Receivership - What is it and how is it useful to lenders?

Receivership What is it and how is it useful to lenders?

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Receivership

What is it and how is it useful to lenders?

A receiver is an individual (or those acting jointly) appointed by a creditor that holds a charge over the assets of a debtor to take custody of the charged assets, manage those assets and receive the income from them.

Usually, a receiver will also have the power to sell the assets and to apply the proceeds of sale in satisfaction of the secured debt.

In this explanatory note, the secured creditor is referred to as the mortgagee and the debtor that has granted the security is referred to as the mortgagor.

David Wood Chartered Legal Executive david.wood@laytons.com +44 (0)20 7842 8000

Receivership | What is it and how is it useful to lenders?

Terminology: fixed charge receivers and LPA receivers

Why would a mortgagee appoint a receiver?

It is common to use the phrase “LPA receiver” to refer to any receiver appointed under a fixed charge or mortgage.

Appointing a receiver over an asset enables a mortgagee to exercise control over the charged asset, whilst maintaining a degree of separation from the responsibilities associated with that asset, i.e. business rates on unoccupied commercial properties or maintenance and repair obligations, especially where a property is tenanted.

The term “LPA receiver” is not defined in the Law of Property Act 1925 (the LPA 1925) or anywhere else. It is a term generally used because the powers to appoint a receiver and the limited powers granted to a receiver are contained in the LPA 1925. In practice, however, it is uncommon for a mortgagee to appoint a receiver in sole reliance on the

Appointing a receiver can also allow a mortgagee to deal with

provisions of the LPA 1925. In reality, the appointment of

the asset and realise its value without incurring any liability.

a receiver will invariably be made under the mortgagee’s

Importantly, the appointment of a receiver by a mortgagee is

security which will grant the receiver all the powers available

a cost effective and efficient way to enforce the security.

under the LPA 1925, as well as specifically conferred extended powers provided under the security itself, i.e. the appointment of a fixed charge receiver.

A fixed charge receiver is someone who is appointed under the terms of the security and whose powers flow from the mortgage deed containing the fixed charge.

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Receivership | What is it and how is it useful to lenders?

When can a mortgagee appoint a receiver?

Power to appoint under the LPA 1925

Power to appoint under the terms of a charge

The LPA 1925 permits a mortgagee to appoint a receiver of

The power of a mortgagee to appoint a receiver under the

the assets secured by its charge (section 101 of the LPA 1925).

LPA 1925 is subject to the terms of the security document,

The mortgagee’s power to appoint a receiver arises at the

which may extend or restrict this power (section 101(6) of the

same time as its power to sell the charged property under the

LPA 1925).

LPA 1925 becomes exercisable (section 109(1), LPA 1925).

Accordingly, the precise circumstances in which a mortgagee The mortgagee’s power of sale under the LPA 1925 arises

may appoint a receiver to the assets of a mortgagor under

when the liabilities secured by the charge have become due

the charge itself will depend on the terms of the charge

(section 101(1)(i) of the LPA 1925). However, the mortgagee

document.

may only exercise this power of sale if one of more of the following conditions are satisfied: • the mortgagee has served notice on the mortgagor requiring payment and three months have elapsed without any payment from the mortgagor • the mortgagor has not paid interest for two months on the sums secured by the charge; or • the mortgagor is in breach of a provision of the document creating the relevant charge, other than the provisions relating to the payment of principal or interest. (section 103 of the LPA 1925)

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Receivership | What is it and how is it useful to lenders?

Powers of the receiver

Receivership and agency

An LPA receiver is, as discussed above, a position derived from statute. Section 101(1) of the LPA 1925 gives a mortgagee of land the remedy to appoint a receiver over that land. Section 109 of the LPA 1925 gives a receiver the power to “demand and recover all income from the property” and to “insure and keep insured…out of the money received by them”. That is all. A receiver whose appointment is made solely under statute has very limited powers. Importantly an appointment by statute grants the receiver no power of sale, and any sale would have to be exercised by the mortgagee.

A receiver appointed under the LPA 1925 or under a fixed charge is deemed to be the agent of the mortgagor, who is liable for the receiver’s acts and defaults. Modern mortgage deeds however tend to make express provision for the agency. Whether a fixed charge receiver is the deemed agent of the mortgagor will depend on the terms of the mortgage deed.

The effect of the receiver being an agent of the mortgagor is to prevent the mortgagee being liable for acts or omissions of the receiver (see Gomba Holdings UK Limited v Homan1 ) .

The agency of a receiver is therefore an expedient device to protect the mortgagee. The nature of the agency of receivership has been summarised by the Court of Appeal

A fixed charge receiver is an appointment made under

(see Silven Properties Limited v Royal Bank of Scotland 2 ) as

the terms of the security and their powers flow from the

follows:

mortgage deed containing the fixed charge. The LPA 1925 1. the agency is one where the principal, the mortgagor,

allows receivers’ powers to be extended by mortgage deed which will include a wider range of powers, including an

has no say in the appointment or identity of the receiver

express power of sale, upon which a receiver can rely. A

and is not entitled to give any instructions to the

charge receiver’s extended powers under a mortgage deed

receiver or to dismiss the receiver 2. there is no contractual relationship or duty owed in tort

will usually include:

by the receiver to the mortgagor: the relationship and • power of sale

duties owed by the receiver are equitable only

• power to take possession of the security and/or

3. the equitable duty is owed to the mortgagee as well

proceedings to obtain possession

as the mortgagor. The relationship created by the

• power to grant, vary or surrender leases or tenancy

mortgage is tripartite involving the mortgagor, the

agreements; and

mortgagee and the receiver

• power to commence or complete repairs or building

4. the duty owed by the receiver (like the duty owed by

works.

a mortgagee) to the mortgagor is not owed to him individually but to him as one of the persons interested in the equity of redemption 1.

2.

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Gomba Holdings UK Limited v Homan [1986] 1 WLR 1301 at 1305) Silven Properties Limited v Royal Bank of Scotland [2003] EWCA Civ 1409

Receivership | What is it and how is it useful to lenders?

5. the receiver’s primary duty in exercising his powers of management is to try and bring about a situation in which the secured debt is repaid; and 6. the receiver is not managing the mortgagor’s property for the benefit of the mortgagor, but the security, the property of the mortgagee, for the benefit of the mortgagee.

Summary Mortgagees generally have a variety of mechanisms to realise their security, depending on the particular facts and circumstances of each case. The appointment of a receiver is one solution for mortgagees, which has clear commercial and practical benefits. An obvious benefit is there is no court involvement, which enables mortgagees to proceed to realise the security without any undue delay.

If you would like any further advice or information about appointing receivers or any other remedies, please do not hesitate to contact David Wood.

About the Author David Wood

Chartered Legal Executive david.wood@laytons.com +44 (0)20 7842 8000

David is a highly experienced lawyer who advises and acts on behalf of banks, companies and individuals in connection with complex and high value commercial disputes including bank recoveries, property litigation, contentious probates, claims in negligence, contractual disputes and insolvency matters.

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This information is offered on the basis that it is a general guide only and not a substitute for legal advice.

We cannot accept any responsibility for any liabilities of any kind incurred in reliance on this information.

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