As many businesses now face another phase of closures, we are seeing borrowers and lenders reconsidering and restructuring their finance arrangements. The Prudential Regulation Authority has warned regulated lenders to be accommodating towards borrowers who are experiencing financial difficulties as a result of Covid-19, however there are still circumstances where lenders may need to take enforcement action for defaulting loans. Below are a few items to remember when enforcing security against real estate.
1. Register a restriction at HM Land Registry
There are several options for a lender to enforce its security over a property. The most common and (usually) advisable method is to appoint a receiver. A receiver is an insolvency specialist who is appointed by the lender but acts as an agent of the property owner to sell the property. Appointing a receiver would mean that:
- there is no need to bring court proceedings; and
- the lender does not become responsible for liabilities arising from the property, which is particularly problematic if there are concerns with potential environmental liabilities, for example.
Importantly, lenders should register a restriction against the property with the HM Land Registry when a receiver is appointed. In the recent case of Ghai and others v Maymask (228) Ltd, the lender had appointed a receiver, which meant that the property owner was not permitted to then deal with the property. However, the property owner sold the property anyway and the court upheld the sale on the basis that there was no restriction on the property register regarding the receiver’s appointment.
2. Make an effort to obtain the best price reasonably available
It is well established that a receiver has a duty to make an effort to obtain the "best price reasonably available". With the recent volatility in the real estate market borrowers and junior lenders may feel aggrieved if the sale price achieved by a receiver is lower than expected. This is particularly so if the sale only leads to substantial recoveries for the senior lender who appointed the receiver. Accordingly, it is good practice for receivers to go through a marketing process rather than simply rely on a professional valuation.
Receivers who are concerned about their liability for selling assets during what may be the bottom of the market can take comfort from case law that holds that receivers have no duty to delay a sale to allow the market to recover. Receivers (and the lenders who appoint and indemnify them) can also take comfort from the recent judgement in CNM Estates (Tolworth Tower) Limited v VeCREF I SARL and others which confirmed that the receiver’s duty to get the best price reasonably available can be limited by agreement. In CNM Estates an exclusion in an intercreditor agreement (which was similar to the Loan Market Association’s template intercreditor agreement) was successful in limiting the receiver’s liability for breach of duty to only those breaches arising from the receiver’s gross negligence, fraud and wilful misconduct.
3. Consider an administrator
Appointing a receiver is a straightforward way to implement a realisation of a single or a limited number of real estate assets. However, if the enforcement strategy involves a period of trading, administration may be a better alternative. An administrator would be in a better position to continue trading as there is a moratorium on creditor action which will give the company "breathing space" and the administrator will have control of all the company’s assets, not just those subject to a fixed charge. An administration (as opposed to a receivership) would also allow companies to benefit from:
- relief from business rates for units which are not let and not being used by the property owner. In the context of shopping centre investments, for example, that can be particularly valuable to help justify a trading administration strategy whilst the property is turned around ahead of a later sale;
- the ability to reclaim input VAT, which may boost lenders’ recoveries; and
- tighter restrictions on the ability of a company’s suppliers to terminate contracts as a result of an administration.
This note only highlights a few items to consider when planning an enforcement strategy and you should contact us if you require more detailed professional advice.
The Prudential Regulation Authority has warned regulated lenders to be accommodating towards borrowers who are experiencing financial difficulties as a result of Covid-19