As we approach the end of 2020 the devastation of the pandemic has seen the loss of jobs, homes, livelihoods and the closing of businesses. Mortgagors have been relatively protected this year as the Government introduced a stay on possession proceedings during the peak of the pandemic. During the stay period, mortgagees and landlords were unable to undertake possession proceedings to obtain possession except in exceptional circumstances. The Government resumed possession claims on the 21st September 2020, however there remains a significant backlog in the Courts which could result in mortgagees using a lesser known alternative procedure to obtain possession of property which does not require Court proceedings.
The alternative procedure that mortgagees can use to recover secured debt i.e. debt secured on a property against mortgagors who are in arrears, is the appointment of a Law of Property Act (LPA) Receiver or a Fixed Charge Receiver. The appointment of an LPA or a Fixed Charge receiver requires no court involvement or formal insolvency proceedings.
The process gives control of a property to the Receiver who will take steps to market and sell the property to repay the Bank.
What is a Law of Property Act Receiver?
A Law of Property Act receiver is appointed under the Law of Property Act 1925 and may also be appointed by virtue of an express power of appointment contained in a mortgage deed.
Law of Property Act 'LPA' Receiver’s Powers
An LPA receiver’s powers derive from Section 101(1), Law of Property Act 1925 which gives a mortgagee the remedy to appoint a receiver over that land.
Once an LPA receiver is appointed by a lender the LPA has specific powers which includes:
The power to sell the mortgaged property. Section 101(1) (i) LPA 1925
To power to insure and protect the property, Section 101(1) (ii) LPA 1925
The power to grant a lease over the property.
The power to demand and receive income/rent on the property. Section 101 (1) (iii) LPA 1925
Fixed Charge Receivers
A Fixed Charge receiver has all the powers available under the Law of Property Act 1925, as well as specifically conferred extended powers provided for in the mortgage deed to be appointed by a mortgagee as a receiver over land. The mortgage deed provides details of the receiver’s powers, duties and remuneration.
Power of Sale
The mortgagees' power of sale arises when the liabilities secured by the charge have become due. The mortgagee may then only exercise the power of sale if one or more of the following conditions are satisfied:
The mortgagee has served notice on the mortgagor requiring payment and three months have elapsed without any payment from the mortgagor,
The mortgagor has not paid interest for two months on the sums secured by the charge; or
The mortgagor is in breach of a provision of the document creating the relevant charge, other than the provisions relating to the payment of principal or interest. Section 103, LPA 1925
Appointment of a Receiver
The appointment of a receiver is as simple as the mortgagee writing to the receiver and the receiver confirming acceptance of the notice. The mortgagor will receive a default letter warning them of the appointment of a receiver with a demand that the full balance due under the charge be paid within a specified period.
A Receiver's Duties
The recent decision in Centenary Homes v Liddell  EWHC 1080 has served as a reminder of a receiver’s duties:
The receivers’ primary duty is a duty to manage the security for the benefit of the mortgagee.
The receivers have a secondary duty to the mortgagor to avoid preventable loss.
Where the receivers decide to exercise their power of sale they will generally owe a duty to the mortgagor to take reasonable care to obtain the best price reasonably obtainable at the time of sale. They will only be negligent if they acted as no competent receiver acting with ordinary care and competent advice would have done and enjoy a degree of latitude, not only as to timing but also to the method of sale employed.
Why should mortgagors be concerned about mortgagees using receivers as opposed to instigating mortgage possession proceedings
In mortgage possession proceedings mortgagors will have the protection of the Consumer Credit Act 1974 and Section 36 of the Administration of Justice Act 1970 as amended by Section 8, Administration of Justice 1973 which provides the Court with discretion to adjourn, stay or make a suspended order for possession on terms that the mortgagor pay the arrears within a defined period of time that the court regards as reasonable. The statutory protection available affords the mortgagor time to clear the arrears and prevent the property being repossessed.
However, if mortgagees are instead minded to appoint receivers none of the above protections exist as the mortgagor has no say in the receiver's appointment as they cannot give instructions to or dismiss the receiver; and the only duty owed to them albeit not individually, is to them as one of the persons interested in the equity of redemption.
What can mortgagees do to protect there interest?
It is quite difficult to challenge receiverships as the actions taken by them will generally be covered by the wide powers and limited restrictions which are usually granted under the provisions of the charge set out in the mortgage deed.
The decision in Jumani v. Mortgage Express highlights the problems faced by borrowers when challenging receiverships wherein it was established that:
The courts will take a strict contractual approach where there is a claim that terms have been varied; and
It is unlikely that any representations made by the receivers will be binding on the bank unless it can be shown that the bank expressly took responsibility for the actions of the receiver or the actions or the actions of the receiver created a new binding contract between them and the borrower.
Mortgagors are advised that if they are subject to a receivership appointment they should firstly negotiate with their lender requesting that the lender use their discretion to withdraw the appointment and thereafter reach an agreement on repayments on amounts due.
Lastly, whilst it is unusual for receivers to be appointed for residential properties should this be the case homeowners of residential properties should refer the lender to the voluntary statement issued by the Council of Mortgage Lenders which obliges its members to obtain an order for possession of owner-occupied residential properties before seeking to sell or appointing receivers. However, mortgagors who have Buy-to-Let mortgages should beware of the powers afforded to receivers in the LPA 1925 and/or in the mortgage deed and discuss any difficulties they are experiencing with making repayments at the earliest available opportunity.
If you would like any further advice or information, please do not hesitate to contact me: firstname.lastname@example.org