LPA Receivership

LPA Receiverships – Explained

Summary and implications

A receiver of mortgaged property can typically be appointed either as an LPA receiver, pursuant to the Law of Property Act 1925; or a fixed charge receiver, pursuant to the terms of the mortgage document. An LPA or fixed charge receiver need not be a licensed insolvency practitioner.

The circumstances in which an LPA receiver can be appointed are restricted under the Law of Property Act 1925 (the 1925 Act). Therefore, in modern security documents, it is typical for the mortgagee to grant itself the right to appoint a fixed-charge receiver in less restricted circumstances, thereby affording the receiver all of the powers of an LPA receiver under the 1925 Act plus the additional powers expressly set out in the security document.

Aim of receivership

The receiver’s primary function is to ensure payment of the debt owed to the mortgagee, usually by way of sale of the charged property. The process is not for the benefit of creditors as a whole and there is no statutory moratorium during this process.

Appointment of receiver

The appointment process takes place by way of exchange of contractual appointment documentation between the mortgagee and the receiver, without court involvement. Appointments are usually taken jointly and the receivers will have the powers contained in the security documents, which are expressly given to them in the appointment documents.

The mortgagor’s agent

Once appointed, a receiver acts as the agent of the mortgagor and not of the appointing lender. Consequently, the mortgagor shall be solely responsible for the receiver’s acts or defaults unless the mortgage deed provides otherwise.

The agency relationship ends once the mortgagor is placed into liquidation. However, the receiver can continue to deal with the property, either as principal, or (only if the mortgagee agrees) the mortgagee’s agent.

Powers and duties of a receiver

The primary duty of a receiver is to receive income from the property, which shall be used to discharge the debt owing by the borrower. The 1925 Act provides the following order for distribution of money received:

• to discharge of all rents, taxes and outgoings affecting the mortgaged property;
• to pay all annual sums (and the interest on all principal sums), having priority to the mortgage;
• to pay the receiver’s commission and all insurance premiums payable under the mortgage deed or under the Law of Property Act, together with the cost of repairing the property as directed in writing by the lender;
• to pay the interest accruing under the mortgage; and
• to discharge the principal money if so directed in writing by the lender.

Any remaining sums shall be passed to the mortgagor. This order may be varied by the mortgage deed and will not apply to a fixed-charge receiver appointed pursuant to the provisions of a mortgage deed as opposed to the 1925 Act.

Rates

A receiver can be authorised to occupy the property in order for a business to continue trading or to market the property. Although the receiver can take physical control of the property, the mortgagor continues to be liable for non-domestic/business rates.

Rates liability is unlikely to shift to the receiver. However, there are two possible instances where this may happen:

1. The receiver has dispossessed the mortgagor of the property and the receiver’s occupation amounts to a rateable occupation. In practice, the courts consider that it would warrant extraordinary circumstances for a receiver’s occupation of a property to fall outside the scope of its agency relationship with the mortgagor.
2. The receiver continues to occupy the premises after the agency relationship between the mortgagor and the receiver comes to an end. In practice, the courts are unlikely to consider a receiver’s use or occupation of a property to be so exclusive and intransient as to be rateable, although this will depend on the facts of each case.

Contracts

Unless they have specifically contracted out, a receiver is personally liable on any contract entered into by him in the performance of his functions and on any contract of employment adopted by him in the performance of his functions. A receiver will not be taken to have adopted a contract of employment, however, by reason of anything done or omitted to be done within 14 days after his appointment.

Statute provides that a receiver is entitled in respect of the above liability to an indemnity out of the assets. The receiver’s statutory indemnity is not exhaustive and the receiver may negotiate a specific deed of indemnity to cover him should the assets be deemed insufficient to satisfy any liability. The statutory indemnity does not apply to contracts entered into without authority.

Advantages and disadvantages of appointing receivers

Advantages

• The receiver acts independently of other creditors;
• Is appointed Out of Court – therefore cheaper & quicker

Disadvantages

• Receiver’s remuneration costs can be expensive;
• No moratorium from creditor claims

Points to remember

• A receiver can only be appointed if the mortgage is made by deed. In the absence of a deed (but where the mortgage is still evidenced in writing), there will be an equitable but not legal mortgage. A receiver can still be appointed on an equitable mortgage but must obtain the appointment from the court.
• The statutory power to appoint a receiver under the 1925 Act can be varied by deed.
• When an individual is adjudged bankrupt a receiver cannot be appointed without leave of the court.
• If there are several charge-holders over the same property and a second receiver is appointed – he can still act, but the charge-holder who appointed the first receiver has priority to receive any proceeds of sale. Where there are several charge-holders, it is advisable to negotiate a joint appointment.

Termination of appointment

A receiver may be removed and a new receiver may be appointed, if directed in writing by the charge-holder.

In all other cases, the receivership will come to an end once the receiver has realised assets to satisfy the debt of the charge-holder who appointed him. The receiver must notify the Registrar of Companies of the termination.

Impact of administration

Where an administration order is made, a receiver must vacate office if the administrator requires him to.

The content on this topic was sourced from Nabarro LLP