The receivership process is an efficient way for a lender to recover an outstanding loan. This process tends to be most cost-effective from the perspective of both the lender and the borrower. Below is a step by step receivership process explained.
Who to appoint?
Although the law permits anyone to act as an LPA receiver, the appointment of a fully qualified Registered Property Receiver and NARA member as a professional receiver can minimise losses and time. It is essential to appoint an experienced and trained professional who will maximise recovery while managing what can be a complicated and delicate situation.
Before the Appointment (Pre-Appointment Report & Actions)
Typically, your LPA receiver will prepare a Pre-Appointment or “Options” report setting out a list of possible options and a range of values based on each option. This report will also set out a recommender strategy and a plan of action. The receiver will also ask for copies of earlier valuation reports to ascertain if accurate advice was given by the original valuer when the loan facility was initially agreed.
In the meantime, the legal advisors will be carrying out a security review ensuring that the mortgage deed is worded appropriately, that it is enforceable and gives all necessary powers to the receiver. The solicitor will also ascertain if there are other charges and priority arrangements in place between the lenders.
Fees paid the Receiver
Both the Conveyancing Act 1881 and the Law of Property Act 1925 provide that the fees of the receiver should amount to no more than 5% of the gross sum released. This includes all expenses, charges, costs and remuneration. However, in practice, as most appointments are made under the mortgage deed, different fee basis are agreed. Normally the fees will comprise on an initial set-up fee, while principal fees are on an hourly rates basis. Alternatively, monthly retainers of a fee based on the ultimate sale price can be agreed.
A fixed charge receiver Appointment Letter
The receiver appointment document will state the date and names of receivers (usually two) appointed to the case, property address, title number, the legal charge and its terms.
The receiver will then issue an acceptance letter reciting all of the basic information and will also state the date and time of receipt and acceptance. It is important to note that appointments over company-owned property must be accepted by the end of the business day after the day of receipt ( see section 33 Insolvency Act 1986). There is also a seven-day deadline for a corporate appointment to be registered with Companies House.
First acts of the receiver
The standard first actions by the receiver are as follows:-
• Write to the borrower notifying of the appointment.
• Write to occupants and inform about the property management arrangements
• Check if the occupational leases have been granted with lender’s consent
• Initiate a property management system
• In case of the vacant property, change the locks and arrange for the plumbing to be drained down
• Establish the VAT status of the property from HMRC
• Open a dedicated recivership bank account and agree on an overdraft
facility with the lender.
• Contact other charge holders
• Assemble a team of advisors, if specialised professional advice is needed.
Adding value to the asset
Although there is no obligation for the receivers to add value to the assets, it is still their duty to achieve the best price reasonably obtainable. In a high number of receivership cases the outstanding debt will be higher than the property value in its current condition. Therefore, maximising value is essential for mitigating lender’s losses. Adding value to the property also means that after the outstanding debt and costs are repaid, the outstanding amount would be payable to the borrower. Adding value to the asset may take the form of resolving planning or building control issues, finishing a semi-complete development, obtaining vacant possession or renegotiating/regearing current leases.
Achieving recovery for the borrower
The three main ways a receiver will typically recover monies owed by the borrower are either asset disposal, refinance or letting the property to cover the interest from rent received.
A sale is the most common method used to recover outstanding debt. Once the asset is sold, and all outstanding mortgage arrears have been settled, the remaining sum is repaid to the borrower or appointed liquidator/trustee in bankruptcy in case of an insolvent mortgagor.
Sometimes a receiver can facilitate property refinancing. In this case, the loan is considered redeemed, and the original lender steps out of the picture.
Letting the property is another option if the rental income achieved is sufficient to meet the borrower’s obligations. In this case, the sale of a property may not be required. In addition, even if the letting income is insufficient, the receiver may still let the asset to maximise its value.
A receiver will send a simple resignation letter to the lender, but more commonly, the appointment will come to an end once that asset has been sold or refinanced. Prior to terminating the appointment, the receiver will settle outstanding invoices and submit returns and resignation form to Companies House if the borrower is a company.
Speak to our experienced Recoveries Team to find out more