Professional negligence: liability of managing agent for ‘distressed sale’ loss

Subject to causation and expert evidence, the concept that a landlord may suffer a loss when his properties are repossessed and sold in a distressed sale owing directly to the non-payment of mortgage instalments by his managing agent is more than merely arguable. In Khan v Woodhead Sharpes Ltd [2023] EWHC 159 (Ch), the claimant landlord was the registered owner of five properties. In 2013, he was arrested in relation to offences of fraud and money laundering. He was subsequently found guilty of some of those charges. A Crown Court restraint order was made against the landlord, which prevented him from dissipating his assets. Under the terms of the restraint order the defendant managing agent was appointed to manage the properties, collect the rents and discharge the mortgage payments. In 2014, the landlord pleaded guilty to criminal contempt for breaching the terms of the restraint order, included diverting funds from the managing agent. From 2014 to 2016, mortgages arrears accrued in respect of the properties and the lenders appointed receivers. Save for one of the properties, which was sold privately by the landlord, the remaining properties were sold by the lenders or their appointed receivers. The landlord brought a professional negligence claim against the agent. He alleged: (a) the rents received from the tenanted properties were sufficient to discharge the mortgage repayments; (b) the agent negligently failed to collect the rents or discharge the mortgage from the rental income; and (c) the agent’s negligence directly caused the lenders to take possession of the properties and sell them in a “forced distress sale” below market value. The agent denied the allegations of negligence and breach of contract and applied for an order striking out the claim or for summary judgment. Summary judgment was granted. On the basis of the expert evidence, the High Court found that although it was more than merely arguable that there may be a potentially recoverable differential between a “distressed sale” and a “non-distressed sale”, the claim failed on causation. There was no real prospect of the landlord showing that the agent’s alleged failure to pay the mortgage instalments directly caused the sale of the properties. There was a break in causation. The lenders appointed receivers, but later made a decision to sell. There was no evidence the decision to sell was caused by the purported failure of the agent to discharge the mortgage payments. Elizabeth Dwomoh is a barrister at Lamb Chambers