When a bank lends to a person or company to purchase a property or other substantial asset, the bank will take charge of the property/asset to mitigate its risk. If the borrower defaults on the mortgage/loan payments, this charge means the bank can sell the property/asset to recover its monies. The lender will appoint an LPA Receiver to protect the asset in such circumstances. This article provides detailed guidance on LPA Receivers and Fixed Charge Receivers.
What is an LPA Receiver?
An LPA Receiver is a receiver appointed by a creditor to protect and manage secured assets which it has a mortgage or charge over.
The Law of Property Act 1925, section 109 governs the appointment, powers, duties, and remuneration of an LPA Receiver.
Due to the limited powers of an LPA Receiver, a secured creditor will typically appoint a Fixed Charge Receiver whose powers are conferred by the Mortgage Deed or Fixed Charge contract made between them and the borrower.
LPA Receivers and Fixed Charge Receivers are not the same as Administrative Receivers, who can be appointed by a floating charge holder, so long as no exceptions to the general prohibition on appointing an Administrative Receiver applies.
Why is an LPA Receiver Appointed?
It is important to note that the borrower does not have to be insolvent for an LPA Receiver to be appointed. A common scenario that leads to a secured lender putting an LPA Receiver or a Fixed Charge Receiver in place is where a property developer falls into financial difficulty halfway through the development project. The lender decides to call in the loan but needs the development finished to recover the entire debt. Given that they are unlikely to be in the business of property development themselves, they can appoint an LPA Receiver or a Fixed Charge Receiver to finish the project and sell the development.
When is a Fixed Charged Receiver Appointed?
Virtually all charge documents contain a clause permitting the lender to appoint a Fixed Charge Receiver. A well-drafted charge document will empower a Fixed Charge Receiver to operate as they would if they owned the land themselves, i.e., commence a sale or advertise for new tenants.
What Does an LPA Receiver Do?
An LPA Receiver does not have to be a licenced Insolvency Practitioner but given the duties and responsibilities of the role, the lender will appoint someone suitably experienced. The LPA Receiver's primary role is to create distance between the lender and the borrower while taking control and preparing the property/asset for sale.
How Does an LPA Receiver and a Fixed Charge Receiver Prepare a Secured Creditor for Debt Recovery?
An LPA Receiver will:
- Act as a mediator between the lender and the borrower.
- Secure, repair, and insure the property/asset.
- Take steps to minimise financial loss, for example, by diverting rental income.
- Pay any disbursements (invoices).
The above powers are granted by the Law of Property Act 1925. However, the Act does not grant an LPA Receiver the power to sell the property or asset. And this is why a Fixed Charge Receiver is typically appointed. Depending on the terms of the contract, they can:
- If required, take possession of the property.
- Develop a management and disposal strategy.
- Pursue planning permission, negotiate new tenancies/leases, and take any other steps that will improve the resalable value of the premises.
- Develop the property.
- Sell the property/asset.
- Distribute proceeds of the sale to all relevant parties.
To whom is the LPA Receiver or Fixed Charge Receiver Responsible?
Although the lender appoints a Receiver, they act as an agent for the borrower. This can lead to disputes, the most common being the borrower alleging the Receiver did not achieve the highest value possible when selling the property/asset. To avoid this and other conflicts developing, it is best practice for the Receiver to seek advice from an experienced Insolvency Law Solicitor.
How is an LPA Receiver or Fixed Charge Receiver Appointed?
The process differs from both LPA Receivers and Fixed Charge Receivers.
LPA Receiver
A mortgage or charge executed as a deed contains an implied right to appoint an LPA Receiver.
A lender can appoint an LPA Receiver when the mortgage money is due but only if one of the following conditions has been satisfied:
- The lender has served notice on the borrower requiring repayment of the mortgage money, and three months have passed without any payment.
- Some interest due on the mortgage money has been unpaid for two months.
- The borrower breaches a provision of the Law of Property Act 1925 or the mortgage contract in a way that does not involve payment of the mortgage money or interest.
The appointment of an LPA Receiver must be in writing.
Fixed Charge Receiver
The process of appointing a Fixed Charge Receiver is governed by the charge document to the extent that the relevant provisions displace the Law of Property Act 1925. The main restriction replaced by the charge document is the provision limiting the lender's right to appoint a Receiver until the mortgage money is due and the property/asset can be sold. Instead, the charge document usually states that the right to appoint is triggered when the security becomes enforceable, typically when the borrower defaults on payment.
A Receiver is Appointed, What Next?
Once a receive is appointed the following task must be completed:
Instruct a Solicitor
The law governing Receivers is complicated and the possibility of a dispute developing bubbles close to the surface of any actions taken. Therefore, appointing an experienced Insolvency Law Solicitor to advise from the outset is crucial.
Insure the Property
Insuring the property must be done right away. Receivers typically have 'Open Cover' insurance, which insures anything immediately for 30 days. During that time, the Receiver will gather valuations and take the required safeguarding measures, such as draining radiators and turning off the electricity in the case of unoccupied properties, as well as meeting any other conditions necessary to obtain the required insurance cover.
Collect Rent, If the Property is Occupied
Part of preparing the property for sale is ensuring the tenancy is running smoothly. This involves the Receiver collecting rent and checking that the tenant complies with the Tenancy Agreement's terms. Collecting rent also provides funds to meet mortgage payment arrears.
File Any Required Forms at Companies House
If the borrower is a limited company specific forms must be filed at Companies House within seven days. An Insolvency Law Solicitor can advise what forms are required.
How We Can Help
The appointment of an LPA Receiver or Fixed Charge Receiver requires diligent legal oversight to prevent legislative breaches, breaches of contract, or other disputes from developing. Instructing an experienced Insolvency Law Practitioner will ensure matters run smoothly and minimise risks.
As experts in insolvency law, Witan Solicitors can provide expert advice and representation on all insolvency matters. Contact us on 0330 173 6983 or send us an email for more information.
