The role of experts in debt recovery

If a borrower fails to adhere to the conditions of a lending agreement secured against a property or portfolio, a process for debt recovery needs to be put in place. The Law of Property Act 1925 (LPA) gives creditors the right to exercise receivership over the property. They can action this by acting as a receiver to recover the debt themselves, appointing an administrator or instructing a receiver to act on their behalf.

Due to the time, skill set and costs involved, instructing a receivership professional is generally favoured by lenders.

Taking charge

LPA receivers will usually be instructed via the lender's solicitor and will take charge of the property with the primary aim of recovering the debt owed against it. As this area of professional practice is a hybrid between litigation law and commercial law, solicitors that can assist a receiver and the creditor in documenting the secured claims and negotiating with the debtor-in-possession of secured property assets, are key to the process of debt recovery when mortgage payments are defaulted and terms of the lending agreement are breached.

In addition to solicitors and receivers, the professional expertise of surveyors, insolvency practitioners, specialist insurers, property managers and estate agents are all required to successfully resolve the often-complex procedures of LPA receivership.

Borrowers' failure to repay a secured loan can arise in a variety of ways including, but not limited to: residential borrowers losing their job and no longer being able to afford repayments for an extended period of time, property developers may be unable to finish a build project so they are unable to sell the assets to repay the initial funding, a commercial business could fail and enter into administration or an individual could pass away before settling a loan against their property.

Receivers will act as a buffer between the creditor and debtor and will most likely be an experienced property specialist who can create a dialogue between the borrowers, collect rent from any tenants and arrange for an orderly sale. Before instructing a receiver, the creditor is advised to examine the planning permissions, factual occupancy arrangements, and licensing of the property. If the intended receiver is also a surveyor, these tasks can be covered by the same professional.

Solicitors acting for the lender will handle communications between the lender and debtor and will start proceedings with an instruction of case describing the loan agreement, occurrence of default and the appointment of a fixed-charged receiver. A final warning once the notification process is complete will also be issued. Solicitors will then instruct an LPA receiver at which point the management of the various parties involved are generally passed to the receiver for the remainder of the process.

Now the receiver has been awarded full control of the property or portfolio they must manage it on behalf of the creditor to deliver the best method of debt recovery. This usually takes the form of collecting rental income from the property or arranging a sale. The latter tends to be the most efficient and an option that saves time, expense and can preserve the value of the property.

Delaying tactics

If the asset is occupied by tenants, receivers must adhere to the Mortgage Possessions (Protection of Tenants etc) Act 2010. The purpose of the Act is to ensure that tenants of landlords whose properties are repossessed by their lenders do not suffer eviction at short notice.

Although it doesn't prevent possession, it does delay it. To enforce possession in these cases, the receiver must request that the court issues a warrant of possession of land and must issue a notice of execution of possession order to the tenants before taking possession.

Once in possession, locks are changed and receivers are required to fully insure the property. Specialist distressed property insurers, who are willing to cover the risks associated with unoccupied properties, will be instructed. Most forms of buildings and contents insurance limit coverage after a building has been vacant for more than thirty days. Distressed insurers fill the void to cover buildings that have been abandoned due to failure to pay the mortgage, with flexible policies to protect the assets for as long as necessary during the time it takes to dispose of the property in receivership.

Vacant buildings are a target for thieves on the hunt for copper wiring or other valuable parts of the building and they are also susceptible to further losses, such as electrical malfunctions or frozen pipes in winter. As the receiver is expected to ensure the care, security and maintenance needs of the building are met while it is in their possession, they will often instruct a property management company to carry out security and maintenance checks on their behalf.

This will ensure the action of minor repairs, such as broken windows or loose tiles, the good order of electrics and drainage, clearance of gardens or landscaped areas to ensure they are free from rubbish which poses a fire risk, and the removal of any accumulated mail so that vandals aren't alerted that the premises is unoccupied.

When putting the property on the market, all parties should agree to the property's initial listing price as any objections or disagreements between involving the final sale price of the property can completely derail the sale further down the line.

Receivers will usually instruct an independent valuer to value the property in preparation for its sale before passing the listing to an appropriate commercial or residential sales agent. All funds received from the sale of the property go to the lender, minus the receiver's fee.

In the overview of receivership given, I have largely focused on the experts involved in the process of the sale of a receivership property as, in my experience, this is the most common method of recovering secured debt on behalf of lenders.

This will of course vary between clients and their requirements, but the effective management of all the experts and parties involved is always crucial to achieving efficiency in debt recovery for lenders.

This means solicitors instructing LPA receivers can effectively protect the lender, the property, and the lender's income, as well as ensure the best possible outcome for all parties involved by utilising an experienced receiver who is able to manage the web of professionals required and has a good understanding of property legislation and law to successfully recover the debt owed. SJ

Rob Kerrigan is a chartered surveyor and valuer for property consultants Kempton Carr Croft