What is a Law of Property Act Receiver?

A Law of Property Act Receiver (“LPA Receiver”) is appointed by a lender holding a mortgage to take control of property (but not necessarily a property) under the Law of Property Act 1925 (“LPA1925”). It is not an appointment under the Insolvency Act 1986 (“IA86”), which sets out the law for Liquidations, Administrations, Bankruptcies, etc.

A “mortgage”, as defined by the LPA1925, is any fixed charge over a specified asset. Any mortgage, or charge, over land and buildings should be registered at HM Land Registry and, where the charge is on property owned by a company, it must also be filed with the Registrar of Companies at Companies House. The LPA1925 also defines “property” widely, as “any thing in action, and any interest in real or personal property”. Therefore, it can include other assets in addition to, but most commonly, freehold property.

When may an LPA Receiver be appointed?

An LPA Receiver may be appointed in respect of the property of a company, a partnership or an individual.

When payments under a mortgage are due and remain unpaid, or the terms of the mortgage have been breached, the lender may appoint an LPA Receiver. There may also be a specific power in the mortgage deed to appoint a Fixed Charge Receiver whenever the security covered by the deed is enforceable and to avoid the lender having to wait for the conditions below to be met. 

A lender can only appoint an LPA Receiver when they are able to sell the charged property under the terms of the mortgage. A power of sale can only be exercised when monies under the mortgage are due and; 

• the mortgagee (the lender) has served a notice requiring payment of the mortgage on the mortgagor (the borrower), or at least one joint mortgagor, and no payment has been made for three months after service; or
• some interest under the mortgage is in arrears and unpaid for two months after becoming due; or
• there has been some other breach of a provision of the mortgage deed or the LPA1925 by the mortgagor.

Is a Fixed Charge Receiver different to an LPA Receiver?

A Receiver appointed by a power of appointment for the lender, contained in the mortgage deed is correctly referred to as a Fixed Charge Receiver, although they are often still referred to as an LPA Receiver.

Who may be appointed?

The lender may appoint any person they think fit to act and there is no statutory requirement for them to hold any qualification or have specific experience. However, it’s often an insolvency practitioner or property agent.

An LPA Receiver must comply with the IA86, even though not appointed under its provisions. For example, when appointed over a company’s property, notice must be given to Companies House within seven days of the appointment and all business correspondence should note the LPA Receiver’s appointment, including orders and invoices.

How, practically, is an LPA Receiver appointed?

The appointment of an LPA Receiver must be in writing and be accepted by the LPA Receiver, or their representative, before the end of the following business day. However, the acceptance does not have to be in writing. The appointment is deemed to have taken effect from the date when the proposed LPA Receiver receives the appointment document.

Who does the LPA Receiver act for?

An LPA Receiver, although appointed by the mortgagee (the lender), acts as agent for the mortgagor (the borrower). A Fixed Charge Receiver is solely agent of the mortgagee, unless the mortgage deed specifically states otherwise.

Does the mortgagor (the borrower) have a say in the appointment of an LPA Receiver and what they do?

No.

The mortgagee acts as an agent of the mortgagor when appointing an LPA Receiver. The mortgagee does not owe a duty of care in appointing an LPA Receiver to the mortgagor or any guarantors.

It should be noted that:

• the mortgagor has no say in the appointment or identity of the LPA Receiver;
• the mortgagor is unable to instruct or dismiss the LPA Receiver;
• the primary duty of the LPA Receiver is to repay the mortgage debt; and
• the LPA Receiver manages the mortgaged property for the benefit of the mortgagee.

However, the mortgagor is responsible for the LPA Receiver’s acts or defaults unless the mortgage deed says otherwise. A mortgagee incurs no liability for the actions of the LPA Receiver they have appointed unless they actively intervene in the conduct of the Receivership.

The LPA Receiver owes the mortgagor a duty to use reasonable skill and care in obtaining both a proper price for the property and in managing the property. Where the LPA Receiver carries on the business of the mortgagor they also have a duty to try and trade profitably and diligently.

The LPA Receiver has no duty to the general body of creditors.

The mortgagee may also delegate their own powers to the LPA Receiver, including:

• to sell the mortgaged property on such terms as they think fit;
• to make agricultural or occupation leases not exceeding 50 years or a building lease not exceeding 999 years; and
• to accept the surrender of a lease but only for the purpose of granting an agricultural or occupation leases not exceeding 50 years or a building lease not exceeding 999 years.

All income or other rent derived from the charged property is paid to the LPA Receiver as agent of the mortgagor.

The mortgage deed is likely to allow the LPA Receiver to sell the property, collect rents, grant leases, borrow funds, instruct solicitors, employ agents, enter into contracts and to insure the property against risks other than just fire.

The LPA Receiver should distribute any monies collected as follows to pay: 

• all rents, taxes, rates and other outgoings affecting the mortgaged property;
• monies due under prior charges having priority to the mortgage;
• the LPA Receiver’s commission;
• all insurance premiums payable under the mortgage deed or the Law of Property Act 1925, together any costs of repairing the property as directed, in writing, by the mortgagee;
• the mortgage interest; and
• part or all, of the mortgage debt if so instructed, in writing, by the mortgagee.

The surplus, if there is one, is then paid to any subsequent chargeholder and then, finally, the mortgagor (the borrower).

What does an LPA Receiver do, practically?

Where a property is let to a tenant by the mortgagor and the mortgagee has no intention of obtaining possession and selling the property, an LPA receiver would collect the rents, and if applicable, insure the property, repair and maintain the property, pay outgoings such as ground rents, head rents, security, maintenance staff, etc, deal with any legal actions and make applications for planning permission. An LPA Receiver could, if the mortgage deed allowed, seek possession of the property, either by agreement or by obtaining a Possession Order from the Court, and arrange a sale through an agent. The mortgagee, after obtaining possession may appoint an LPA Receiver to sell the property through an agent.

An LPA Receiver of a company’s property must deliver a receipts and payments account for the first twelve months of their appointment and then for every subsequent six month period. The accounts should be filed with the Registrar of Companies within one month of falling due. A final receipts and payments account must be filed within one month of the LPA Receiver ceasing to act.

Where an LPA Receiver is appointed to deal with leasehold property they cannot disclaim the lease, but are not personally liable for contracts entered into prior to their appointment, including the lease agreement. The landlord can still pursue other parties to the lease and retains the remedies of forfeiture or distress.

The LPA Receiver has the power, if instructed in writing by the mortgagee, to obtain fire insurance for any property covered by the mortgage. Additional insurance may only be obtained in accordance with the provisions of the mortgage deed. The premiums for the policy can be paid out of any monies received.

The mortgagee can require the mortgagor, or the LPA Receiver, to apply all monies received from an insurance claim on mortgaged property;

• to make good a loss or damage; or
• towards the discharge of the mortgage monies owing.

Who pays any taxes that accrue whilst the LPA Receiver is acting?

Where the mortgagee or LPA Receiver is not in possession of an occupied property the tenant is liable for the payment of council tax or national don-domestic (business) rates. Where the property is unoccupied the mortgagor is liable for the payment of council tax or business rates. Where the mortgagor is in occupation and liable to pay the council tax or business rates, the LPA Receiver has a statutory obligation, as agent of the mortgagor, to make that payment.

If the mortgagor is registered for VAT they remain responsible for submitting VAT returns and paying any tax due. A mortgagor may also register for VAT to claim VAT on their inputs. Where the LPA Receiver is collecting rents they have a statutory obligation, as agent of the mortgagor, to account for VAT due. 

The mortgagor remains responsible for submitting income tax (either Schedule D or Corporation tax) returns on income from the property and paying any tax due. The LPA Receiver has a statutory obligation, as agent of the mortgagor, to account for any income tax due.

How much does an LPA Receiver cost?

An LPA Receiver is entitled to receive commission from the monies they collected. The rate of commission may be specified in the appointment document and should not exceed 5% of the gross amount of all monies received. If no rate has been specified, the rate will be 5% of the gross amount. This commission includes the LPA Receiver’s remuneration and all costs, charges and expenses incurred. Where the LPA Receiver believes the rate of commission is too low they may apply to Court for an increase. 

What happens if the mortgagor (the borrower) becomes subject to an insolvency procedure?

An LPA Receiver ceases to be the agent of the mortgagor if;

• a resolution for voluntary winding up is passed;
• a winding-up order is made by the Court; or
• a Bankruptcy order is made by the Court.

After the start of the Liquidation or Bankruptcy the LPA Receiver becomes personally liable for any contract or agreement entered into after that date. Where the LPA Receiver, is receiving instructions from the mortgagee, they would not be personally liable as they would become the agent of the mortgagee.

A Liquidator or Trustee in Bankruptcy may apply to Court for an order to fix the LPA Receiver’s remuneration.

The Liquidation or Bankruptcy of the mortgagor deprives the LPA Receiver of the power to bind the mortgagor personally as its agent, however, the formal insolvency does not affect their powers to continue to hold or dispose of the property covered by the mortgage unless the creation of the mortgage is invalid.

The mortgagee has the power to appoint an LPA Receiver after the mortgagor has gone into Liquidation or become Bankrupt except where the statutory or express powers for a mortgagee, either to sell or to appoint a LPA Receiver, are exercisable because the mortgagor has been adjudged bankrupt. Then, the permission of the Court will be required.

Can an LPA Receiver be removed?

An LPA Receiver may be removed by the mortgagee. The notice of removal must be in writing. The mortgagee can then still appoint a new LPA Receiver.

Anything else of note regarding LPA Receivers?

It’s possible for a Local Authority to incur expenditure on a property that is abandoned or in a poor state of repair and then apply for a charge over the freehold. That charge will have the same powers under the LPA1925 as a mortgage to appoint an LPA Receiver.

Our conclusion

When a lender has made demand for monies that they are owed under a mortgage deed and are threatening to appoint LPA Receivers it is vital that directors who have concerns about the future solvency of their company take clear, practical advice at the earliest opportunity.

If you would like specific guidance for you or your company, talk to Sadlers today or download this guide.