The property recession may be over, but with various debt portfolios left to unwind and the current uncertain times leading to reducing property prices and more cautious lending approaches, the ability to appoint a Fixed Charge Receiver is as relevant as ever in the enforcement options available to a lender. Fixed charge receivership also remains the enforcement option offering the most control and the least additional cost to lenders.
The statutory power to appoint a Receiver is contained in section 101(1) (iii) of the Law of Property Act 1925 (“LPA”). Provided the mortgage was made by deed, the power to appoint a Receiver arises as soon as the monies secured by the charge become due. The mortgage deed need not expressly reserve this right. However, whilst the lender is empowered to appoint a Receiver when the monies are due, it may not actually do so until its own power of sale becomes exercisable.
Most legal charges of land contain a covenant by the mortgagor to repay all monies due to the mortgagee forthwith on demand made in writing.
Unless the mortgagor immediately repays on receipt of a demand all monies due, various powers of the lender arise under the Act, principally:
(i) to sell the property
(ii) to insure the property
(iii) to appoint a Receiver in respect of the rent and incomeUnder section 103 of the LPA, the mortgagee’s power of sale and of appointing a Receiver only become exercisable if:-
(a) following a demand, no repayment of all or any of the money has been made for three months; or
(b) some interest is in arrears and unpaid for two months after becoming due; or
(c) there has been a breach of some provision in the mortgage or in the LPA by the mortgagor or someone connected with the mortgagor.
It is customary for mortgage deeds to exclude the provisions of section 103 and to replace them with a provision that the mortgagee may exercise its power of sale, and other powers under the LPA, at any time after making a demand for payment under the mortgage.
Appointment of an LPA Receiver
Under the LPA, the appointment of a Receiver must be in writing under hand of the mortgagee. It need not be by deed. There is no prescribed form for making an appointment or for removing a Receiver. The appointment takes effect when the Receiver receives and accepts the written appointment.
The Powers of an LPA Receiver
Generally the powers of the Receiver derive from three sources; those prescribed by the Act, those delegated by the mortgagee and those expressly granted in the mortgage deed to the mortgagee and Receiver.
The statutory powers granted by the LPA are:
(i) to demand and recover rent and income
(ii) to give receipts for income
(iii) to insure (if required to do so by the mortgagee in writing) any building, effects or property comprised in the mortgage against loss or damage by fire, using the money received by the Receiver
(iv) to grant a lease of the whole or part of the property at the best rent reasonably obtainable
(v) to accept a surrender of whole or part in order to grant new leases
It is usual for the Receiver’s powers to be extended widely beyond those contained within the LPA, thus enabling them to act as they consider fit with the consent of the mortgagee, effectively to take control and deal in the property over which they are appointed. Such powers should include the provision for the Receiver to borrow funds as they consider appropriate, as it is often necessary to incur expenditure to enhance the value of the security, either by undertaking essential repairs or sometimes completing a development. Charges often confer all powers an Administrator/Administrative Receiver has under Schedule 1 of the IA on a Receiver.
The main power of a Receiver appointed under the LPA is to collect rent. If the Receiver issues proceedings, they can do so in the name either of the mortgagee or the mortgagor. The Receiver has no power under the LPA to take proceedings to recover possession; they can only do so if there is an express power granted by the mortgage or the mortgagee’s own statutory power has been delegated to them.
Lenders often want to appoint a Receiver in order to distance themselves from the property by way of the Receiver selling or otherwise dealing with the property. Under section 101(3) of the LPA, the mortgagee can delegate to the Receiver all his/her powers, which includes their power of sale. In the absence of such delegation, or an express power in the mortgage deed, the Receiver cannot sell the property.
Similarly, a Receiver has no power to grant new leases unless the mortgagee delegates statutory power to grant leases to them. There are severe restrictions in section 99 of the LPA on the type of lease that a mortgagee may grant. It is therefore desirable that the mortgage deed should give a wide power for granting leases.
Again, under the LPA, the Receiver can only accept surrenders of leases if the mortgagee has delegated their power to the Receiver. The statutory power of a mortgagee to accept surrenders is limited. A mortgagee can only accept surrenders for the purpose of enabling a lease to be granted, and as indicated in the previous paragraph, there are restrictions in section 99 of the LPA on the type of lease which can be granted. It is therefore desirable that a mortgage deed gives wide discretion to the mortgagee and to the Receiver to accept surrenders of leases.
A Receiver can exercise all the powers of the mortgagee regarding renewals of business tenancies under the Landlord & Tenant Act 1954 (section 67). The Receiver can, for example, serve a notice terminating a tenancy, serve a counter notice to a tenant’s notice, and take part in any proceedings under the Act.