Buying a house from receivers
Insight
In an uncertain market with interest rates having risen significantly, the likelihood of defaulting mortgages inevitably increases. The effect of this is that more properties on the market are being sold by receivers. Fixed charge or Law of Property Act 1925 (LPA) receivers are appointed by a lender seeking to enforce its security over a property in order to be repaid.
Receivers have a duty to achieve the best price that is reasonably obtainable in the circumstances: they do not need to improve the state of a property, nor do they need to wait for the market to pick up. Once the receivers are satisfied with the valuations they have obtained and the marketing advice they have received, they most likely want a quick sale. This can present opportunities for potential purchasers who may be looking for a quick buy. It is therefore important purchasers know what they are looking out for when buying from receivers: what are the risks and how do you mitigate them?
Validity of receivers
The first thing to check is that the appointment of the receivers are valid. An invalid appointment may render the sale contract void. Receivers are usually appointed by the lender under the express power of appointment contained within their mortgage deed. As such, your solicitor, ideally one with experience in insolvency, should be requesting a copy of the appointment documents at the very early stages of your purchase and should be satisfied that the receivers have been validly appointed. A copy of the acceptance of the appointment by the receivers should also be obtained. Where there are multiple receivers, it should be clear in the appointment whether they can act jointly and severally, or jointly only.
Title guarantee
Usually, when you buy a property from a normal seller, they sell the property with full title guarantee. This means that they are giving a warranty that they have the right to sell the property, there are no third-party rights or interests in the property save for those on the register (assuming that the property is registered) and that they will do all they can to ensure that you will acquire good title to the property.
However, receivers are not the registered owners of the property and have no knowledge of it. As a result, receivers sell with “no title guarantee”. They cannot confirm that there are no third-party rights or interests attached to the property and they therefore offer no warranty or indemnity in respect of any such interests. This puts increased onus on solicitors to undertake thorough due diligence on the property and obtain as much information as they can to satisfy themselves that no such interests exist. Indemnity insurance can also be put in place to cover any potential risk from unknown third-party rights.
The maxim “caveat emptor” (buyer beware) in English property law places the responsibility on a buyer to ensure they have made their own investigations before handing over any money or signing on the dotted line.
Replies to enquiries
Part of the purchase process includes obtaining replies to standard enquiries from a seller on various matters relating to the property, and raising any additional enquiries that may be required based on the information obtained in a buyer’s searches and title review.
Receivers will not be in a position to provide many (if any) replies, therefore any responses will be limited and incomplete. Buyers must be prepared to accept this and to ensure that they have a good surveyor to advise them on any potential structural/physical issues with the property, and a good solicitor to make the most of the public resources available to glean as much information about the property as possible.
Those buying from receivers may find themselves getting a slightly discounted price on paper (depending on valuations and market conditions, accepted prices can sometimes be lower than the market average), but there is a quid pro quo.
Duties of receivers
Whilst the relationship between receivers and a borrower is that of agent (receivers) and principal (borrower) and the receivers owe the borrower a duty to act in good faith during the course of their appointment, the receivers owe their duties primarily and almost exclusively to the appointing lender. This means that receivers can refuse to accept a price that would be deemed acceptable to the borrower (or vice versa), albeit that they should ensure the transaction is not unduly delayed.
From a buyer’s perspective, this means that the receivers will be primarily concerned about financial matters and moving the transaction forward in the most economical way possible. Delay on the buyer’s side may mean you lose the deal.
Existing rights
Buying a property from receivers can lead to difficulties if there are existing restrictions or notices on the title to the property. Usually, any existing notices or restrictions would be cleared off or dealt with by the seller in advance of completion. However, that is not necessarily the case if you are buying from receivers, and the Land Registry will only cancel other entries that are noted on the register if it is clear to them that the charge (under which the receivers were appointed) has priority to the interest which is the subject of the entry.
If the receivers are proposing to sign the transfer and there is a form A restriction on the title (which is a restriction protecting third party beneficial interests in a property), the transfer would have to be from at least two owners/borrowers and signed by at least two receivers in order for the buyer to take free of the third party beneficial interests in the property protected by the restriction (called “overreaching”). Where there is a sole owner and a form A restriction, to avoid any issues with overreaching, a buyer should insist upon the lender signing the transfer in exercise of its power of sale. This also ensures that any subsequent notices or charges on the title are cleared off as part of the application to register the purchase.
Conclusion
It is likely that the need for receivers is going to increase in the current economic climate and buyers may see more properties coming to market in distressed situations. Buyers should ensure that they are aware of the differences between buying from receivers and a standard purchase and that they have experienced advisers to fill in the gaps where information from the receivers will not be forthcoming.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, July 2024