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Reining in a charge : Protecting Receiver’s fees in case of a breakdown in relationship with the mortgagee

  • United Kingdom
  • Corporate

24-04-2017

Key points

High levels of debt sale activity have led to an increase in situations where transfers of security are made with receivers appointed over the secured assets.

When such situations arise receivers may be put under pressure by an incoming mortgagee to reduce fees, which may ultimately lead to a dispute.

Where a receiver can be removed from office by a mortgagee there are limited options for receivers to protect recovery of their fees.

Specifically, the article considers whether it is possible to protect the receiver’s interest by placing a restriction or notice against the registered estate and/or charge which would prevent a mortgagee from registering a dealing with the charge or the property without a receiver’s consent.

Introduction

In most receiverships there is insufficient equity available to the borrower to permit a full payment of both debt and the receiver’s costs and expenses. This means that part (if not all) of the cost of the receivership will be borne by the mortgagee. While the basis of a receiver’s remuneration is determined by the terms of the mortgage under which he is appointed (and failing that under the Law of Property Act 1925 (“LPA”)) in practice this just means that the mortgagee is given the exclusive right to agree the receiver’s remuneration with the receiver.

The fee basis, often agreed in advance of or shortly after the receiver’s appointment, can come under renewed scrutiny by the mortgagee at any stage. However, scrutiny is more likely in difficult cases where the recovery to the mortgagee is reduced far beyond that expected at the outset (whether as a result of the receiver’s actions or otherwise). A receiver asked to reduce his fees will commonly reach a commercial agreement with the mortgagee on the basis of a historic and on-going relationship, but in cases where that relationship is severed by a sale of debt and transfer of security a receiver may find himself in a substantial dispute with the mortgagee. While a receiver is in office he is unlikely to be overly worried about recovery of his fees since he retains control of the property. However, in cases where the receiver resigns or is removed from office, his options to ensure recovery of fees are limited to either accepting that he must litigate or attempting to protect his interest against the property over which he was appointed.

Litigation is costly, takes time and involves an inherent risk of recovery even if successful. That risk of recovery may be heightened if the mortgagee is a SPV set up to take on a specific debt and security. Thus it will be preferable to a receiver to have his interest in the property protected at the Land Registry against the title. This article looks briefly at the basis of receiver’s fees and their position under the mortgage and the LPA, then moves on to look at possible methods to protect the receiver’s interest at the Land Registry.

Basis of the receiver’s remuneration and priority

s109(6) LPA sets out the default basis for a receiver’s remuneration at a rate of no more than 5% of the gross amount of all money received. If no rate is specified then 5% of the gross amount or such other amount the court thinks fit (upon an application by a liquidator under s36 Insolvency Act 1986 a court determined that a rate of 4.2% was reasonable remuneration for a receiver Munns v Perkins [2002] B.P.I.R 120). Like most of the sections of the LPA relating to mortgagee and receiver’s powers, the LPA stipulates that the provisions may be amended by the mortgage deed itself (s101(3) LPA). Thus it is usual that the mortgage deed stipulates that the receivers remuneration shall not be subject to the maximum of 5% and that the receiver’s remuneration may be agreed at the mortgagee’s discretion (meaning the mortgagor has no say).

The payment waterfall which governs the sale proceeds recovered by a receiver are also set out in the LPA (s109(8)). Again those provisions may be amended by the mortgage deed itself. Generally, it is provided that the receivers remuneration is paid prior to the mortgage debt and no receiver would accept an appointment if the mortgage stipulated otherwise.

Relying on the payment waterfall is fine while the property is under the receiver’s control. However, if the receiver is removed (or forced to resign) from office by the mortgagee (whether under s109(5) LPA or under the provisions of the mortgage) the receiver will naturally be less comfortable since he is then reliant for payment upon the mortgagee or upon a newly appointed receiver. The discomfort is probably heightened if the removal/resignation has been forced by a disagreement with the mortgagee and particularly if the disagreement related to fees.

Receivers of companies may take comfort from the provisions of s37 Insolvency Act 1986 (“IA”) which states that the receivers’ remuneration “shall be charged on and paid out of any property of the company” in priority to any charge or other security held by his appointee. As this section relates to a charge on property of a company, it will give no comfort to a receiver appointed over an individual’s property. Instead a receiver of an individual’s property will have to look to the mortgage deed to see if a charge is granted to him for his remuneration. Depending on the drafting, a receiver’s remuneration may not be included in the secured obligations, or the charge wording may not be drafted in such a manner as to extend to the receiver (extending to mortgagee only). If the Land Registry’s standard form charge CH1 is used there is no such provision.

It follows that the receiver’s interest in his remuneration, and which he could seek to protect, is either (i) a charge on the property or (ii) a contractual right in the mortgage deed to priority over mortgage debt.

What steps can a receiver take to protect his interest?

A receiver can take a number of contractual steps to protect his position. Perhaps most importantly insisting on proper protections and indemnities in the appointment document. However, in a competitive market the receiver’s negotiating position is handicapped by his wish to take on the job.

Unless an outgoing receiver is paid upon his departure, it is likely that he will have to wait for the realisation of the asset before he receives payment. While monitoring one asset is relatively easy, a large receivership practice (and the inevitable staff circulation) will want better protection. Particularly so if the same receiver has been removed from a portfolio of a mortgagee’s appointments.

In the absence of reliable indemnities, the aim of the outgoing receiver is to retain or obtain some element of control of the secured asset so as to have a seat at the table when the asset is sold and secure timely payment of his remuneration.

The common way a receiver will seek to protect his interest is to place a unilateral notice on the registered title to the property he was previously appointed over. However, what is sometimes over looked is the ability to place a restriction or notice against the registered charge (as distinct from a restriction/notice affecting the registered freehold/leasehold). We consider both in this article.

Notices

A Notice protects an interest against automatic postponement to a subsequent registered disposition of the land. The process of putting a unilateral notice on title is relatively straightforward. An application to register the Notice is made and the Registrar will enter the Notice if it is thought to be an interest which can be protected in that way. The registered proprietor and proprietor of a registered charge affecting the title in question are given notice that the entry has been made against the register and will from that point on be able to apply for its removal.

Against the registered freehold/leasehold estate

As explained above, the Notice would be entered to protect either (i) the charge in favour of the receiver (if held) or (ii) the priority of the receiver to his remuneration.

A Notice on the registered freehold/leasehold protecting the receiver’s priority is unlikely to form good protection. The right to priority is contractual to the mortgage deed (since even the statutory provision is deemed read into the mortgage deed) and not proprietary in the freehold/leasehold estate. One could argue that the mortgagee consented to the priority interest by entry into the mortgage deed and so cannot overreach the Notice protecting it, but in the absence of case law such a Notice alone should not be relied on.

A Notice on the freehold/leasehold protecting the receiver’s interest in a charge over the property securing his fees may not form good protection if taken in isolation. Taking the statutory charge under s37 IA (applicable to companies only) as the example, the Land Registry, governed by rules and procedure, when presented with a TR2 (transfer under power of sale) may permit the removal of the entry relating to the s37 IA charge. Of course the notice of charge option will not be available in some cases of personal receivership. That said, there is an argument to state that the mortgagee consented to the creation of the s37 charge (and any charge benefitting the receiver in the mortgage deed) by the appointment of the receiver. If this is successfully argued, the Land Registry may decline to automatically permit the overreaching of the Notice by a TR2. Therefore, if attempting to protect an interest in this way the receiver would be well advised to highlight the mortgagee’s consent to the receiver’s charge in any covering letter accompanying the Notice application.

Therefore, although the Notice will stop a subsequent receiver from selling free of the Notice, there is a risk that a sale by mortgagee exercising its power of sale could overreach the Notice and pass a clear title to the purchaser, the receiver being then left to look to sue the mortgagee for fees under the priority arrangement applicable to a mortgagee handling the proceeds of sale. Conversely, as the Notice’s removal is not guaranteed to be overreached it should make a purchaser nervous enough to require removal of the Notice prior to or as a condition of sale which would assist the former receiver.

This section presumes a sale of the property takes place, but a sale is not the only case in which a mortgagee may get paid and release its security. The borrower may repay its debt and the mortgagee release its charge. If the debt repayment is financed by lending then it is likely that the incoming mortgagee will require the same as a purchaser (i.e. removal of the Notice) and the situation outlined above repeated. If the borrower simply repays the debt (perhaps by refinancing/selling other assets) and the mortgagee releases the registered charge then the receiver is left to litigate for his fees or await a sale by the borrower. Options he is trying to avoid through exercise of control. Therefore, it is seen that even an effective Notice is not absolute protection.

Against the registered charge

As explained above, a Notice on the registered freehold/leasehold may not give a receiver enough control to demand a payment from sale proceeds as condition of his release, since his interest may be subject to being overreached by the mortgage.

It should be considered whether a Notice against the registered charge (as a distinct interest) itself should be applied for. On a natural reading of s37 IA (or the charge in the mortgage) such Notice could only be registered against the registered charge in respect of the receiver’s priority, since any charge benefitting the receiver is secured against the property itself rather than the registered charge. In other words the charge from which the receiver may benefit is not to be confused with a sub-charge of the charge itself.

If the registered charge is encumbered by a Notice in this way then it may not be possible for the mortgagee to exercise its power of sale or a release of its mortgage without first applying for the Notice to be removed. Present Land Registry guidance is silent on the approach it would take upon receipt of a TR2 from a mortgagee in the case that the registered charge itself is encumbered by Notice. Therefore, it remains a possibility that the Land Registry may see the notice as protecting a contractual right in the mortgage deed and thus although entitling a receiver to a letter notifying him of the sale and subsequent cancellation of his Notice, it will not give the receiver the control he desires.

It should be noted that although a degree of control may be obtained in this way, if the Notice is determined to protect an interest which it is not permitted to protect (such as a merely contractual interest) the receiver could open himself up to risk of being sued for any loss caused by the unlawful Notice. For this reason, we would not recommend placing a notice on title merely for the payment priority interest.

Restrictions

Restrictions prevent the Land Registry from registering a disposition without first ensuring compliance by the person specified in the Restriction with the terms of the Restriction. Therefore, if a receiver can obtain a Restriction over the property or the charge it will give him more control than a Notice.

Perhaps the easiest way would be for the receiver, prior to his removal, to apply on behalf of the registered proprietor (as agent) for a Restriction preventing sale without his consent. Such a Restriction would almost certainly be registered and this would prevent sale by a subsequent receiver, but not by the mortgagee. At first there appears to be a natural conflict of interest in the receiver taking this action, though on review the receiver by attempting to preserve his right to payment out of proceeds is actually benefitting the registered proprietor, since the registered proprietor is primarily responsible for payment of his remuneration and will benefit if the receiver gets paid out of the sale proceeds.

After removal from office a receiver would have to convince the Registrar of his entitlement to a Restriction. The Registrar has a general discretion to enter a Restriction if it appears necessary or desirable to do so for the purpose of:

(a) preventing invalidity or unlawfulness in relation to dispositions of a registered estate or charge;

(b) securing that interests which are capable of being overreached on a disposition of a registered estate or charge are overreached; or

(c) protecting a right or claim in relation to a registered estate or charge (s42(1)(c) Land Registration Act 2002). Save that no restriction may be entered under that provision if it could be protected by a Notice.

It appears unlikely that the Registrar would permit the entry of a Restriction purely to protect the receivers’ interest in the charge benefitting him (if there is one), since that could be protected by notice. However, and specifically where a breach of the priority provisions is anticipated, Land Registry guidance suggests that a receiver should be able to rely on the ground at (a) above as justification for entry of a Restriction, the form of which will follow one of the standard forms requiring the receiver’s consent prior to registration of any disposition. The receiver’s application for a Restriction should be permitted due to his standing as a person who otherwise has sufficient interest in the making of an entry (s43(1) Land Registration Act 2002 (“LRA”)). A person holding sufficient interest was held by the High Court in the case of Serbia v Croatia to be a wide class of persons which would almost certainly include a receiver. Indeed a receiver appointed by the court is specially envisaged in Land Registration Rule 93 class (s) as a person having sufficient interest to apply for a restriction, so it would follow that a receiver (or former receiver) appointed out of court would have similar standing. An application on such grounds is within the discretion of the Land Registry and so the receiver must explain and convince the Land Registry of his standing to apply and the reason the Restriction is needed.

It should be noted that the mortgagee or subsequent receiver will have a chance to object to the Registrar exercising its discretion to put the Restrictions in place. If the Registrar believes the objection has merit, it may lead to litigation to resolve the issue between the parties.

Against the registered freehold/leasehold estate

A Restriction against the registered freehold/leasehold title would be drafted to prevent a sale by the registered proprietor of the freehold/leasehold or by the proprietor of any subsequently registered charge. In addition a second specific restriction against a disposition by the mortgagee under the specified charge (form T restriction) should be sought to guard against a sale by the mortgagee overreaching the Restriction previously referred to. If obtained, such a Restriction would prevent any subsequent receiver from selling as either agent or attorney for the registered proprietor and would also to restrict the appointing mortgagee from selling by way of power of sale.

Against the registered charge

Where a Restriction is effectively placed against the registered charge, the mortgagee is unable to deal with the charge unless it has complied with the terms of the restriction. This means that the mortgagee is not able to transfer its charge to a new mortgagee without the receiver’s consent. Therefore, an attempt could be made to persuade the Land Registry to register a Restriction preventing a disposition of the registered charge in order to protect the receiver’s interest.

The Land Registry’s practice guide 19 states that a release of a registered charge is not a “disposition” which can be restricted. Therefore, the Restrictions above need to be combined (if possible) with a Notice against the freehold/leasehold estate to protect the receivers interest in the charge benefitting him (if existing).

Summary

If the receiver has the benefit of a s37 charge or a charge contained in the mortgage deed, he should attempt to register a Notice on the registered title and highlight to the Land Registry that the mortgagee consented to such charge. In addition, the receiver may be well advised to apply to the Registrar for (i) Restrictions against (a) the freehold/leasehold preventing sale by registered proprietor and subsequent mortgagees and (b) the charge to restrict dispositions of the specified registered charge and (ii) a restriction against the registered charge preventing a disposition of the charge itself. Although the receiver cannot prevent a release of the charge by the mortgagee, in practice a payment from the borrower triggering such a release is usually for full payment (including fees) and the borrower would want a clear title and removal of the receiver’s Notice.

It should be noted that the article does not consider the case where funds flow through an officer of the court (such as an administrator, liquidator or court appointed receiver) in which case one presumes that that office holder will comply with the priority provisions.

Conclusion

Disputes between mortgagees and receivers are not that common. However, when they do occur the receiver can be left in a difficult position in relation to recovery of his fees. Without protection the receiver is left with a choice between expensive litigation or potentially his own insolvency. This article demonstrates that it should be possible to protect the receiver’s remuneration at the Land Registry, but that full protection is not available. A combination of Notices and Restrictions against both the freehold/leasehold estate and the registered charge are needed to provide the receiver with the best protection he can get. So provided that a receiver can wait for the secured asset to sell, a receiver may well prefer the relatively low registration fees to obtain such protection as against the higher costs of litigation.

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