By Diana Featherstonhaugh and Ben Kilshaw, Partners at Hamlins LLP
Lenders with defaulting borrowers may want to take control over the secured assets. A lender may have various options but if it holds security over property, appointing a Fixed Charge Receiver, also referred to as an LPA Receiver, will often be a speedy and cost effective choice. In this article we briefly explain the key steps.
Appointing a Receiver enables the appointment of a property professional who can manage and/or dispose of the property in the borrower’s name. This has advantages. Alternative methods of enforcement such as appointment of an administrator could, if the principal asset is a property, bring unwelcome issues and costs such as dealing with staff and other elements of the borrower’s business. Exercising its power of sale would require a lender taking possession if the property is occupied, thereby creating liabilities particularly if the lender does not wish to dispose of the asset immediately nor engage with the borrower directly.
If the security documents do not contain an express power to appoint a Receiver, lenders have power to appoint a Receiver under the Law of Property Act 1925. There must be a legal mortgage over the property which should be reviewed before an appointment is made. If the charge permits, then a lender will often appoint joint receivers with power to act jointly and severally. Once a lender decides to appoint a Receiver, it will want to act quickly and the Receiver may not have time to carry out all the available checks to be satisfied the appointment is valid, such as that the mortgage is by deed, that it is registered against the property at the Land Registry and, if the borrower is a company or LLP, registered at Companies House. If the mortgage is not by deed then the lender will not have the power to appoint a Receiver and would need to request the Court to make the appointment. If the mortgage had not been registered at the Land Registry then it will be an equitable charge rather than a legal charge which will mean that the Receiver will not have power to convey the property unless authorised by the Court, although the power of attorney usually contained in the mortgage deed may give sufficient authority to do so whilst the borrower is not in liquidation. The lender would also be very exposed and would not be protected if the property was sold or charged to another lender. If the borrower is a company or limited liability partnership and the mortgage was not registered at Companies House at the time of the loan then the mortgage will be void against any liquidator, administrator or other secured creditor and the lender will rank as an unsecured creditor unless late registration was possible; although the lender would still rank behind other secured creditors. If the charge is defective then the Receiver could be liable in damages.
The appointment should be by a formal deed and (if over a company’s property) require the Receiver to formally accept before the end of the business day following receipt and then the appointment should be registered at Companies House within seven days. Notice of the appointment should be served on the borrower, other creditors, tenants and landlords.
Once appointed, the Receiver has power to collect and take action to recover income from the property. The Receiver will need to ascertain whether the mortgagor has opted to tax and if VAT is payable on the rents he collects. The legal mortgage will nearly always extend the Receiver’s powers to allow the Receiver to sell the property, grant and surrender leases, undertake works to the property and take all other steps necessary for the sale or management of the property. The sale of a property can be made by the Receiver or alternatively negotiated by the Receiver and completed by the mortgagee exercising its power of sale.
A Receiver will usually act as agent of the borrower but this may change to agent of the lender if the borrower enters into bankruptcy or liquidation and there are duties the Receiver owes to both lender and borrower. The Receiver will owe a duty of good faith to the borrower and in relation to a sale, a duty to achieve the best price obtainable, which may now mean having to consider the availability and value of capital allowances. A Receiver would usually obtain two independent valuations and it is prudent to advertise the property for sale in the normal manner and offer to sell the property to the borrower, any guarantors and other mortgagees. Whilst not normally personally liable, the Receiver does assume responsibility for the payment of head rents, VAT, environmental liabilities for contaminated land and in some circumstances business rates.
When accepting the appointment with the lender, a Receiver will want to agree remuneration and may seek an indemnity for any other costs or liabilities. An indemnity is important should the mortgage be invalid as the Receiver could be subject to a claim from a party who suffered a loss from the actions of the Receiver. It would also be important in other situations where there could be potential liabilities which fall to the Receiver, for example, where there was a risk that the land was contaminated. Whether an indemnity is provided or not, a Receiver should maintain professional indemnity insurance.
A Receiver’s role will usually come to an end after completion of the sale of the property but the lender can terminate the appointment at any time. If the borrower is a company then within one month of termination the Receiver needs to file accounts and notice at Companies House.
To conclude, appointing a Fixed Charge Receiver is an effective means for a lender to manage and dispose of properties where the borrower is in default. Whilst quick and straightforward, it is important to carry out and follow the necessary checks and formalities.
Diana Featherstonhaugh and Ben Kilshaw, Partners at Hamlins LLP
Diana Featherstonhaugh is a partner in the Commercial Property Department. She has extensive experience in all aspects of commercial property, particularly investment property, commercial leases, rent reviews, management agreements, acting for LPA/fixed charge receivers in connection with their appointment, post appointment and on sale and termination and acting for investors, property developers, pension funds and lending institutions
Ben Kilshaw is a partner in the Commercial Property Department. He has a wide range of experience in commercial property including acting for receivers, property investors, occupiers and leisure operators. He also advises on non-contentious construction law.