted in Australia to sell for less than fair value and it can only be done once an auction at a fair value price has not succeeded. Even before a failed auction, a Sheriff in Australia can use an estate agent (or a private auctioneer) to sell property.[11] This approach appears to have arisen from a report written by the Law Reform Commission of Western Australia[12] that recommends[13] that the Sheriff should take steps to determine a reasonable price and that other methods should be tried if he cannot sell at public auction for a reasonable price.

The Council of Europe issued rules in 2003 including one that requires “The prompt sale of assets while still seeking to obtain the highest market value and avoiding costly and unnecessary depreciation”.[14] Thus European rules require their banks to sell properties for market value and not substantially less than they are worth. Similarly, in Australia, if the sheriff does not find the price acceptable, he can reject the sale and later sell it by public treaty for no less than the price bid at the auction. He is thus obliged to attempt to obtain a fair price[15] and may be liable for damages if he does not. [16] Another act [17] requires “reasonable care to sell secured property for market value or the best price reasonably obtainable in the circumstances”.[18] New Zealand too requires that lenders try to get the “best price reasonably attainable” requiring:

“Duty of mortgagee exercising power of sale

(1) A mortgagee who exercises a power to sell mortgaged property[19]…owes a duty of reasonable care to the following persons[20] to obtain the best price reasonably obtainable[21] as at the time of sale.”[22]


Thus the New Zealand criteria is “A duty of reasonable care… to obtain the best price reasonably obtainable”. However, in McArthur Ridge,[23] the lender was found not to have complied with the requirements[24] In that case, the court laid out the six requirements that indicated whether the mortgagee had failed to get the best price reasonably attainable. The criteria  are:

  • appointment of a reputable real estate agent to market the property[25];
  • a valuation report from an experienced valuer;
  • marketing over a reasonably long period;
  • an extensive advertising and promotional campaign;
  • a properly conducted auction; and
  • a sale price that, given all the circumstances, can be reconciled with expert opinion as to value. [26]

In Scotland, the relevant Act[27] reads as follows: “The appointed person must ensure that the price at which the land is sold is the best that can reasonably be obtained.” In contrast, our practice of selling at auction for much less than value would not qualify as the best that could “reasonably be obtained” when an estate agent sale was possible. In France too, the judge checks that the property has been sold for market price.[28] Even in  the sixth century AD, the Roman Emperor Justinian required that foreclosure was only allowed if the property was sold for a reasonable price.[29]

Furthermore, in England[30] the lender has an established duty of care towards the borrower in selling the property: “it has long been the law that in exercising its power of sale, the lender owes the borrower a legal duty to take all reasonable steps to obtain the best available price for the property”. The Council of Mortgage Lenders has also affirmed[31] that their members have a duty to obtain the best price reasonably obtainable when they sell repossessed properties. Significantly, UK statistics show that repossessions now make up only 20% of the properties on sale at auction.”[32]  In other words, with respect to the other 80%, people voluntarily put their houses into auctions. This would not happen if the process did not secure good prices.

In 2014,[33] it was found that the test was whether or not the bank had taken reasonable care to sell for the best price.[34] There is thus no doubt that such a duty exists in English law[35]: “in law, the defendants owed the plaintiffs a duty to take reasonable precautions to obtain the true market value”.[36] This is also the case in developing countries: in Malaysia, another former British colony, the property must be sold for “the best price that can be obtained”[37]

Indeed, the obligation has been so long regarded by the English courts that the test case often quoted is from almost fifty years ago. In 1971, the Privy Council confirmed what had been the case for almost 100 years citing the 19th century case of National Bank of Australasia v United Hand-in-Hand and Band of Hope Co,[38] which expressed the clear view that a mortgagee is chargeable with the full value of the mortgaged property sold if, “from want of due care and diligence, it has been sold at an undervalue.”[39] Furthermore, in a 1913 case, McHugh[40], now having taken place more than a hundred years ago, it was found that a mortgagee had a duty to behave in the way a reasonable man would behave in disposing of his own property[41] In other words, the question would be whether the bank would sell the property at a sheriff’s auction if it was their own property. Finally, the English court made clear that the seller of the property in execution must plainly be in the wrong to be liable. This is known as the Cuckmere[42] Test after the eponymous case. Here, the judge found that “the mortgagee was not merely under a duty to act in good faith, i.e. honestly and without reckless disregard for the mortgagor’s interest, but also to take reasonable care to obtain whatever was the true market value of the mortgaged property at the moment he chose to sell it”.[43] Ultimately, it is clear that in the English environment, banks are not allowed to sell properties for less than they are worth.

The approach in the United States  is different in form, but similar in result: a proper market price for the house sold is required. The Uniform Commercial Code[44] of the United States, which applies across all states[45], uses the criteria of commercial reasonableness in Section 9–627, a sub-section entitled “Determination of whether Conduct was Commercially Reasonable”, to determine if a property has been sold for a legally valid price. If the court decides in the negative then, inter alia, a creditor cannot collect any shortfall in the difference between the price the property was sold for and the amount owed (known as the “deficiency”). However, we must take note of sub-section (a),[46] which provides that “the fact that a greater amount could have been obtained by a disposition…at a different time or method is not of itself [47] sufficient to ”make it commercially unreasonable.” In other words, the entire situation needs to be examined, including factors such as the degree of the “greater amount” and the inconvenience of the “different method”. Nevertheless, according to the Official Comments on the UCC: “[w]hile not itself sufficient to establish a violation of [Part 6], a low price suggests that a court should scrutinize carefully all aspects of a disposition to ensure that each aspect was commercially reasonable.”[48] If the sale is not commercially reasonable, a borrower can raise this as a defence if the lender tries to collect a “deficiency” balance – what the debtor owed minus what a house was sold for.[49] The obligation to be commercially reasonable cannot be waived.[50] Section (b) continues as follows:

“(b) [Dispositions that are commercially reasonable.]

A disposition of collateral is made in a commercially reasonable manner if the disposition is made:

(1) in the usual manner on any recognized market;

(2) at the price current in any recognized market at the time of the disposition; or

(3) otherwise in conformity with reasonable commercial practices among dealers in the type of property that was the subject of the disposition.”


The key criteria, for our purposes, is sub section b (2),[51] that the disposition is made “at the price current in any recognized market at the time”. In other words, in our context, at the price that an estate agent could sell for in the normal market or the price that similar properties in the same area had recently sold.

In is perhaps true in the US that an auction could be used more readily, since the nature of a large, rich market like the US means that auctions yield much closer to the price that an estate agent would receive – at least in major cities.

It is important to note that what is looked at in the United States is not the price per se, but whether or not the process used is one likely to yield a fair price. Thus the relevant factors are “manner, time, place, and terms of the sale.” This requirement is similar to the six points in the New Zealand law, discussed above, where one point stipulates that the price had to be according to the valuation.[52]. In R & J of Tennessee v. Blankenship-Melton Real Estate, Inc.(“R and J”)[53] we see the criteria discussed above laid out in practice. The question from the case that is of relevance to us was whether or not R & J conducted the sale in a ‘commercially reasonable’ manner. It was found that:

Under Tennessee Article 9[54], a secured party[55] may sell, lease, license, or otherwise dispose of any or all of the collateral in its present condition or following any commercially reasonable preparation or processing. In carrying out the sale, the obligations of good faith and commercial reasonableness bind secured creditors and govern every aspect of the disposition. Also, the disposition should be in accordance with prevailing trade practices among reputable and responsible commercial enterprises. Consequently, the court determines compliance on a case by case basis. [56]

In the context of a security agreement, the standard for a “commercially reasonable” transaction was outlined as follows in R and J[57]:

Generally there are two tests that may be applied to the conduct of a sale as referred to by the Court of Appeal in Wood v. Bank of Nova Scotia[58] . One is the less stringent test that is that the creditor who sells must act in good faith. The plaintiff has clearly complied with that test. The other test is the more stringent one, that the creditor must take reasonable care that the proper value is obtained. While it is not a trustee for the debtor, it cannot act negligently in the sale. I adopt the principle as stated in Debor Contracting Ltd. [a Mechanics’ Lien action] that the creditor must ‘act a role somewhat akin to that of an agent or fiduciary for the purpose of a sale’. This is a higher standard than that referred to in Kimco Steel Sales Ltd. … where the test was that the sale be in good faith and not be in a recklessly improvident manner calculated to result in a sacrifice of the equipment.11

Based on this decision, “commercially reasonable” includes “proper value” as a central consideration of what will be considered reasonable. In context of security agreements, the “commercially reasonable” standard must be considered objectively from a commercial standpoint, as opposed to subjectively, as might be expected in most good faith agency relationships.12 Ultimately, the bank must act in a similar way as to how an agent of the borrower would act. In other words, it must make real efforts to get as high a price as possible. This ties in with the theoretical perspective in economic literature that efficiency is achieved when the single owner rule is applied.[59]  When the credit provider sells the property for 50% of its value when there are offers for 90% of its value[60], it is difficult to see how such a bank action could avoid also failing the good faith test as well. Indeed, in this case, the court determined that R and J did not act in a commercially reasonable manner and therefore in order to be able to pursue the debtor, they had to prove what the actual market value was. Then, if successful, they could claim the difference between that and the debt amount.[61] While individual states vary, this case would be fairly typical of the approach in most states where deficiency judgments are allowed at all.[62]

Another example of this principle is found in Girard Trust Bank v Castle Apartments,[63]  where there was a 347 unit garden apartment complex on which “the mortgage indebtedness exceeds $4,000,000. At the sale of the property under the foreclosure proceeding, the property was sold to plaintiff for $214,996.64. Defendant has moved to set aside the sale on the ground that the sale of the property having a fair market value of $4,000,000 for $214,996 represents gross inadequacy of price which shocks the conscience of the Court.” Further on in the case, the Delaware principle is introduced as per Central National Bank v. Industrial Trust Co.[64], that any sale under 50% of value “shocks the conscience of the court” and is invalid. It is thus fairly clear that the US cases support the concept that the creditor has an obligation to sell the property for what it is worth.

Even in the US, there is concern that creditors do not maximize the value of the debtor’s collateral.[65] Studies using U.S. data consistently show that foreclosed properties are sold at 4%-24% lower than non–foreclosure properties.[66] Hearings by the Federal Trade commission have considered the charge that deficiency judgments should be eliminated because if a deficiency judgment is not available this gives the creditor an incentive to maximize the value.[67]  Obtaining a judgment to collect a deficiency[68] requires a second court case in the United States[69] and this takes time, even if unopposed. This means that a deficiency judgment is costly and uncertain, Schwartz concludes that this means that creditors will maximize the value of the collateral when they sell it.[70] The facts that the deficiency judgment is often impossible to enforce makes it still more likely that they will maximise the value.[71]  There is also the danger of bankruptcy[72]. However, Schwartz does show that the creditor is better off maximizing the value that it sells the collateral for given all these factors.

In conclusion, it is shown in this section, that across many countries, including England, Scotland, the USA, Australia, New Zealand and Malaysia, that the requirement to sell a property for close to market price is considered feasible and practical as well as just and equitable.

When  the bank does not obtain make efforts to obtain a reasonable price it is held liable for damages in all of the countries studied. In England, in an undervalued sale “the lender is held liable for any loss”[73]. Likewise, in the United States, the judgment in the Girard Trust Bank[74] defined the price difference as the quantum of damages:

If the collateral is disposed of in a commercially unreasonable manner, the debtor may not receive as great a credit against his debt as if the sale had been conducted in a commercially reasonable manner. The damages the debtor will suffer are equal to the difference between the price obtained in a commercially unreasonable sale and the fair market value of the collateral i.e. what it should have brought in a commercially reasonable sale.[75]  Thus, the rights of the debtor can be adequately protected by determining the fair market value of the collateral at time of repossession and awarding the debtor an additional credit in the amount of the difference between the fair market value of the collateral as determined and the amount the collateral brought in a commercially unreasonable sale.[76]

Similarly, in New Zealand in the case of Aglio,[77] the lender had to pay the borrower $90,000[78] for failing in its duty to obtain the best price. This amount was the difference between the best reasonable price and the price they actually sold for. In fact, Australian legal authorities also require banks to sell properties for their market price or pay the borrower back for the difference. The requirement that they take legal care to sell at market price was strict enough that the bank is still liable if it appointed an agent and the agent failed to perform.[79] The Queensland Statute[80] went further than the Corporations Act[81]: “It is the duty of a mortgagee, in the exercise after the commencement of this Act of a power of sale conferred by the instrument of mortgage or by this or any other Act, to take reasonable care to ensure that the property is sold at the market value.” [82]



[1] Gramckow ,  Heike “Court Auctions: Effective Processes and Enforcement Agents – Justice and Development Working Papers Series 18/2012 ( Washington: World Bank) p3.

[2] Gramckow, Heike “Court Auctions: Effective Processes and Enforcement Agents – Justice and Development Working Papers Series 18/2012 (Washington: World Bank) p4 This is still considerably above the prices obtained in South Africa.

[3] Information and Consumer Credit in Central and Eastern Europe Akos Rona-Tas University of California, San Diego Alya Guseva CBT

[4] Gramckow ,. Heike “Court Auctions: Effective Processes and Enforcement Agents – Justice and Development Working Papers Series 18/2012 (Washington: World Bank) p17.

[5] In Sweden the property can be sold by an estate agent.  See the official swedish website at https://www.kronofogden.se/download/18.33cd600b13abbc8411c800020855/1371144370347/kronofogden_in_english.pdf CBT

[6] Note that in England, the norm is to take possession of the house (evict the mortgagee) right at the beginning of the process in order to be able to sell with vacant possession.[6]

[7] http://england.shelter.org.uk/get_advice/repossession/mortgage_arrears/handing_back_the_keys.

[8] “If the property has been undervalued, you can ask the courts for an injunction to prevent the sale. This can be done at any time before the completion date. Lenders have a legal responsibility to get the best price for the property that can reasonably be obtained. If you think your lender has failed to get a fair price… you may be entitled to compensation” at http://england.shelter.org.uk/get_advice/repossession/ordered_to_leave/sale_by_a_mortgage_lender.

[9] Sub clauses 2-4 of Clause 69 of Civil Judgements Enforcement Act 2003.

[10] Civil Judgements Enforcement Bill 2003 Explanatory Memorandum under Section 69.

[11] Civil Judgements Enforcement Bill 2003 Explanatory Memorandum under Section 115.

[12] Law Reform Commission of Western Australia Project Number 67: Writs and Warrants of Execution June 2001.

[13] At points 28 and 29 on page 43.

[14] Gramckow, Heike “Court Auctions: Effective Processes and Enforcement Agents – Justice and Development Working Papers Series 18/2012 (Washington: World Bank) p13.

[15] The phrase is” fair value” in Clause 69 of Civil Judgements Enforcement Act 2003.

[16] Corporations Act 2001 (Australia).

[17] Corporations Act 2001 (Australia). Section 420A

[18] Wellard, Mark Norman (2012) “Does section 420A impose ‘strict liability’ upon controllers for acts or omissions of agents and experts?” Insolvency Law Journal 20(2), pp. 124-14.

[19] Removed from main text: “including exercise of the power through the Registrar under section 187, or through a court under section 200

[20]  The persons are “(a)the current mortgagor, (b)any former mortgagor, (c)any covenantor, (d)any mortgagee under a subsequent mortgage, (e)any holder of any other subsequent encumbrance

[21] My italics.

[22] New Zealand’s Property Law Act 2007 Section 176

[23] McArthur Ridge Investments Limited v Schulz [2012] NZHC 423\.

[24] As laid out in a Public Trust.

[25] Not in this system estate agents market the property before the auction.

[26] Note this “and”. In the antipodes, a real estate agent markets the property first then there is an auction attended by many of the people who have already been to the house with the estate agent. Auctions therefore reach market prices and people who are not selling in execution use this mechanism voluntary. It is difficult to imagine any seller who had a choice using our sheriff’s auctions.

[27] Bankruptcy and Diligence etc. (Scotland) Act 2007 The word “diligence” in Scots law is equivalent to “execution”. A “diligence against the heritage” is equivalent to a “warrant of execution” in English law.

[28] http://www.fondation-droitcontinental.org/fr/wp-content/uploads/2013/12/lecture_by_patrick_safar_v_270420091.pdf

[29] Hunter “A Systematic and Historical Exposition of Roman Law in the Order of a Code” 438.

[30] I will used “England” to mean “England and Wales”, with apologies to the Welsh.

[31] Steyn, Lienne 2012, “Statutory regulation of forced sale of the home in South Africa” LLD thesis, University of Pretoria, Pretoria p481.

[32] http://www.propertywire.com/news/europe/property-auction-sales-repossessions-200808091449.html.

[33] Aodhcon LLP v Bridgeco Ltd [2014] all ER (D) 50 (Mar).

[34] In that case in had, in fact, done so.

[35] Dean v Barclays Bank plc [2007] EWHC 1390; For the duty of a mortgagee in exercising a power of sale and employment of agents, see 27 Halsbury’s Laws (3rd Edn) 302, 303, para 567, 364, para 570, and for cases on the subject, see. 35 Digest(Repl) 565, 2410, 569, 570, 2444–2466. This is relevant in Cuckmere.


[36] Cuckmere Brick Co Ltd and another v Mutual Finance Ltd Mutual Finance Ltd v Cuckmere Brick Co Ltd and others [1971] 2 all ER 633.

[37] Malaysian Rules of Court Order 31 Rule 2 (1) The rules in Singapore are identical including the order number and rule number.

[38] National Bank of Australasia vUnited Hand-in-Hand and Band of Hope Co. (1879) 4 App. Cas. 391. s [1971] Ch. 949, 967 see also Wolff vVanderzee (1869) 20 L.T. 353; Tomlin v. Luce (1889) 41 Ch.D. 573; (1889) 43 Ch.D. 191; 

[39] Cuckmere Brick Co Ltd and another v Mutual Finance Ltd Mutual Finance Ltd v Cuckmere Brick Co Ltd and others [1971] 2 all ER 645.

[40] ([1913] AC at 311).

[41] This ties in with the ‘single owner’ test discussed in the law-and-economics section of chapter three.

[42] Cuckmere Brick Co Ltd and another v Mutual Finance Ltd Mutual Finance Ltd v Cuckmere Brick Co Ltd and others [1971] 2 all ER 633.

[43] Cuckmere Brick Co Ltd and another v Mutual Finance Ltd Mutual Finance Ltd v Cuckmere Brick Co Ltd and others [1971] 2 all ER 633 – the Defendant’s case had been that they only required to act in good faith i.e. not cheat the Plaintiff, and that there was no duty and therefore could be no negligence. The judge ruled otherwise.

[44] UCC forthwith.

[45] Some states modify the terms but in the case of this term it does not appear to have been modified in different states.

[46] Uniform Commercial Code (UCC) of the United States Section 9 – 627 a.

[47] My italics.

[48] McCahey, John P “Commentary on the Enforcement of Security Interests Under UCC Revised Article 9” see Rev. U.C.C. § 9-627, cmt. 2

[49] This would clearly only apply if the resulting amount was positive.

[50] U.C.C. § 9-501(3)(b); Rev. U.C.C. § 9-602(7) cited in McCahey, John P “Commentary on the Enforcement of Security Interests Under UCC Revised Article 9” 18

[51] Uniform Commercial Code (UCC) of the United States Section 9 – 627 b

[52] The other five related to whether the proper process to obtain a good price was followed

[53] R & J of Tennessee v. Blankenship-Melton Real Estate, Inc., 166 S.W.3d 195 .

Tenn. Ct. App. 2004.

[54] Tennessee’s particular implementation of UCC Article 9.

[55] The term ‘secured party’ in terms of Article 9 is equivalent to “creditor” in South Africa.

[56] R & J of Tennessee v. Blankenship-Melton Real Estate, Inc., 166 S.W.3d 195 .

Tenn. Ct. App. 2004.

[57] [57] R & J of Tennessee v. Blankenship-Melton Real Estate, Inc., 166 S.W.3d 195

Tenn. Ct. App. 2004

[58] This is a Canadian case based on the similar but not identical equivalent to the UCC, the Canadian Personal Property Security Registration System (PPSR). The UCC is emulated in many countries. In Canada the first PPSR province was Ontario, which passed that legislation in 1967.

[59] See my  theoretical chapter (three).

[60] Author’s  professional experience.

[61] R & J of Tennessee v. Blankenship-Melton Real Estate, Inc., 166 S.W.3d 195

(Tenn. Ct. App. 2004.

[62] See section in this chapter  “Incentives to Obtain Market Price”.

[63] Girard Trust Bank v. Castle Apartments, Inc., 379 A. 2d 1144 -Del: Superior Court 1977.

[64] 51 A 2d 854 1947 -.

[65] Schwartz “The Enforceability of Security Interests in Consumer Goods” in  Journal of Law & Economics, Vol. 26, No. 1 (Apr., 1983), pp. 125 The University of Chicago Press

[66]Wong, Chyuan, Lee, Daud, Nasir, Ng, Cha “Strategic Development of Property Auctions Market in Malaysia” Journal of Real Estate Literature 22.2 (2014): 261-278

[67] For a discussion see Schwartz  “The Enforceability of Security Interests in Consumer Goods” in  Journal of Law & Economics, Vol. 26, No. 1 (Apr., 1983), pp. 125 The University of Chicago Press. Though this analysis does not appear to take into account that the theoretical amount of a deficiency judgment is often uncollectable. Thus assumption four is wrong  is his argument –

[68] A shortfall in South African terms.

[69] Where it is possible at all. In some states it is not.

[70] Schwartz  “The Enforceability of Security Interests in Consumer Goods” in  Journal of Law & Economics, Vol. 26, No. 1 (Apr., 1983), pp. 127 The University of Chicago Press

[71] In the US the loss the bank makes by selling for lower value is tax deductible which, somewhat but not entirely, reduces the incentive for maximizing the sale value.

[72] The Insolvency Act CBT ref

[73] Hayward “Valuation: Principles and Practice” (Routledge 2014) p580 – the text is primarily concerned with the effect on the valuer.

[74] Girard Trust Bank v. Castle Apartments, Inc., 379 A. 2d 1144 -Del: Superior Court 1977.


[75] See White and Summers, supra, § 26-15 at 1133.

[76] 482 So.2d 1362 (1986) Herbert WEINER, Petitioner,v. AMERICAN PETROFINA MARKETING, INC., Respondent. No. 66375. Supreme Court of Florida. February 6, 1986.

[77] Agio Trustees Company Ltd v Harts Contributory Mortgages Nominee Co Ltd.

[78] At the time of writing the New Zealand dollar buys around 9 rands.

[79] CGA v Nixon (1981) 152 CLR 491 at 500 (Mason J).

[80] Section 85(1) Property Law Act 1974 (Qld) (as considered in CGA v Nixon) .

[81] Section 420A(1) Corporations Act 2001 (Cth) – the market value or the best price reasonably obtainable if it has no market value.

[82] Section 85(1) Property Law Act 1974 (Qld) (as considered in CGA v Nixon).