Buy to Let and Receivers – a practical approach for Lenders when default levels rise

To Let sign on terrace houses Print publication

07/08/2018

Walker Morris’ Housing specialists Karl Anders and Zoe McLean-Wells look to what is on the horizon for the buy-to-let market (BTL) and offer their advice as to how Lenders can take practical and proactive steps to weather the likely changes.

Headwinds affecting the BTL market

Lenders should be aware that there are currently headwinds which are affecting the BTL market and which are set to increase in strength over the next few years. These include:

  • The stance taken by the Government in seeking to reduce the number of private landlords in favour of larger, institutional investors. This has been manifested by reductions in mortgage interest tax-relief and changes to the wear and tear tax allowance; the tightening of underwriting tests for BTL loans introduced by the Bank of England’s Prudential Regulation Authority; and introduction of the 3% surcharge on stamp duty for second homes.
  • The effect of Brexit in terms of a constriction in the BTL market due to falling levels of migrant workers.
  • Rising interest rates.

It is therefore important that Lenders and their Mortgage Administrators prepare for what is predicted will be a rising level of default on BTL loans going forward.

Such preparation would include ensuring that Lenders have appropriate internal procedures in place, as well as staff and advisers, with the requisite knowledge of options and remedies to be able to deal with these particular accounts.

Practical solution to weather the storm

Lenders have a variety of remedies to assist them in protecting and/or realising their security. The most appropriate solution will differ from case to case. One such remedy for Lenders dealing with leasehold properties is the appointment of a Fixed Charge Receiver. Appointing a Receiver enables a Lender to exercise a degree of control over a secured asset, whilst maintaining a desirable distance from the risks and responsibilities associated with that asset. It can also, if used correctly, allow a Lender to deal with the asset and release its value without incurring liability.

Typically a Lender will wish to avoid liability in respect of repairing obligations, or for licensing and regulatory requirements, where a leasehold property is tenanted. Appointing a Receiver effectively creates a protective buffer between a Lender and these risks.

In addition, appointing a Receiver can be a quick and cost effective way to enforce security. No court involvement or formal insolvency proceedings are required, and many lenders feel that this remedy attracts less stigma and negative publicity than may be linked to other options.

In normal circumstances, the Receiver will act as agent of the borrower. The mortgage deed will usually give a Receiver the power of sale, the power to take possession of the property or bring possession proceedings or to grant, vary or surrender leases or tenancies. The result is a powerful tool; the Receiver manages and realises the value of the security for the benefit of the appointing lender, with the ultimate objective being repayment of the debt.

For further detail about Fixed Charge Receivers and Receivers appointed in accordance with section 101(1) of the Law of Property Act 1925 (LPA Receivers) and their powers and capacity, please see our recent article.

Lenders, Lawyers and Receivers – proactive partnering

Walker Morris’ housing and banking specialists have been acting for Receivers and their appointing Lenders both before and after the financial crisis in 2009. We have expert knowledge of the legal and practical issues that can arise and are experienced in helping Lenders to quickly and cost-effectively protect their position, whilst avoiding liability and adhering to wider TCF [1] and regulatory responsibilities.

In particular, our lawyers can work in partnership with Lenders and Receivers to help prepare and implement appropriate procedures for dealing with distressed BTL accounts and to deliver practical, tailored training to educate staff about the option to appoint a Receiver.

Understanding the reasons to appoint Receivers (and lenders’ powers to do so); Receivers’ powers; how Lenders and Receivers should interact with each other post appointment; and the steps that Receivers take in practice to protect and realise Lenders’ securities is one of the most effective steps that Lenders can take now, to prepare for the anticipated changes in the BTL market.

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[1] Treating Customers Fairly

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