Receiver managing mortgaged property owes the mortgagor a duty of due diligence

A receiver managing mortgaged property owes a duty to the mortgagor (and anyone else interested in the equity of redemption) to do so with due diligence. If the receiver decides to carry on a business that was being conducted at the mortgaged property, this duty requires the receiver to try to run the business profitably.

In Medforth v Blake ([2000] Ch. 686, CA (Eng)) the plaintiff was a pig farmer. He borrowed money and gave the bank a mortgage over the farm. The mortgage gave the bank the power to appoint a receiver who could take possession of the farm and carry on the farm’s business. Receivers were appointed and they ran the farming business. Later the farm and business were returned to the mortgagor. Despite frequent prompting by the mortgagor, the receivers did not seek discounts from pig feed suppliers. The mortgagor claimed that the receivers owed him a duty of care and that their failure to secure the discounts was a breach of that duty or of their duty of good faith.

The Court of Appeal held that receivers managing mortgaged property owe duties to the mortgagor and anyone else interested in the equity of redemption. Their duties include a duty of good faith. In some cases, they may owe additional duties. The main duty is to try to ensure the loan principal and interest are repaid. They also owe a duty to manage the property with due diligence. This does not require them to carry on any business that the mortgagor ran from the mortgaged property. If they do run such a business, the duty of due diligence requires them to try to do so profitably.

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