Chart Property Partnership, as LPA Receivers, are frequently asked by lenders, borrowers and even tenants the following questions. When we discuss receivers, many people automatically think of company receivers or administrators; the type that took over Woolworths and MFI and more recently Portsmouth and Rangers football clubs. Below we discuss Law of Property Act Fixed Charge Receivers in greater depth.
LPA Receivers and fixed charge receivers; what is the difference?
A Law of Property Act fixed charge receiver is a single asset receiver appointed over a property, rather than a company. It is a means for a lender to “ring fence” an asset and its income within a company, over which they have a fixed charge or mortgage. The terms LPA and fixed charge come from the Law of Property Act 1925, under which we are appointed and which gives certain constrained rights to act. The rights to appoint occur at the time in which power of sale has arisen. They are then underpinned by terms within the fixed charge, such as the mortgage deed, which gives the receiver his or her specific, wide ranging powers to act.
What powers do LPA or fixed charge receivers have?
A Fixed Charge Receiver’s powers to act are set out in the LPA, but more specifically, in the mortgage deed. Once appointed the receiver is acting in the interests of, and, therefore, an agent of the borrower. This is not to be confused with an estate agent or similar role. (By agent, we mean acting in loco parentis.) Once an appointment has been made the borrower no longer has any rights to act; he cannot collect rents or issue valid receipts, he cannot sell or let the property and he has no rights in terms of the property management. He neither has the right to enter the building, nor to interfere in the management of the asset in any way. The receiver, however, has the power to collect rents, enter into leases, and enter into contracts for sale or any other relevant contract pertaining to the management of the building. However, while appointed by the lender and acting for the bank, the receiver still owes a duty of care to the borrower and is treated in law as the borrower’s representative. The borrower remains the legal owner of the property and is responsible for all costs and liabilities, including empty rates. This is the responsibility of neither the receiver nor the bank. An LPA receiver has a number of legal responsibilities, which we will elaborate on shortly.
How would you appoint an LPA receiver or fixed charge receiver?
The first thing you need to do is secure confirmation from your lawyer that an appointment is valid. Once validated, there are many attractive advantages to LPA Receivership, such as the ease in which an appointment can be made. The bank simply needs to advise the borrower of the breach and serve a formal demand for repayment of the debt. This demand gives rise to the power of sale and triggers the ability to appoint.
With no statutory time period, good practice dictates that 24 hours later the bank can issue appointment letters to the receivers. This is subject to having secured clearance from their lawyers for the correct legal authority to appoint. They must sign, date and return acceptance of that appointment within 24 hours, or one working day. This is statutory for Ltd Companies (not individuals) and good practice for all appointments. If the borrower is an Ltd and a UK Company, a form LQ01 needs to be sent to Companies House in order to register the appointment. The cost is minimal and the timing is almost immediate. Furthermore, there is no need to apply through the courts. Legally, the client does not have to give the property back to the borrower, even if the breach is rectified. This is governed by the politics of the situation and whether or not the lender is prepared to continue the relationship with their client.
Why appoint an LPA or fixed charge receiver?
There are a number of reasons why one should use and be prepared to appoint an LPA Fixed Charge Receiver. The appointment itself is often enough to encourage a borrower to sort out their financial debt. It is amazing how many times we have been appointed for arrears that have been running for months or years that quickly get resolved when borrowers face forfeiting the ability to collect rent.
A more serious reason is evident when there are deeper problems. Borrowers are not always entirely honest. At times, they use the rent from an asset to pay a creditor who is more assertive. By appointing a receiver we can investigate the property and render greater transparency. This will help us to prepare a full report on all the issues that may impact the bank’s ability to secure a suitable exit route. It will also help us to determine whether there are issues that impact security.
Remember that one can always dis-instruct; the appointment of a receiver is not terminal, unlike repossession. Once a client is satisfied that everything is in order and that the breach is remedied, a lender can hand control back to the borrower at their discretion and matters can proceed as they previously existed.
Is timing important, and what costs are involved?
Timing can be crucial. By the time a property gets to the recovery team the relationship has usually broken down partially or entirely. In our experience a borrower will do their utmost to prevent a lender from taking action. It is imperative that an appointment be put in place as soon as possible. For example, banks lose money when delays result in lost planning consents.
Appointment of an LPA does not have to be an aggressive move if handled properly. We are happy to have a pre appointment meeting with the lender and the borrower where we will explain that if he can get the loan performing again, there is every chance that he will get the building back. Remember, this is not a terminal arrangement! We simply explain that we will manage the building so that the borrower can focus on getting his finance issues resolved.
Timing is also important with regard to collecting rents. Unfortunately, some borrowers will collect rent without transferring it to the lender. We have also seen many instances where borrowers have collected rent in advance by offering large discounts to their tenants for paying 6-12 months in advance. This compounds the problem once an LPA is appointed.
What are the advantages of appointing LPA Fixed Charge Receivers?
LPA fixed charge receiverships are widely used because of the ease and speed in which the lender can get control of the building and the situation, while still maintaining a comfortable distance. Repossession requires a lender to go through the courts; it is a terminal action in which a lender has taken the legal ownership away from the borrower and now has to bear all liabilities.
Receivership also allows you to investigate fully what is going on with the building and to uncover whether the borrower has been entirely truthful with you. Furthermore, if you find something onerous, you have the option to walk away and leave the borrower with said liabilities. One example of such an occurrence is contamination.
What are the responsibilities of LPA or Fixed Charge Receivers?
While there are no prescribed responsibilities, the receiver acts as an agent for the borrower and as such should act in good faith at all times. A receiver is expected to act to protect the asset and to achieve the best price upon realisation of that asset subject to prevailing circumstances. The receiver does not actually have to take instruction from the borrower or the bank and can act on his own volition. However, a receiver who has integrity will want to ensure that the lenders and borrowers interests are looked after and will work in tandem with the lender. Bear in mind that a receiver is not appointed in the way that an estate agent is; he has liabilities and responsibilities. As such, he should be proactive in advising the bank and mindful that he is charged with securing best price for the borrower within certain guidelines and case law.
Other legal responsibilities including maintaining adequate and appropriate insurance, suitable gas safety checks for residential property, and certificates that are in place for health and safety issues. The receiver will be held personally responsible and liable so he must act to deal with these matters regardless of circumstances, especially where health and safety matters are concerned.
We also are responsible to ensure that the appointment, when appropriate, is registered at Companies House and returns are made at the correct times. We have to collect VAT on rents and disposals as appropriate and make returns to HMRC, though we cannot make vat reclaims.
We also maintain clear, concise, and transparent accounts in order to demonstrate expenses and income if challenged by the lender or the borrower. We are also governed and overseen by the IPA and NARA.
Tips To Remember When A Property Is In Default
- With LPA Receivership you can always dis-instruct, which makes it useful for short or long periods of time, while we check the true financial position of the building.
- Waiting too long gives unscrupulous parties time to extract money and cover their tracks. We have seen many parties go into fake leases or offer tenants a discount if they pay 6 or 12 months’ rent up front prior to our appointment.
- A receiver can resolve issues that you cannot; he can enter into contracts and leases.
- If a borrower is selling but not being realistic in his asking terms, a receiver can step in, agree the sale and complete the contract for you.
- Chart property charges most fees at the end and subtracts them from the sale, so that there are no major cash flow issues. For a more comprehensive guide to LPA Fixed Charge Receivership please contact NARA.