What fixed-charge recovery offers lenders and receivers

Next year marks the 100th anniversary of the Law of Property Act 1925 – perhaps not the most exciting of celebrations, although the legislation certainly improved lenders' ability to recover fixed-charge loans. 

Section 101 of the Act allows a fixed-charge lender to appoint a receiver to sell an asset or collect rent in order to repay a debt under the lender's fixed charge.

In a free, open and sophisticated economy with a range of lending and borrowing methods, the ability to recover debts in such a way is still as pertinent today as it was almost a century ago.

Downturns and recessions – such as those arising from the global financial crisis of 2008, Brexit, the COVID-19 pandemic and recent inflation and associated interest rate hikes – typically lead to an increased number of receiverships as loans default and lenders seek to recover their money. 

Indeed, the number of receivership appointments that involved UK companies increased from 428 in 2019 to 519 in 2023 with a further 351 in the first half of 2024.

This includes, for instance, the amount, length of the loan, interest to be charged, property or asset secured against and other requirements.

The legal charge is typically split into two types:  

• fixed charge: a charge that is fixed against a physical, tangible asset such as property, land, plant and machinery or fine art, for example
• floating charge: a charge that can change over time as the needs of a business change and assets move; for example stock, debtors and cash.

Where a borrower breaches or defaults on the terms of the charge, a lender can recover assets most commonly using one of the two following methods.

• Administration: without a borrower's, director's or shareholder's consent, a qualifying lender would need to make an application to court to put a debtor in administration. This is a costly and time-consuming exercise, with the administrators being appointed over all assets and debts rather than just the lender's specific debt.
• A Law of Property Act (LPA) Receiver: this is a simpler and more cost-effective approach, allowing the qualifying fixed-charge lender to appoint a receiver. This can be for various reasons, as set out in the definition of the legal charge. The lender would then serve a demand, and if the loan is not fully repaid as required, could appoint a receiver by way of a simple deed signed and witnessed by the lender itself.

An LPA receiver can be appointed under a fixed charge only and not a floating charge, where a lender would have to appoint an administrator.

It is important to note that the appointment of a receiver is not an act of insolvency and that the breach which prompts it can be for non-monetary reasons, such as not reaching certain milestones in a development or breaching a required loan-to-value ratio.

The appointment simply concerns assets under the fixed charge, and the appointing fixed-charge lender has priority over the repayment monies net of receivership fees and costs.

With regard to terminology, you will often hear 'LPA receiver' or 'fixed-charge receiver' being used. In essence, the roles are similar. However, the Act is very restrictive, meaning that a receiver appointed is limited to insuring the asset under section 101(1)(ii) and collecting rent on it under section 101(1)(iii).

That said, section 101(3) allows these powers to be modified and extended by including additional powers with the legal charge to enable marketing and selling an asset, obtaining possession, applying for planning consent, agreeing a lease and borrowing money.

Such a receiver is appointed as an individual and is thus personally responsible, typically taking on cases where commercial relationships have broken down and the only information available is incomplete. This means that they must be careful about how best to proceed. 

The 1925 Act helps in this regard in that the receiver's primary duty of care is to the lender. If the debtor is not bankrupt or in liquidation, the receiver enjoys agency status where they act on behalf of the borrower and can enter into agreements and sell on their behalf.

Once appointed, a receiver will need to undertake their own due diligence, unearth any hidden problems, understand fully why a breach has happened, and develop and implement a strategy to sell the asset and repay the lender.

For instance, Silven Properties v Royal Bank of Scotland plc [2003] EWCA Civ 1409 sets out that the primary duty of care is for the mortgagee to assist receivers with their duties.

Given their personal responsibility, receivers need to be fully aware of their obligation to comply with relevant statutory compliance, such as the Fire Safety Act 2021 and the Gas Safety (Installation and Use) Regulations 1998 to name but two, to carry out a thorough health and safety audit, and to appoint experts to undertake any necessary investigations, such as fire risk assessment or asbestos reports.

As such, the variety of cases, the need to solve problems, the range of assets and the requirement to provide realistic strategic advice have made my 20 years working in property loan restructuring and recovery extremely interesting and rewarding.

Although there is no professional qualification requirement for receivers, chartered surveyors are well placed to be LPA receivers thanks to their expert knowledge of the property and land sectors as well as their understanding of valuation and markets in England and Wales.

The scheme's sole objective is to accredit professionals who carry out LPA and fixed-charge receivership work, and thus offer reassurance on the standard of that work to those making such appointments as well as to creditors and the wider public.

Currently, 116 registered property receivers are part of the scheme, which is voluntary. Members must prove that they have the required skills, knowledge and experience to provide focused services before, during and after a receivership. Moreover, all registrants must belong to a relevant professional body such as RICS.

The Registered Property Receivers Scheme has proved a success, with a number of leading banks only appointing those receivers who are prepared to be regulated by their peers through the scheme.

Overall, no matter what direction the economy and property market go in, wherever there is lending there will always be a need for recovery and LPA receivers.