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Leasehold issues for lenders mini-series 3: LPA receivers and a recent leasehold case

Print publication

12/09/2018

Walker Morris’ Banking & Finance Litigation expert Sandip Singh explains LPA Receivership, which can be a valuable remedy for lenders dealing with leasehold properties.

Reasons to appoint a receiver

Appointing a receiver over an asset 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 any liability.

Typically a lender will wish to avoid liability for maintenance and repair obligations, or for licensing and regulatory requirements, where a leasehold property is tenanted. Should the lender take the property into possession with a view to selling the property the lender would in those circumstances, for however short-a time, become landlord to the current occupying tenant.

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.

Powers

The terms “LPA receiver” (or, in its long form, “Law of Property Act receiver”) and “fixed-charge receiver” are often used interchangeably with little thought or consequence. But there is an important difference between the two.

An LPA receiver is a position derived from statute. Section 101(1) of the Law of Property Act 1925 (the LPA) gives a mortgagee of land/lender the remedy to appoint a receiver over that land. Section 109 gives such a receiver the power to “demand and recover all income from the property” and, if so directed, to “insure and keep insured…out of the money received by him”. That is all. A receiver whose appointment derives solely under statute has very limited powers. There is, for example, no power of sale. In that situation, any sale would have to be exercised by the lender directly.

A fixed-charge receiver, on the other hand, is an animal of instrument. His appointment and powers derive from the mortgage deed containing the fixed-charge. The LPA allows receivers’ powers to be extended by mortgage deed and so, certainly in the case of institutional lenders, the wording within the mortgage deed contains a wider range of powers, including an express power of sale, on which a receiver can rely. Typical powers extended to a fixed-charge receiver under a mortgage deed include:

  • power of sale
  • power to take possession of the property and bring proceedings to obtain possession
  • power to commence or complete repairs or building works; and
  • power to grant, vary or surrender leases or tenancy agreements.

Many mortgage deeds also contain a catch-all power empowering a receiver to do anything that an absolute owner of the property may do, or anything that the receiver considers to be incidental or necessary to preserve or improve the property.

Capacity

There are various capacities in which a receiver can act in exercise of his powers. Each has different legal and practical implications for a lender. The default position, and certainly the most useful, is as agent of the borrower, but all of the different possibilities are explained below.  Lenders should consider the effects of such capacities and the methods by which they communicate with a receiver to ensure that important boundaries are not blurred or crossed.

Agent of the borrower

In most cases a receiver exercises his powers as agent of the borrower. This allows a receiver to exercise control of a property without incurring any personal liability. This agency position derives from the LPA, although it is typically repeated and reinforced within the mortgage deed: “a receiver shall be deemed to be agent of the mortgagor [borrower] who shall be solely responsible for the receiver’s acts or defaults” (section 109(2) LPA). Importantly, it also means that the lender does not incur any personal liability to the borrower, to the receiver or to the world at large for the property.

The result is a powerful tool. Provided a receiver acts within the scope of given powers, whatever the receiver does or does not do, he will not be personally liable. The receiver acts merely as agent and it is his principal (i.e. the borrower) who is accountable. Whilst this may appear unfair on the borrower who has no control over the receiver, in fact in signing the mortgage deed and accepting its terms, the borrower has agreed to this and created the environment in which the receiver can act.

This ‘agent of the borrower’ capacity creates “an uncomfortable tripartite relationship between the receivers, the appointing lender and the debtor over whose asset they are appointed. [A receiver] owes his main duties to and acts in the best interest of the mortgagee [lender]; but the debtor is his principal and is responsible for his actions. He has two masters with different (and usually competing) interests[1].

Peculiarities of the ‘agency’

The tripartite relationship involving the borrower, the lender, and the receiver is unique and creates an agency like no other. The borrower, although the principal, has no say at all in the decision to appoint a receiver or whom to appoint, and is not entitled to give the receiver any instructions.

The receiver owes no contractual obligations or duties to the borrower. There are equitable duties (so, for example, a receiver must act with skill and care in the exercise of his powers), but these duties are owed to the lender as well as the borrower, and to all parties with an interest in the equity of redemption. This would include a trustee in bankruptcy or liquidator of a company, or any subsequent ranking chargeholders.

It is important to remember that the role and function of a receiver is not to manage a property for the benefit of the borrower akin to a managing agent, but to manage and realise the value of the security for the benefit of the lender with the ultimate objective being repayment of the primary debt.

Receiver as principal

More rare, but sometimes advisable, is for a receiver to exercise his powers, whether given under statute or a mortgage instrument, in his own name as principal. In such cases the receiver is personally entering into whatever contract or bargain is being done. The usual scenario in which a receiver would do this is where the default agency has been lost or terminated, usually by the bankruptcy, winding-up, or dissolution of the borrower.  If a borrower has lost the ability to deal with its own assets and affairs as principal in its own name, it follows as a matter of law that no party can act as its agent in dealing with those assets and affairs.

In the circumstances where agency has been lost, the recommendation is generally that a receiver should exercise his powers as principal. Whilst there is the option to act on behalf the appointing lender (as is explained below) this defeats a key purpose of the appointment in the first place – namely, to protect the lender and to retain a buffer between it and the asset. In practice, however, a receiver may find its powers curtailed in such cases, not through operation of law, but by virtue of its desire to minimise any potential personal exposure to liability. In many cases, the charge instrument will contain an indemnity in favour of the receiver which would cover this liability and typically the receiver will request such an indemnity before agreeing to accept an appointment on this basis.

Agent of the lender

If a receiver is acting as agent of the lender, it is the appointing lender who becomes the principal in legal/contractual arrangements, and who therefore incurs liability for the receiver’s actions. This generally defeats the purpose of the receiver’s appointment, as the lender loses its protective buffer, but there are certain circumstances in which it may be necessary for the receiver to act as agent of the lender.

The first is if the receiver does not have the requisite power (whether under the LPA or the mortgage deed) to carry out the acts he wants to, and so he is required to utilise the powers of the lender itself.

The second may be more unintentional, and is an area of potential contention: where a lender instructs or influences a receiver in the performance of his duties, there is a risk that the lender may inadvertently take on the role of principal. A receiver is required to be impartial and, whilst he owes his primary duties to the appointing lender, he should be free to exercise his powers as he sees fit in order to achieve his objectives and fulfil his duties. A receiver should not be a puppet of the lender. (In practical terms there is a balance, however, as a lender is entitled to reject a certain sale figure if, for example, the net proceeds would be insufficient to redeem the secured debt in full. In this way, a lender can indirectly control the timing or strategy of sale without stepping over the line to become puppet-master.) If, in reality, the lender is instructing the receiver, there is a risk that the receiver will be deemed to be acting as agent of the lender and the lender will be liable for the acts and defaults of the lender.

Attorney of the borrower

A lesser known, and much less used, possibility is for a receiver to act in the name of the borrower as an attorney. This power of attorney is not a statutory power under the LPA but is often incorporated into a mortgage deed which may appoint both the lender, and any receiver appointed by it, to be the borrower’s attorney. The wording of the power of attorney is important as it may, for example, be limited to the ability to execute deeds and documents, so may not be sufficient to carry out day-to-day management functions over the subject property.

The use of a power of attorney is also restricted. Where a receiver has full agency status it follows that all actions are performed as agent of the borrower. If agency is lost, for example on bankruptcy, there is legal argument that a receiver’s power of attorney is also lost. Even though expressed to be ‘irrevocable’, only where a power of attorney is given to secure a proprietary interest or the performance of an obligation will the power be genuinely irrevocable [2]. The power of attorney granted to a receiver is not given as security so would be extinguished on bankruptcy, whilst a lender’s power of attorney would survive

Are receivers obliged to obtain the best price?

The obligations of a receiver and the tension in the tripartite relationship, came to the fore in a recent case. The scenario was a fairly typical one, involving a loan which was secured against several properties, including one, Warne Court, which comprised a number of residential flats let on a variety of Assured Shorthold Tenancies and long leases.

In Centenary Homes Limited v Gershinson & Anor [3], the borrower defaulted on the loan and the lending bank appointed receivers.  The receivers proceeded to sell several properties within the borrower’s portfolio, realising sufficient funds to discharge the debt owed to the bank in full. Warne Court was sold as a single block for £3.25 million, whereas the borrower contended it would have achieved a higher price had it been sold as individual flats.  The borrower issued a claim against the receivers, alleging that they had acted in breach of their duties.

The court found in favour of the receivers and in doing so set out existing case law restating the duties owed by receivers including:

  • a receiver’s primary duty is to realise the security in the best interests of the lender
  • a receiver has only a secondary duty to the borrower to exercise care to avoid preventable loss
  • a receiver is only required to protect the interests of the borrower where doing so is consistent with the primary duty to realise the security
  • a receiver is free to sell a property in the condition it is in
  • in exercising a power of sale, a receiver will owe a duty to the borrower to take reasonable care to obtain the best price reasonably obtainable at the time of sale and to exercise his powers in good faith and for a proper purpose.

On the basis of the above, the court concluded that it was not enough for the borrower to simply identify alternative strategies or decisions that the receivers might have made.

Lenders and receivers will therefore welcome the Centenary decision for its recognition that the primary duty of receivers is to realise the security to recover the secured debt.

WM comment and practical advice

Lenders generally have a variety of remedies available to help them protect and/or realise their security. The best strategy and advice will differ in every case, depending on the particular facts and circumstances. Appointing a receiver is one such remedy and it can have clear practical and commercial benefits – especially in the leasehold context.

Properly understanding the LPA receivership agency and effectively managing the inherent tensions that can so often arise between the competing interests of each party can make all the difference when it comes to a lender being able to quickly and cost-effectively protect its position, whilst avoiding legal liability and also adhering to its wider TCF [4] and regulatory responsibilities.

Further, to ensure that lenders are able to take full advantage of the benefits of a receivership appointment, they need to be wary of how they interact with them so as to avoid inadvertently crossing from a scenario in which the receiver acts as agent of the borrower to one in which the receiver becomes agent of the lender.

Please do not hesitate to contact Sandip Singh for further specialist advice and assistance.

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[1] Spotlight on Receivers, Neil Levy and Holly Doyle, Guildhall Chambers, June 2013
[2] Power of Attorney Act 1971 s 4 (1)
[3] 2017 WL 06388362
[4] Treating Customers Fairly

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