FREE CHAPTER from ‘A Practical Guide to Property Receivership’ by Thomas Lillie

CHAPTER ONE – PRE-APPOINTMENT

1. Introduction
   • The appointment of receivers is one of several enforcement methods that a secured lender will consider when faced with a borrower in default. Some lenders will have a clearly defined process as to which enforcement method they will use and what steps they will take given a particular set of circumstances. Receivers will often be appointed when the secured property is either a commercial, mixed use or residential “buy-to-let” investment property. Receivers are not commonly appointed where the borrower is in occupation of the secured property.
   • This chapter provides guidance on steps a lender and their advisers may take prior to the appointment of receivers. Some of those steps are optional but may be recommended depending on the circumstances. Other steps are mandatory if a receiver appointment is to be validly made.

Security Review

• A security review is a document prepared for a lender containing advice as to the enforceability of the security held in the lender’s favour. Its purpose is to advise the lender on practical or theoretical risks it may face concerning the mortgage documentation and enforceability, if it decides to enforce its security or exercise its remedies.
• Lenders may require a security review as part of their decision making on whether to appoint receivers or other pursue other remedies. The security review may be commissioned after the lender has identified a breach of covenant or event of default on the borrower’s part, or it may be commissioned in anticipation of a breach. It may be commissioned alongside other sources of information concerning the borrower’s financial position.
• Many lenders have specific requirements as to what a security review should investigate and report upon and the circumstances in which a security review is required. Practitioners should ascertain whether the lender has any such processes or policies to ensure they are followed, and whether the lender has a particular form of security review that it requires.
• Absent any specific requirements, a security review would ordinarily involve: collating documentation and information from the lender, undertaking external searches to obtain further information, analysing the information obtained and preparing a written report.

Security documents and other information from the lender

• It will be necessary to obtain all contractual security and ancillary documents from the lender. The documentation concerning a standard residential buy-to-let mortgage may consist of only a mortgage offer, legal charge and mortgage terms and conditions. However, more complex lending arrangements may include: facility letters or loan offers, legal charges, debentures, all sets of terms and conditions incorporated into the aforementioned documents (noting that there may be several), collateral security documents, personal and corporate guarantees, board minutes, any intercreditor agreement or deed of priority. Ideally original documents or certified copies should be provided but it is not uncommon for the lender to simply have retained non-certified copies.
• It may also be necessary to establish the corporate structure of the borrower, shareholders and directors in relation to a corporate borrower. The lender may be able to furnish this information which can be checked against Companies House records using the online public search facility.[1]
• A lender may also provide any evidence it may have as to a potential default and should furnish other important information, such as the outstanding debt balance and any arrears, or other information concerning financial or non-financial breaches, along with any valuations of secured assets (historical and recent). All of this information will help to assess whether the borrower is in default and what enforcement options the lender may have, and, in the event of a possession claim, what the court may order.

Searches

• It is necessary to conduct relevant searches to ascertain whether required forms of security are correctly registered and identify any other relevant entries on the public record. Searches should include: HM Land Registry and Companies House.

HM Land Registry

• A proprietorship search should be conducted in relation to a corporate borrower in order to identify property owned by the company. Once a registered property is identified, an office search without priority should be conduced in order to obtain official copies of the register of title. It is critically important to undertake a new HM Land Registry search, rather than rely on historical official copies of the register of title that date from the time of the lending because they will not record recent entries which may be adverse to the lender’s position.
• There are restrictions on searching HM Land Registry for properties owned by individuals, as detailed in Practice guide 74: searches of the index of proprietors’ names.[2] Instead, official copies of the register of title for any relevant or secured properties known, or thought to be owned, solely or jointly by the individual borrower should be obtained.
• Any documents referred to within official copies of the register of title and noted to be held by HM Land Registry should also be obtained. For example, copies of legal charges referred to within the charges register and copies of leases in relation to leasehold property.
• An official search in respect of home rights to ascertain whether any third parties have a right to redeem the mortgage or remedy any breach (a home rights search may also later need to be produced in possession proceedings).
• For individual borrowers or individual guarantors, a land charges bankruptcy search should be undertaken.[3]

Companies House

• Online searches of Companies House public records should be conducted for all corporate borrowers and corporate guarantors incorporated in England & Wales. Searches can be conducted using the company name or company registration number using the Companies House online search facility.[4]
• All relevant documents should be obtained from Companies House. These may include: all outstanding registered charges and debentures, any notices of receiver appointment, company memorandum and articles of association, all filings concerning director appointments and resignations.
• Pursuant to section 859K of the Companies Act 2006, notice of a receiver appointment is required to be given to the registrar of companies which is then recorded on the public search facility. It is important for a lender to understand whether other creditors have already appointed receivers in relation to a corporate borrower’s assets.

Other

• Depending on the nature of the lending facility and the requirements of the lender, further searches may be recommended, such as the trademark and patent register, Central Register of Winding Up Petitions by telephone[5] and an online search of the London Gazette for any insolvency notices.[6]

 

 

Analysis of Security Documents and Search Results

• Once the documentation and search results have been obtained, it will be necessary to analyse the material. The following issues will need to be considered:
  • Has security documentation been correctly executed?
  • Has the legal mortgage been executed by deed in accordance with the formalities for an individual borrower[7] or corporate borrower[8] (as applicable)?
  • Has security documentation been correctly registered at HM Land Registry in the case of real property and, in the case of a corporate borrower, Companies House?
  • If security is not registered, or registered incorrectly, what effect does this have on the lender’s rights?
  • Does the security have priority over other secured creditors?
  • Did a corporate borrower have the power to borrow and grant security over company assets?
  • Are there records indicating that other creditors have taken legal action, such as other receiver appointments made in respect of a corporate borrower, winding up petitions or bankruptcy entries?
  • Did the directors of a corporate borrower have authority?
  • What contractual covenants or obligations have been breached (if any)?
  • Has an event of default occurred which may trigger the option to exercise certain remedies?
  • What formalities are contained in the documentation regarding enforcement? For example, is a formal demand required? Is the borrower entitled to notice and a period of time to remedy the breach? What are the service requirements and how would service be proved?
• The security review should specify whether the lender has the power to appoint fixed charge receivers or Law of Property Act receivers[9] and what powers the receivers will enjoy. If there are any key deficiencies or omissions in those powers, then this should be highlighted in the security review, together with a summary of any other potential issues, risks or deficiencies with the security, its registration or the title of the secured property. If there are title issues, it may be prudent for the security review to recommend that the lender obtains a specialist report on title in relation to the secured property.
• The security review should identify any risks or vulnerabilities as to the security and likely challenges. Similarly, any deficiencies in relation to the registration of the security at HM Land Registry and, in the case of corporate borrowers, at Companies House, should be highlighted, together with the effect these deficiencies may have on the lender’s ability to enforce the security and exercise its remedies.

Enforcement Options

• The security review should identify the lender’s enforcement options, based on the documentation and search results analysed, and any other information provided by the lender.
• If there is evidence to show that an event of default has occurred, or that the borrower or guarantor is in breach of any obligations, the lender will likely have a number of remedies and enforcement options available to them. These may include the right to appoint administrators or administrative receivers of a corporate borrower, the right to petition for the bankruptcy of an individual borrower or the right to appoint fixed charge receivers over assets of an individual or corporate borrower secured by a fixed charge.
• Following receipt of the security review, a lender may be able to make a decision as to whether to proceed with the appointment of a receiver or whether other enforcement options are more desirable.

Receiver Pre-appointment report

• In some cases, the lender may ask the proposed receiver to prepare a report on the prospective receivership. This may include the likely strategy to achieve redemption of the debt or other options and an indicative or “desktop” valuation of the secured asset.[10]
• At this stage, the receiver should also have regard to the risks associated with the appointment. Examples such risks include: onerous property which may be damaged, contaminated or a risk to third parties or public; high risk occupiers or use, for example, if the property is believed to be used for criminal purposes; insurance arrangements and costs, whether the receivers may require an indemnity from the lender[11] or whether there are wider commercial or reputational risks. Arrangements for the receivers’ remuneration should also be considered.[12]

Default and Demand

Options for a Lender

• The lender will usually have obtained advice on enforcement options in the form of a security review or otherwise. The lender’s aim will often be to take proportionate action to recover the debt owed by the borrower, including any interest and costs, factoring in the costs of the various options considered below, whilst seeking to take into consideration the interests of the borrower, where possible. The appointment of a receiver is unlikely to be the only option available to a lender. Lenders would be well advised to consider the alternatives although the appointment of receivers is commonly a swift and cost-effective way in which to achieve redemption of the secured debt without taking direct action against the borrower.
• The lender should give consideration to the wider circumstances, such as an assessment of the estimated value of the secured property at the present time, against the secured debt, to ascertain the estimated equity value (or loss) in the property, and whether certain actions, such as the appointment of receivers, may trigger cross-default provisions in other facilities, either with that same lender or with others. Lenders may choose to work with prospective receivers, insolvency advisers, valuers and solicitors to obtain professional advice on these issues, particularly in complex or high value situations.
• Options for a lender will commonly include negotiation, expressly reserving rights, insolvency or other legal action, or the appointment of receivers. We shall consider each in turn.
• Negotiation with the borrower: When considering whether negotiation may be worthwhile, lenders should consider:
• Whether the default can be remedied in a reasonable period of time (and in the case of arrears, whether the borrower is likely to be able to pay off the sums by the end of the term)?[13]
• Whether the event of default or breach is significant or fundamental to the relationship or one creating material risks for the lender? Or whether it is something less significant, perhaps not causing a material risk to the lender or being technical in nature?
• Whether the borrower may be able to make arrangements to redeem the mortgage debt, such as by way of refinance (remortgaging with another lender), capitalising any arrears, offering the lender further security assets, or by making a single lump sum or a series of payments to reduce the debt balance and/or pay down any arrears?
• Are there any extenuating circumstances which may justify the lender exercising forbearance?
• Such negotiations are commercial in nature and the lender should have regard to any contractual rights, remedies or obligations contained in the security documentation as well as its own policies and procedure and any applicable regulatory obligations or codes of conduct.
• Reservation of rights: Whilst negotiations are underway or otherwise where the lender requires some time to consider its options, lenders may elect to issue a “reservation of rights” letter. A reservation of rights letter is often issued by a lender and served on the borrower when a breach of the facility agreement or an event of default has occurred or is expected to occur, but before the lender has decided on whether to take formal enforcement action. It is intended to notify the borrower of the breach or event of default and reserve the lender’s rights in relation to the specific breach or event, thereby preventing the borrower from later asserting that any delay in the lender taking action amounted to a waiver of its right to do so or otherwise amounting to an acquiescence of the breach. Often there is an express term in the mortgage that forbearance on the lender’s part will not amount to the waiver of any rights.
• Direct legal action: The lender may have an option to take direct legal action against the borrower, which may involve a claim for possession of the secured property and/or a money judgment. Consideration should also be given as to whether action is appropriate against any corporate or individual guarantors.
• Insolvency action: The lender may have the right to petition for the bankruptcy of the borrower or any individual guarantor or appoint administrators or issue a winding up petition. These actions have wide ranging consequences and will only be appropriate in certain circumstances. The lender should obtain professional advice from insolvency experts.
• Appointment of a fixed charge or Law of Property Act receiver: The first step in assessing whether a receiver can be appointed is to consider the terms of the security document and make a decision on whether the appointment can proceed under the fixed legal charge or under the Law of Property Act 1925 which is considered in detail below.

Options for a Borrower

• Borrowers would be well advised to obtain professional advice when faced with formal or informal notification of default or on receipt of a reservation of rights letter. In many situations, there will be some communication with the lender and a window of opportunity whereby the borrower may be able to come to a negotiated arrangement with the lender to prevent formal action being taken. This may range from the lender agreeing to exercise forbearance for a period of time, to agreeing a plan and timescales for full redemption of the secured debt, whether by way of sale or refinancing.
• Solicitors may be engaged to act on behalf of borrowers in relation to these pre-action communications or negotiations. The borrower’s solicitors will need to review the facility documents to ascertain what events of default have occurred and what other rights or powers the lender may have under the facility documents. It is recommended that borrowers attempt to engage with lenders with the aim of reaching an amicable solution and also to ensure that the lender correctly complies with the requirements of the facility documents in relation to notice provisions and timescales. The borrower’s adviser will need to decide if, when and how to notify the lender of any breaches of obligation on the lender’s part, depending on the consequences the breach may have on the action the lender proposes to take and/or the stage of the negotiations between the parties. Sharing the progress of a potential sale, such as the receipt of offers and prospective purchasers committing to the process by e.g. undertaking searches, may comfort the lender.
• If the borrower makes proposals to the lender regarding sale, refinancing or some other payment arrangement, then suitable evidence should be provided to the lender to support the proposal. If there is no realistic refinancing, other payment arrangement or non-financial proposals that assuage the lender’s concerns or cure the events of default, then borrowers should consider whether it is beneficial to them to work towards a swift termination of the relationship. This may involve a sale of the secured property. Lenders may be willing to allow the borrower to control the marketing and sale, if suitable timescales are agreed, together with a clear plan as to how that is to be achieved. For example, the procurement of professional valuations and appointment of marketing and sale agents.
• Borrowers often wish to retain control of a sale in the belief that they will achieve a higher sale price and/or at lower cost, than if they rescinded control of the sale to the lender or receivers.
• Borrowers and their advisers should have regard to the lender’s contractual indemnity in relation to costs. Most facility agreements will entitle the lender to recover their costs from borrowers, whether by way of demand, indemnity or by debiting to the secured debt. These will likely include the cost of the lender’s legal and other professional advisers, often on the condition that such costs are reasonably incurred. Proportionality must be maintained as it will not be in the borrower’s financial interests to meet its own direct legal costs, and the lender’s costs, incurred in negotiations or disputes. This will depend in large part on the financial standing of the borrower and the value of the borrower’s debt against the current value of the security.

Fixed Charge vs LPA Receiverships

• A key distinction in the field of receivership concerns receivers appointed under the terms of a fixed legal charge (known as fixed charge receivers) on the one hand, and receivers appointed pursuant to the Law of Property Act 1925 (known as “LPA receivers”, or “Law of Property Act receivers”) on the other hand.
• Fundamentally, fixed charge receivership is a contractual mechanism. The formalities and method of appointment and the powers of the receivers are determined by the contractual terms contained in the security documents or mortgage conditions, whereas a Law of Property Act receiver is a creature of statute in terms of the formalities of appointment and the powers granted to the receiver, which are limited.
• It is not unusual for there to be overlapping provisions in several of the security documents, for example, provisions in a legal charge and further provisions in mortgage terms and conditions. If that is the case, it is necessary to carefully review the documents to understand which provisions will take priority.

Statutory conditions for Law of Property Act receivers

• A lender under a legal charge or mortgage has a statutory right to appoint a receiver pursuant to section 101(1)(iii) of the Law of Property Act 1925:

• A mortgagee, where the mortgage is made by deed, shall, by virtue of this Act, have the following powers, to the like extent as if they had been in terms conferred by the mortgage deed, but not further (namely):

…

(iii) A power, when the mortgage money has become due, to appoint a receiver of the income of the mortgaged property, or any part thereof; or, if the mortgaged property consists of an interest in income, or of a rentcharge or an annual or other periodical sum, a receiver of that property or any part thereof…

• There are therefore two statutory conditions. Firstly, this power arises when “the mortgage money has become due”. The terms of the mortgage must be reviewed carefully to ascertain when the mortgage money becomes due. Some mortgage terms provide for the mortgage money to become due on the date of the mortgage, but some conditions state that the money is only due following a defined event of default, or on demand after an event of default.
• When the money is due on the date of the mortgage, the appointment of the receiver can be made immediately after completion of the mortgage. If, however, there are contractual conditions, then these must be met before the right to appoint a receiver arises.
• If a demand is required, the mortgage terms should be checked to ascertain if there are any contractual requirements as to what the demand must contain and any requirements as to service of the demand.
• A demand must clearly state that the mortgage balance is due immediately and it is recommended to state the mortgage balance, noting that the figure provided is not a redemption figure if necessary.[14]
• If there are no contractual requirements as to service of the demand, then it is best practice to effect service by process server. It is not necessary for the demand to be acknowledged by the borrower or recipient, but it is recommended to obtain a written acknowledgement, if possible, particularly if a process server is not being utilised.
• When the borrower is a deceased person, the demand should be served on the personal representative or the Public Trustee, as appropriate.
• The borrower should be provided with a short period of time in which to pay the sum demanded before receivers are appointed. Unless the borrower has confirmed to the lender that he cannot or will not satisfy the demand, in which case an appointment can be made immediately after the demand has been served.
• The second statutory condition states that the lender must be “entitled to exercise the power of sale” which occurs when at least one of the conditions set out in Section 103 of the Law of Property Act 1925 is met:

(i) Notice requiring payment of the mortgage money has been served on the mortgagor or one of two or more mortgagors, and default has been made in payment of the mortgage money, or of part thereof, for three months after such service; or

(ii) Some interest under the mortgage is in arrear and unpaid for two months after becoming due; or

(iii) There has been a breach of some provision contained in the mortgage deed or in this Act, or in an enactment replaced by this Act, and on the part of the mortgagor, or of some person concurring in making the mortgage, to be observed or performed, other than and besides a covenant for payment of the mortgage money or interest thereon.

• Mortgage conditions will typically set out a list of pre-defined events, the occurrence of which will permit the lender to appoint receivers or take other enforcement action. These are commonly referred to as “trigger points” and must be carefully reviewed and construed. Common trigger points include: mortgage arrears, sometimes of a specified amount or duration e.g. two months’ worth of arrears; a breach of any condition in the mortgage or mortgage offer; where other occupational or security interests are created without the lender’s consent; insolvency action against the borrower,[15] there is a breach of any statutory requirements, and there is a breach of any leasehold covenants if the property is leasehold.
• Where the borrower is bankrupt and the mortgage conditions allow the lender to appoint receivers if the borrower is declared bankrupt, the lender is not entitled to appoint receivers on this ground alone, without the leave of the court. This restriction is set out in section 110 of the Law of Property Act 1925.[16]

Summary

• Prior to the appointment of receivers, lenders should consider the merits of commissioning a security review to ascertain the enforceability of the security and outline options, together with a Receiver Pre-appointment report in complex or high value cases.
• A good security review will carefully assess the enforceability of the security and set out the results of searches in relation to the position of the borrower, outline the type of receivership options available (fixed charge receivers vs Law of Property Act receiver) and the powers of the receiver. Any issues, risks or deficiencies should be highlighted.
• Once receivership is determined to be the appropriate enforcement option, it is necessary to carefully consider the contractual terms contained in the security documentation or mortgage conditions. This is to ascertain the specific circumstances in which a fixed charge receiver can be appointed and any pre-conditions of appointment (such as the service of a demand).

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[1]     see paragraph 1.16

[2]     https://www.gov.uk/government/publications/searches-of-the-index-of-proprietors-names/practice-guide-74-searches-of-the-index-of-proprietors-names

[3]     https://www.gov.uk/guidance/land-registry-portal-how-to-make-a-bankruptcy-search

[4]     https://find-and-update.company-information.service.gov.uk/

[5]     Central Register of Winding Up Petitions telephone number: 0906 754 0043 and website: https://www.gov.uk/courts-tribunals/companies-list

[6]     https://www.thegazette.co.uk/

[7]     Section 1 of the Law of Property (Miscellaneous Provisions) Act 1989

[8]     Sections 43 to 52 of the Companies Act 2006. There are difference requirements for Limited Liability Partnerships and other entities

[9]     See paragraph 1.42 regarding fixed charge receivers vs Law of Property Act receivers

[10]    A desktop valuation is one conducted from a desk, as opposed to a more detailed valuation conducting following a physical inspection

[11]    See paragraph 2.72 regarding indemnities

[12]    See paragraph 2.76 regarding remuneration

[13]    See Cheltenham and Gloucester Building Society v Norgan [1996] 1 All ER 449 in relation to mortgage arrears where a reasonable period of time was considered, as a starting point, to be the remaining term of the mortgage

[14]    A redemption figure is typically the final settlement figure which may include additional costs and interest and be valid for payment for a specified period of time. It is often different from the “running” balance which may not include costs and interest

[15]    See paragraph 1.55 in relation to insolvency action

[16]    See paragraph 2.15 to 2.18 in relation to bankruptcy