Property Newsletter January 2010

LPA Receivers - Their time has come - again!

The current well publicised difficulties with the property market have again highlighted the necessity of lenders having available to them appropriate remedies to enable them to enforce their security if a borrower defaults. We look at one such remedy: the appointment of a Law of Property Act receiver and what this means for lenders

As a result of the changes to insolvency law introduced by the Enterprise Act 2002, administrative receivers are now comparatively unusual. Whilst administration is extremely common, it will not always be the case that it is appropriate for a secured lender to initiate formal insolvency procedures, whether administration or liquidation in the case of a company, or bankruptcy in the case of an individual.

As a general rule, even in a situation of formal insolvency, a lender is entitled to rely on its security and enforce that security, and one of the most effective means of enforcing security is the appointment of a Law of Property Act receiver.  This is not in itself an insolvency procedure and is just one of a number of remedies open to a secured lender - and frequently more desirable than the lender itself going into possession of the property.

Powers of a receiver
The statutory power to appoint a receiver is contained in the Law of Property Act 1925, but this is a limited power relating in the main to the right of the receiver to collect in the income arising from the property.  In other words, if a lender holds security over a property which is let, either in whole or in part, then the receiver, when appointed, can demand and recover the rent from the tenants to the exclusion of the owner/borrower and then account to the lender. 

Well prepared mortgages or legal charges will also confer on the receiver greatly extended powers.  These may include a power to sell (in the name of the borrower) and to carry on any business as a going concern.  This can be extremely useful where the object of the lender is to preserve the business with a view to an eventual sale as a going concern and so, in the meantime, preserve the value both of the property and any underlying business.

It is, therefore, vitally important that all lenders ensure that their security documentation deals adequately with issues relating to the appointment of a receiver and the powers of that receiver.

Although appointed by the lender, the receiver will, in fact, act as agent for the borrower and therefore most of the formal steps and acts taken by the receiver will be in the name of and on behalf of the borrower.

As an LPA receiver is not an office holder within the meaning of the Insolvency Act 1986, he does not have to be a Licensed Insolvency Practitioner.  Whilst many Licensed Insolvency Practitioners do accept appointments as LPA receivers, the majority of receivers are, in fact, Chartered Surveyors. 

With leasehold property special considerations may arise as the appointment of an LPA receiver will not prevent a landlord from taking action to forfeit the lease.  An LPA receiver, unlike a liquidator or a trustee in bankruptcy, has no power to disclaim but normally will have power, if appropriate, to negotiate a surrender.  Furthermore, the appointment of an LPA receiver does not have the benefit of the wide ranging moratorium preventing legal and other proceedings being taken against a company, as is the case when a company goes into administration.

Whilst an LPA receiver is certainly not immune to liability, recent cases have shown that whilst a receiver is under an obligation to obtain a proper price for a property, he has a general right to market the property as he thinks fit and to sell it when he thinks appropriate, even if the timing of a sale may be disadvantageous for the borrower.  This does not, of course, mean that the receiver can totally ignore the rights and interests of the lender or, indeed, guarantors or other interested parties.  Furthermore, a receiver is under no duty to incur expenditure so as to improve the property or enhance its value.

Michelmores has considerable experience in dealing with property matters and insolvency issues, and we are well placed to advise lenders on security issues, including the appointment of receivers, and in advising receivers on the issues and pitfalls that they can expect to face, as well as dealing with the sale of the property.

For further information, please contact Cameron Caverhill, a Partner within the Commercial Property Team, at cameron.caverhill@michelmores.com.