In 2017, Mrs Burns accidentally sold her £450,000 property for £1. This is the story of what went wrong.

The £1 was the deposit paid on exchange of contracts with Mr Bridge, a property developer. The plan was that Mr Bridge would build three houses on the property, sell them, and share the proceeds. More precisely, Mr Bridge would mortgage the whole property, use the funds to complete one of the houses, and use the sale proceeds to complete the development of the other two houses. To allow this to happen, Mrs Burns granted the mortgagee priority over her own charge.

“In the event,” as HHJ Cawson KC stated in Burns v Bridge [2024] EWHC 2620 (Ch) (at [23]), “matters did not work out as expected”. There were three big problems. Firstly, the house that Mr Bridge had intended to complete first was not the one in which potential buyers were most interested, so further sums were needed to complete the project. This, in turn, meant that Mr Bridge borrowed ever-increasing amounts upon which compound interest and costs were payable. And finally, of course, COVID-19 added its own complications.

The three houses were sold in 2021 for a net figure of £1,270,141.76. This was significantly less than the £1.8M that Mrs Burns had expected, but still significantly more than the sale price.

Unfortunately, Mr Bridge’s debt had ballooned over those four years. His original 2017 mortgage was with Together Commercial Finance Ltd for £365,000. In 2018, he refinanced with Property Funding Limited (PFL) for £650,000. By a further loan agreement with PFL in 2019, this figure was increased to £850,000¹. By 2021, with interests and costs, Mr Bridge owed £1,732,819.97 to the mortgagee. He went bankrupt, and Mrs Burns was left with her £1.

Perhaps unsurprisingly, Mrs Burns challenged this outcome. She argued that, although she had granted Together and PFL priority, she had not been privy to the details of Mr Bridge’s various contracts, and could not reasonably have been expected to agree to grant priority to a debt subject to such significant interest and costs that it more than doubled in two years. Moreover, and more significantly, she argued that the terms of those agreements, correctly interpreted, did not grant priority to the full sum. Finally, she argued that PFL had failed to obtain the best price reasonably obtainable.

HHJ Cawson KC found that the terms of the various deeds of priority were binding on Mrs Burns and dismissed the sale-at-an-undervalue argument as speculative. The focus was therefore on the correct interpretation of the priority debt, which was defined as being “up to a maximum of £850,000 plus interest and costs”.

Mrs Burns argued that “interest” referred to reasonable interest, rather than the compound interest actually payable by Mr Bridge. She further contended that “costs” referred only to legal costs, rather than the full “costs, charges and expenses properly incurred”, which are deductible from sale proceeds by a mortgagee in possession pursuant to s.105 of the Law of Property Act 1925.

Unfortunately for Mrs Burns, the Judge found that logic and commercial sense favoured the lender’s interpretation. Mrs Burns had known that Mr Bridge was borrowing money to develop the property, and that this arrangement required her to give priority to PFL. A reasonable observer would have concluded that she was granting priority for the entire sum, notwithstanding that she was ignorant of the precise terms.

The Judge did find that the statement of account should have started afresh with the 2019 loan agreement. Although that would have reduced the interest to some extent, the Judge did not order the recalculation as it would not have affected the fact that there was no surplus left to pay Mrs Burns.

Those looking to avoid being similarly burnt should adopt the motto caveat venditor: let the seller beware.