The Road to Debt Recovery for Lenders and Borrowers
During these difficult times, lenders, or anyone that may have lent or invested money and taken a charge over a property, may be faced with the difficult issue of what steps they can take to recover a loan that is in default or over term.
Lenders ought to be aware of and start thinking about their potential steps to recover a loan. It may be needed more than ever over the coming months and years once the general ban on possession proceedings imposed at the end of lockdown comes to an end on 20 September 2020 (previously 23 August 2020) and the guidance from the Financial Conduct Authority against starting or continuing possession proceedings ends on 31 October 2020.
It is also important for lenders to be aware that possession proceedings are not going to offer a ‘quick fix’. There are substantial backlogs, and courts have suspended the usual duty of listing the initial hearing within two weeks of issuing the claim, which is why it’s all the more critical that lenders plan by exploring all other options, including appointing Receivers.
In most cases, under the loan documentation, appointing a Receiver is one of the ways lenders who seem to be at the end of the road may find a few more turns and a relatively quick, inexpensive and hassle-free way to exit the loan.
WHAT IS RECEIVERSHIP?
Receivership is a means for lenders to recover a debt when a borrower is, for whatever reason, no longer paying their mortgage. A Receiver is an ‘agent for the borrower’ and steps into the shoes of the borrower.
It is a personal appointment, and the Receiver may have a serious impact on the borrower’s circumstances, so it is an important role.
Importantly, for lenders, most loan documents allow for the Receiver’s costs to be fully recoverable from the borrower. So, if there is a surplus, the lender should not have a cost at the end of the day, although there may be upfront costs to bear.
DUTIES OF A RECEIVER
A Receiver’s primary duty is to recover the lender’s debt in the shortest possible time. As the Receiver is paid by the lender and the future work/client relationship depends on the lender, a Receiver walks a tightrope as they also have a duty of good faith to the borrower. They must, therefore, ensure that they satisfy the lender in the least harmful way to the borrower.
TYPES OF RECEIVER
There are two types of Receiver and it is important to differentiate between them:
Receiver appointed under the Law of Property Act 1925
The Receiver in this case has limited powers being only able to collect rent (to pass to the lender) and insure the property. Importantly, in this capacity, the Receiver does not have a power of sale.
Fixed Charge Receiver
Most, if not all, the appointments nowadays are appointments under the loan documentation, referred to as ‘Fixed Charge Receiverships.’ The powers afforded to a Receiver are determined by the loan agreement but typically include:
- a power of sale;
- the ability to grant and surrender leases;
- the right to collect rent and, if it improves the outcome, to use the rent or borrow money to for example fund works, or develop.
In each case, the strategy will determine the powers to be used.
DIFFERENCE BETWEEN A RECEIVER & INSOLVENCY PRACTITIONER
A Receiver’s powers, when appointed under the Law of Property Act 1925 or as a Fixed Charge Receiver, only relate to the property. In comparison, an Insolvency Practitioner [IP] (Administrator/ Administrative Receiver/Liquidator) will have a remit over the whole company, including any property assets.
There is a lot of cross-over between a Receiver and an IP. In cases where the company’s creditors appoint an IP, they often work closely with a Receiver. In cases where an Administrator is appointed, the Receiver needs their permission either to be appointed or to continue the appointment. In the case of a Trustee in Bankruptcy; liquidator or Administrative Receiver, the Receiver does not need the IP’s consent. In our experience, it is better to appoint a Receiver sooner rather than later so that they can establish themselves in the case.
WHO CAN BE APPOINTED AS A RECEIVER AND LENDER'S DUTY NOT TO APPOINT AN INCOMPETENT
A Receiver does not have to be an Insolvency Practitioner. Most informed lenders today only appoint Receivers who have obtained accreditation as a Registered Property Receiver, under a scheme regulated by the Royal Institution of Chartered Surveyors and the Insolvency Practitioners Association. This ensures qualification, regulation and monitoring, with a complaints process.
The appointment has to be for an individual (not a company) and the Receiver cannot be an undischarged bankrupt. Most Receiverships are taken jointly to ensure continuity where an individual might be away or become incapacitated. This could be particularly important during the time of COVID-19.
Importantly, the lender has a duty not to ‘appoint an incompetent’ and cannot appoint someone who will use the position for an improper purpose.
ADVANTAGE OF USING A RECEIVER FROM A WIDE SKILL-BASED PRACTICE
Whilst many Receivers have extensive experience, there is a clear advantage to appointing a Receiver who is part of a practice with a variety of specialisms so that they can draw upon colleagues from lease advisory, leasehold reform, insurance, property management, agency and auctions.
Within Strettons, for example, our Receivers can liaise with the in-house insurance brokerage to place cover with immediate effect when accepting an appointment for all property types and at any time of day or night. This is especially useful as many insurers will not cover properties that are in receivership and many lenders use our insurance team where borrowers cannot get cover quickly. Equally, our in-house expert witness team is available to review all lending valuations.
A close working relationship with agency and auction colleagues allows us to use auction as a ‘back-stop’ to ensure that the borrower’s refinance takes place by a specific date. In many cases, the refinance only completes moments before the auction starts! Working with our auction team also gives the Receiver visibility on the level of interest which we can feedback to the lender. This is not always so easy if using a third party auctioneer or agent.
A Receiver’s role is always serious and subject to scrutiny and challenge. It is not a dissimilar role to that of a mediator where the task is to facilitate an exit from a relationship that has broken down. This can often be a long and twisted road to travel, but we work hard to try to build a relationship with the borrower – this will almost always reap benefits in time, cost and success.
For more information about appointing Receivers or for an informal discussion about your current property matter, please contact Paul Joseph - firstname.lastname@example.org