Notwithstanding that we find ourselves in the teeth of lockdown restrictions in the middle of a pandemic, it is reasonable to suppose that at some stage market activity will return to some semblance of normality in the future.
As a matter of logic this will lead to banks and other lenders looking at the extent of their bad debt book to see what steps can be taken to recover sums due to them. When the security comprises a charge over land then the option of appointing a receiver is likely to be considered as a preferred means of achieving this.
What is the benefit of taking this course? In simple terms it takes the mortgagee or chargee out of the equation in terms of taking practical steps to enforce the security and also away from possible issues which might arise in the exercise of a power of sale. The procedure in appointing a receiver is straightforward and in the scheme of things cheaper and quicker than other options. In particular there is no change in ownership when a receiver is appointed and whilst he will become the agent of the defaulting borrower he will owe a duty to preserve the secured asset and to realise it for the benefit of the lender to clear all sums due to it. The receiver owes to both mortgagee and mortgagor a duty to act in good faith.
Whilst receivership is an equitable concept, the Law of Property Act 1925 (Section 101) incorporates a statutory right for a mortgagee to appoint a receiver over the charged assets. This statutory power is limited however and consists of a right only to receive rent or income from the mortgaged property. Most mortgages though will provide a significant extension to these powers to include amongst other things a power of sale or a power to grant leases. The term “LPA Receiver” is commonly used but this is generally a misnomer as it will tend to refer to any receiver appointed under the terms of a fixed charge or mortgage. A single receiver can be appointed but joint receivers can also be appointed to act jointly and severally.
A mortgagee’s right to appoint a receiver arises when the liabilities secured under the charge have become due and the mortgagee’s powers have arisen. As one would expect this would comprise a failure to pay sums due under the mortgage but also this could extend to any act of default under the terms of the mortgage or loan agreement. Where the mortgagee makes a demand under the mortgage and such a demand is not satisfied by the mortgagor then this can open the way to an appointment of a receiver. As long as the mortgagee acts in good faith it can appoint a receiver at any time after the grounds for appointment have arisen.
In practice, before accepting an appointment, a receiver will need to obtain proper advice to understand the nature and extent of his powers and obligations under the terms of the charge. The receiver’s legal advisers would also check to see whether the mortgagor has been subject to insolvency proceedings. Whilst such proceedings would not necessarily preclude the appointment of a receiver, it may affect any commercial judgement on the appointment. Where a receiver is to be appointed then the technical requirement is for the appointment to be in writing but the appointment will need to be executed as a deed if the receiver is to be given power to execute deeds. The appointment will need to be duly delivered to the receiver and whilst there is no technical rule that this cannot be by email, logically it would be best served in hard copy. The formal acceptance of the receiver relating to the appointment will need to be made before the end of the business day after receipt. Timing is therefore important.
In the absence of provisions in the charging document, there is no obligation on the mortgagee to give notice to the mortgagor relating to the appointment. However as a matter of good practice one would expect that the mortgagor will be given notice. If the mortgagor is a company then there is a requirement in any event for notice to be filed at Companies House. The receiver would also be advised to register his interest at the Land Registry – albeit that this is not as change of ownership but rather to provide an amended address for the purpose of service of notices.
A receiver would also require that the appointing mortgagee will provide an indemnity in his favour given that the receiver will become personally liable under all contracts that he enters into during the course of his appointment. This is over and above the ordinary statutory indemnity which is provided for the Insolvency Act 1986.
It is important to understand that the appointment of the receiver does not displace the directors’ power of management in respect of any company which is affected by the appointment nor does it remove directors from their office. It is a common misconception that receivership in these circumstances constitutes insolvency or bankruptcy. This is not the case although arguably if a mortgagor cannot pay its debts as and when they fall due it will be technically insolvent in any event.
A fixed charge receiver does not need to be a licensed insolvency practitioner but any receiver who is appointed should be qualified as a registered property receiver.
As can be seen from the above in the scheme of things, the appointment of a receiver is a reasonably straightforward process. If done correctly, it does not involve any court proceedings or company or creditors meetings and consequently this presents itself as a sensible option for a mortgagee to pursue in recovering monies due to it.
For more information on any of the items raised in this article please contact Julian Bishop on 020 7400 6583 or click here to email Julian.