The economic landscape in which we find ourselves due to the cost of living crisis, inflation and interest rate rises and energy price hikes, all of which have been exacerbated by the Russia-Ukraine conflict, sadly has potential to create a less than perfect storm for lenders, property investors and landlords collecting receipts from property.
For many years interest rates have been at historic lows and with the Covid-19 pandemic, furlough and Government Backed Business Loans (CBILs) have helped to preserve the financial positions of many.
The hardening economic climate is expected to continue and is likely to impact borrowers’ ability to maintain financial obligations. There’s potential for a significant rise in missed mortgage payments and defaults on property loans.
However, there are options available to optimise the value of distressed property loans and recover default loans quickly and efficiently.
What happens if a borrower misses a mortgage payment and defaults?
If lenders have property loans where the borrower has defaulted and failed to keep up regular payments, the lender needs to take steps to protect its capital, control the value of the property and hopefully, avoid a shortfall.
In this scenario, lenders can:
- Suggest that the borrower should take steps to sell and realise the asset.
- Take possession of the property.
- Initiate an insolvency process.
- Appoint a Fixed Charge Receiver (LPA Receiver) under the terms of the loan agreement.
Amicable sale of the asset
In an ideal world, the lender and borrower can communicate, collaborate and share information to understand the circumstances relating to the property asset. By adopting a cooperative rather than a combative approach, borrowers may be more likely to provide the necessary information. The lender then has detailed information in the event that further measures become necessary.
The lender can propose that the borrower should dispose of the property asset under the direction of the lender’s property advisor although unfortunately, borrowers in this situation often have unrealistic views as to value so a cooperative sale frequently does not work.
Lender takes possession
If the cooperative route has failed, the next step for the lender is to enforce its charge and take possession of the property. This gives the lender direct control yet puts the lender into a direct legal relationship with the borrowers, bringing with it legal responsibilities and potentially onerous obligations. Although this can appear the cheapest solution, the lender in possession will not only be obliged to have direct dialogue with an uncooperative borrower but also, in the case of a let investment, is likely to involve direct contact with tenants, even if managing agents are instructed.
On the face of it, lenders may save fees doing it themselves, but they will still need to instruct property professionals to manage and then sell the property. The time required for this should not be underestimated and it is a significant distraction from more profitable lending.
Insolvency
Insolvency processes, even if possible, are often inappropriate and can be a “sledgehammer to crack a nut” when the lender is only interested in recovering the debt. It is a more expensive process than alternatives, as insolvency professionals will still need to instruct property experts, which in effect doubles fees and lowers already tight margins.
Appointing a Fixed Charge Receiver
The appointment of a receiver can reduce the lenders exposure to litigation and save fees in the longer term. If loan documents have been well drafted, an LPA Receiver can usually be appointed in a matter of days and has broad powers to facilitate a positive outcome quickly and efficiently for the lender.
An LPA receiver has the power to sell the property, collect rent, grant leases and borrow funds. They also have the power to enter into contracts for building works or similar, to bring the property up to a saleable standard. Importantly, they also have the power to insure. In our experience we frequently find that borrowers allow insurance to lapse as soon as cash flow becomes an issue.
Benefits to lenders of appointing a Fixed Charge Receiver
Delivering diplomacy
An experienced receiver is dedicated to resolving distressed property matters. They understand the circumstances involved and the desired outcome from all parties and are dealing with problem cases on a daily basis. They are in a much better, and more objective position, than the lender to assess, identify and propose the most advantageous realisation strategies.
‘One stop shop’ service
If the receiver is a well-qualified property expert the appointment is a “one-stop” seamless exercise, thereby minimising the necessity of instructing additional professionals and subsequently incurring additional fees.
Lenders can focus on the day job
Once having appointed the Fixed Charge Receiver the lender will need to spend little time on the case and concentrate on the more important income earning function of dealing with new lending.
Paul Joseph is receivership director at Strettons
