We all know that a property loan is secured by registering a charge at the Land Registry and the property cannot be dealt with (sold, re-mortgaged etc.) until the charge has been released. In the event of a default by the borrower, the terms of the mortgage will usually (but not always) allow the lender to appoint a fixed charge receiver to step into the shoes of the borrower in order to manage the property and often sell it. If there is no such provision within the mortgage deed then the Law of Property Act 1925 comes into force which still allows the lender to appoint a receiver but with restricted powers.
Thus any lender can appoint a receiver. Second charge lenders seldom seek to appoint a receiver as they feel (incorrectly) that they have to wait for the first charge holder to take action. The first charge holder is not “in charge” and the holder of a second charge has every right to appoint a receiver in order to use income from the premises to pay off the debt, or the realisation from a sale to pay off the principal sum. The only difference between a first and second charge holder is that the second charge holder (or their receiver) must pay interest or capital due under the first charge before passing any funds to the appointer, or seek the first charge holder's agreement to any other financial arrangement.
On appointment the receiver must notify the first charge holder who may choose to appoint their own receiver. If this is the case the first charge holder's receiver may allow the second charge holder's receiver to continue or will ask them to stand aside. Thus the appointment of a receiver by the second charge holder can be a useful tool in forcing the first charge holder into action. In our experience the first charge holder’s receiver will always displace the second charge holder’s receiver. This may be unnecessary and will incur additional costs for the borrower and thus put the receiver at risk of being sued for not properly looking after the interests of the borrower.
Clearly caution must be exercised by any second charge holder since there may be insufficient equity to pay off the first charge, let alone the second debt. The problem in our experience is that there may be no way of ascertaining the amount of the first charge – many lenders will not reveal this because they don’t understand the Data Protection rules… It may be prudent for the second charge holder to let sleeping dogs lie and hope that the property value increases to a stage where they might have some chance of recovery.
We have had two appointments recently under a second charge. The first related to a loan on a building in Hertfordshire of circa £1.5 million. The building itself was worth about £1 million so the lender in question took a first charge on three other residential properties and also a second charge on a parade of shops. When the loan went into default the lender thought that they had plenty of equity but the market had changed to such an extent that they needed to look to the second charge. Although the receiver’s position in law is as the borrower’s agent the first charge holder (a high street bank) refused to release details of the amount of their loan. Eventually the borrower realised that his costs were increasing and agreed to provide the information but often we find that the borrower has simply ‘disappeared’ and the second charge holder is left bearing responsibility for all the costs with no certainty that he is not simply increasing his own shortfall.
In another case, a lender had secured loans on a portfolio of property with a dozen second charges but a quick review of the case showed that there would be little, if any, equity even to satisfy the first charge and we advised the lender not to appoint us.
As ever, the secret to a successful outcome is to carry out due diligence, usually before the appointment. In our experience the threat of a receivership can show whether the borrower is genuinely hard up or is simply stretching the lender’s patience.
The big change in the receivership world is that we are now starting to see borrowers challenging the actions of receivers, especially where they are appointed by the big banks. The receiver has a duty of care to the borrower and we have had two instructions recently to act as expert witnesses in litigation against receivers.
Simon Tilsiter is a Registered Property Receiver at Strettons. For more information contact Simon at [email protected]
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