Market Insight

LPA Receivership Explained

March 25, 2011

25/03/2011

There are often misconceptions about the process of LPA/ Fixed Charge Receivership. In many cases Receivers have the opportunity to add value, solve problems and reach a resolution that benefits all affected parties. Russell Miller is a qualified Registered Property Receiver and member of the Association of Property and Fixed Charge Receivers (NARA). He explains where an LPA Receiver sits within the context of Insolvency, sets out their powers, duties and obligations and provides an illustration of how the Receiver can add value and maximise the recovery of a secured loan for the mortgagee.

Insolvency is defined as the inability to pay one’s debts as they fall due. The impact of a shrinking economy and the downward pressure on incomes has led to a rise in the financial troubles of corporate organisations and individuals. There are a range of remedies available to a creditor with the most common aimed at rescuing businesses through Administration and voluntary arrangements.

So where does LPA Receivership fit in? The mortgagor does not necessary have to be insolvent. The trigger for the appointment of a Receiver is an appropriate default of a mortgage, usually the accrual of at least two months mortgage payment arrears. The overriding objective of an LPA Receiver is to seek realisation of the secured asset to aid recovery of the debt for the lender. However, the strategy in a wide range of circumstances might be to utilise the specialist property expertise of the Receiver, which might include the management of the property and collection of rents.

We are often asked ‘to whom do we owe our primary duty of care?’ The Receiver has a duty to act in the best interests of the appointing lender, but residually for the borrower and other interested parties such as subsequent charge holders. The Receiver’s powers are derived from the Law of Property Act 1925, hence the term “LPA,” but also from the mortgage deed, which will usually afford much wider powers to include collection of rents, securing possession, granting leases and ultimately selling.

Does the appointment of a Receiver always lead to an immediate sale? Not necessarily. The Receiver will consider an appropriate strategy, including the status and occupancy of the property, any issues that may be detrimental to its value that could be overcome, the relationship between the bank and borrower and the financial background of the mortgage (monthly payments, arrears and balance). In many cases the Receiver will have the ability to exploit opportunities to add genuine value to maximise realisation for the benefit of all parties.

An example is three houses in Devon which were developed by the borrower as holiday lets. Unfortunately the project failed, arrears mounted and the owner was unable to secure adequate rental income to sustain the mortgage payments. The Receivers were appointed and could have proceeded with an immediate sale, but this would have resulted in the lender crystallising a substantial loss and the borrower facing possible bankruptcy. The Receivers identified the opportunity to add value by removing the holiday let planning restriction, which was achieved a year later at appeal. They also rented and managed the houses which produced a monthly income to pay the mortgage and fund the planning costs. The resultant Market Value of the three houses increased by 30% and facilitated full recovery of the bank’s debt without onerous liabilities remaining on the borrower.

To discuss anything you have read in the above article, please contact our LPA team.