By the end of 2021, managing agents are likely to be seeing a lot more Law of Property Act (LPA) receivers becoming involved in service charge arrears cases.
The terms LPA receiver and fixed-charge receiver are often used interchangeably, but there is an important difference between the two, as property management solicitor Cheryl Bates explains.
An LPA receiver is a position derived from statute. Section 101(1) of the Law of Property Act 1925 allows a mortgage lender to appoint an LPA receiver to “demand and recover all income from the property” and to “insure and keep insured…out of the money received by him”. An LPA receiver will manage the property, collect any rent or charges that are due and then dispose of the property.
A fixed-charge receiver on the other hand, is appointed under a legal charge or mortgage and only has power to deal with and dispose of the charged property.
The LPA receiver is most likely a property professional, often a surveyor, and with an understanding of how to manage property.
Appointing a receiver is a valuable remedy for lenders dealing with tenanted properties when a mortgage customer is in arrears with mortgage instalments.
For both lender and freeholder, the ultimate remedy to recover debt is to obtain possession. Whilst the lender relies on the covenant (promise) to pay the mortgage in the mortgage deed signed by their customer, the freeholder relies on the covenant to pay rent and service charge in the lease.
However, if the property is a “buy-to-let”, the lender also has the power to appoint an LPA Receiver.
This is because banks are in the business of lending, not letting and, if the property is tenanted for a period after possession but before the property can be sold, then the lender would become a landlord.
The LPA receiver, therefore, acts as a buffer, protecting the lender from taking on liability for maintenance and repair and dealing with any licensing and regulatory responsibilities.
Despite having been appointed by the lender, rather curiously, the LPA receiver is deemed to be the agent of the borrower. This allows a receiver to exercise control of a property without incurring any personal liability. They can make decisions such as whether to extend the tenancy or undertake repairs but, more importantly, they can take actions.
In short, the LPA receiver can and will pay the service charge on the leaseholder’s behalf.
So, managing agents should rub their hands together with delight if an LPA receiver appears on the scene of a service charge arrears case.
Points of interest
The LPA receiver has nothing to do with insolvency so, unlike a Trustee in bankruptcy who will only pay the service charge from the date of a bankruptcy order and from funds from the sale of the property or receipts of rent, the receiver (having stepped into the shoes of the borrower) will pay the whole leaseholder debt once they have seen evidence the sums are due.
Nor is the LPA receiver like an executor under a Will, who won’t pay until the Grant of Probate is obtained. An LPA receiver can be appointed within 24 hours once the conditions in the mortgage deed which allow their appointment have been met (usually more than three months’ mortgage arrears – although the impact of Covid-19 means this has increased to nine months’ arrears in practice).
Practical advice
When an LPA receiver is involved, a quick and effective settlement can be reached to clear the service charge arrears. Once a breakdown is provided, together with evidence of the service charge arrears, the receiver will report to the lender, which will release settlement funds directly.
The receiver is a complicated legal entity: an agent of the borrower, yet appointed by the lender, to manage and realise the value of the property in order to repay the mortgage: two masters with different (and usually competing) interests. However, where the service charge is concerned, the interest is aligned – to pay it as quickly as possible.
