A growing number of mortgage lenders are responding to the credit crisis by using a legal short cut that entitles them to repossess property without a court order, according to a leading Midlands real estate lawyer.
An Act of Parliament dating back more than 80 years allows – in specific cases – banks and building societies to appoint their own receivers, usually experienced property professionals such as surveyors who are authorised to seize property on which borrowers are defaulting.
They can then divert any income generated by the property to the lender, to service the outstanding loan, said Jonathan Wright, a commercial real estate partner with Birmingham-based law firm Hill Hofstetter. Mr Wright said it was possible to by-pass the time-consuming court system by using powers set out in section 101 of the Law of Property Act, 1925 (LPA).
LPA receivers – a broad term that also encompasses those known as ‘fixed charge receivers’ – can be appointed in cases where the lender holds a fixed legal charge on a property. Although they are appointed by the lenders, their legal duty is to act as agents for the borrowers to ensure that their obligations to the bank or building society come first.
Typically, Mr Wright said, LPA receivers have been put in place where buy-to-let landlords facing cash flow problems have diverted rentals to meet their own financial commitments, such as tax, rather than service their loans.
“Increasingly, however, they are being used in the commercial property sector,” he added.
If the mortgage agreement permits, they can take possession of property without permission from a judge and, in extreme cases, even sell it. Mr Wright said: “We are seeing a number of inquiries about this from surveyors who are being asked by landlords to act as fixed charge receivers, and want to know exactly where they stand legally.”
Owners of commercial and in particular private property sometimes rely on the court system to delay any repossession proceedings that a lender might begin in response to non-payment of a mortgage loan.
They believe - and there is evidence to show they are right - that by going before a judge to plead their case they can win breathing space while retaining their ownership.
Meanwhile, if they continue to default, the mortgage provider receives no income from the loan. Mr Wright said the powers granted by the LPA - or express powers under the mortgage deed - can be particularly valuable during an economic slump, when lenders urgently need to protect cash flow and look for ways to ensure that all of the property on their books is generating income.
He added: “There has been an increase in the number of fixed charge receivers being appointed because some borrowers may have over-stretched themselves in the property boom.
A number are effectively in negative equity, sometimes because development sites can’t be taken forward because of the shortage of finance, and sometimes because the tenants they have installed are going broke.
“The banks find themselves in a difficult position because these loans are not being repaid, and one way of dealing with the problem is to ask a property professional like a chartered surveyor – someone very good at managing property in the most profitable way – to intervene to generate some income.”