Receivership and Recovery Tip: Why appoint a Fixed Charge Receiver?

Our Receivership team looks at how appointing a Fixed Charge Receiver can help lenders avoid litigation and swiftly recover debts.

Last week, interest rates increased by 0.5% to 1.75%. This was the largest increase in 27 years and taking them to the highest level since 2009, together with inflation at 9.4% (and expected to go to 13%), a cost of living crisis and predictions of a recession at the end of the year. It is essential for lenders to be proactive with their loan book and identify issues early. We are here and ready to advise even at an early stage on any loans where there may be issues.

What happens if a borrower misses a mortgage payment and defaults?

When the borrower has breached loan terms (usually failing to maintain regular payments), the lender needs to take steps to protect its capital, control the value of the property and hopefully, avoid a shortfall.

In this scenario, lenders can:

1. Suggest that the borrower should take steps to sell and realise the asset

In an ideal world, the lender and borrower can communicate, collaborate and share information to understand the circumstances relating to the property asset and the default. By adopting a cooperative rather than a combative approach, borrowers may be more likely to provide information which the lender then has in the event that further measures become necessary.

2. Take possession of the property

If the cooperative route has failed, the next step for the lender is to enforce its charge and take possession of the property.

On the face of it, lenders may save fees doing it themselves, but they will still need to instruct property professionals to manage and then sell the property. The time required for this should not be underestimated and it is a significant distraction from more profitable lending.

Additionally, appointing a receiver creates a buffer between lender and borrower, helping lenders to maintain good relationships with their borrowers and also protecting themselves against claims.

3. Initiate an insolvency process

Insolvency, even if possible, can be a “sledgehammer to crack a nut” when the lender is only interested in getting the property asset back to recover the debt. Insolvency practitioners will still need to instruct property experts, which in effect doubles fees, takes time, and reduces already tight margins.

4. Appoint a Fixed Charge Receiver (LPA Receiver) under the terms of the loan agreement 

A Fixed Charge Receiver has the power to sell the property, collect rent, grant leases and borrow funds. They also have the power to enter into contracts for building works or similar, to bring the property up to a saleable standard. Importantly, they also have the power to insure. In our experience we frequently find that borrowers allow insurance to lapse as soon as cash flow becomes an issue.

To discuss your current property matters and get advice on the best way forward for you, please get in touch.