Appointment validation for fixed charge receivers16th March 2013
In the first of a series of articles on problems faced by Fixed Charge Receivers, we look at three common issues that Receivers encounter; where there are no documents available for a Receiver to check; where the lender refuses to provide an indemnity to the Receiver and where the legal mortgage is not registered at Companies and/ or the Land Registry.
Take the following scenario; a lender contacts a Receiver with a view to the Receiver being appointed over a commercial property in England where the borrower is a UK company. The property is let to a number of occupiers but there are also vacant parts. The lender sends the Receiver its standard draft form of appointment and acceptance but does not provide copies of any security documents. Following further enquiry by the Receiver the lender is certain it has security over the property and has a summary of the principal terms of the loan but does not have any documents. This could be for a variety of reasons.
Should the Receiver be concerned that there are no documents to check? The short answer is “yes”. If the mortgage is not by deed then the lender will not have the power to appoint the Receiver and would need to request the Court to make the appointment. If the mortgage deed did not include a power of sale of land by the Receiver then the Receiver would not have the power to sell the land without the authority of the Court. In relation to those parts of the property let, the Receiver would wish to check copies of leases to the tenants to establish the rents payable and to enable the Receiver to effectively manage the property.
Often the appointing lender would hold the deeds for the property which should include the counterpart leases for those parts of the property let. However there may have been tenancy changes. The lender’s lawyers who acted for it at the time or the borrower’s lawyers might hold the documents or copies of them. The first step for the Receiver would be to ask the appointing lender for details of lawyers involved
Most land in England and Wales is registered at the Land Registry and with a postal address a copy of the title can usually be obtained. If the mortgage is registered then a copy of the mortgage can also be obtained from the Land Registry. Where leases have been granted for a term over 7 years then after 13 October 2003 those leases should have been registered so it might be that copies of the leases could also be obtained. If the postal address does not enable the title number of the property to be identified, then with a plan of the property an Index Map Search can be submitted which will identify the title numbers affecting the land so copies of the registered title can be obtained.
The Land Registry will also be able to confirm to whom the documents were sent following registration of the charge over the property.
It is always advisable that the Receiver views the property and speaks to any managing agents appointed who may well have copies of any missing leases.
Returning to our scenario, what is the Receiver’s position if the lender’s appointment documents do not contain an indemnity in favour of the Receiver and the lender advises that it is its standard policy not to provide one? An indemnity is important to protect the Receiver from liability that might arise during or as a consequence of his appointment. If the mortgage was invalid then the Receiver would not have the power to deal with the property and would be personally liable to a party who suffered a loss from the actions of the Receiver. Whilst the Receivers lawyers should carry out initial checks to ensure that the power to appoint a Receiver has arisen, it is not possible to be 100% certain. If the borrower became bankrupt or entered into liquidation, then the Receiver would be acting as agent of the appointing lender rather than the borrower with potentially an increased exposure. There may also be situations where there could be potential liabilities which fall to the Receiver, for example, where there is a risk that land is contaminated.
It is reasonable for a Receiver to request an indemnity and he could apply to court to impose one although Court action would be damaging to the relations between the Receiver and appointing lender.
A Receiver would also want an indemnity to ensure that in addition to fees, any costs necessarily incurred in managing the property would be reimbursed. These costs may relate to works needed to the property to let vacant space or to maximise sale value. In practice, the Receiver would normally collect the rents and could deduct its fees and costs from those monies. Often the lender will provide an overdraft facility for the Receivers use during his appointment.
If ultimately the lender cannot be persuaded to provide an indemnity the Receiver should obtain legal advice on his risks to assess whether to accept the appointment.
Turning to the third issue considered in this article, as part of the pre-appointment review, the Receivers lawyers should check that the mortgage is registered at Companies House and registered at the Land Registry.
Pursuant to the Companies Act a charge over a company or limited liability partnership needs to be registered at Companies House within 21 days of creation. If it is not then the charge will be void against any liquidator, administrator and other secured creditors and the lender will rank as an unsecured creditor. It is possible to apply to Court for late registration in certain circumstances, but any registration will rank behind other secured creditors and where the borrower has entered into liquidation or administration late registration is not normally possible.
If the mortgage has not been registered at the Land Registry then it will be an equitable charge rather than a legal charge which will mean that the Receiver will not have the power to convey the property unless authorised by the Court, although the power of attorney contained in the mortgage deed may give sufficient authority to do this whilst the borrower is not in liquidation. If the mortgage is not registered then the lender is very exposed and would not be protected if the borrower sold the property or mortgaged it to another lender. Therefore the Receivers lawyer should immediately apply to register the mortgage and apply for a priority search to protect its position in the meantime.
To conclude, a Receiver may still be able to accept an appointment where the security title and other documents are missing, where the lender will not provide an indemnity and where there are registration problems but there are some important steps to be taken and issues considered before doing so.
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