We often have conversations with clients who ask what their options are to enforce a legal charge.
Ordinarily, the client will have lent money to a third party, entered into a formal Facility Agreement concerning the loan and secured the loan by way of a legal charge against a property.
The borrower will have failed to repay the loan on the repayment date, and the client wants their money back together with any interest and costs.
The first step is to ensure that the client (lender) has the right to enforce the security and to ascertain when it can be enforced.
Does a formal demand need to be made before the lender can take enforcement action, or can they proceed straight to enforcement? It will be necessary to undertake a full review of the security documents to ascertain what the position is.
Assuming the lender can enforce the security, then there is normally a suite of options available to the lender, including:
- Appointing a receiver;
- Appointing an administrator;
- Selling the property;
- Taking possession; and
- Foreclosure
Appointing a receiver
If the lender has a fixed charge, they can appoint a receiver to enforce the security. The charge normally has express powers to appoint a receiver, but statutory powers are available to the lender.
The security document will set out the powers of the receiver, and they are normally wide-ranging, including the ability to take control of the property, sell the property and use the proceeds to pay the sum due to the lender.
If the receiver is appointed under statute, their powers are more limited and do not include the power to sell the property. This is why having formal security documents drawn up at the outset is beneficial.
Appointing an administrator
The administration of a company allows for its affairs to be reorganised or for assets to be realised to benefit creditors.
The administrator will take over the affairs of the company. We have a specialist insolvency team who can assist with the appointment of an administrator.
Sale of the property
A statutory power of sale applies to all mortgages (which includes charges) made by deed, provided the loan has become due and payable. The statutory power of sale can only be exercised if either:
- Notice requiring payment has been served on the borrower, and the borrower has failed to make payment three months after the notice;
- Two months' interest is unpaid;
- There has been a breach of a provision of the security document other than payment of the loan and interest.
These provisions are normally disapplied if there is formal security documentation in place. If the lender is relying on the security document (rather than statute), the security document will set out when the power of sale can be exercised.
There is no need to apply to Court. The sale can be conducted by private treaty or auction.
However, the lender must act in good faith, take reasonable steps to get a proper price for the property, act with reasonable care and skill and act fairly towards the borrower.
Any sale proceeds are to pay the sale expenses and then discharge the security liabilities.
Sale of the property
A statutory power of sale applies to all mortgages (which includes charges) made by deed, provided the loan has become due and payable. The statutory power of sale can only be exercised if either:
- Notice requiring payment has been served on the borrower, and the borrower has failed to make payment three months after the notice;
- Two months' interest is unpaid;
- There has been a breach of a provision of the security document other than payment of the loan and interest.
These provisions are normally disapplied if there is formal security documentation in place. If the lender is relying on the security document (rather than statute), the security document will set out when the power of sale can be exercised.
There is no need to apply to Court. The sale can be conducted by private treaty or auction.
However, the lender must act in good faith, take reasonable steps to get a proper price for the property, act with reasonable care and skill and act fairly towards the borrower.
Any sale proceeds are to pay the sale expenses and then discharge the security liabilities.
Foreclosure
Foreclosure is an old remedy available to the lender of a legal or equitable mortgage. It is not available to a charge holder.
Foreclosure allows the property to vest in the lender. They become the absolute owner of the property and can sell it free of any rights the borrower had in the property and free from the rights of any party with lower-ranking security. The lender must apply to Court for foreclosure.
The lender must bear in mind that in bringing a claim for foreclosure, they lose the right to claim for the debt owed, so they will not be able to recover any sums from the borrower that exceed the property's value.
In summary, several options are available to enforce a legal charge. The lender must seek legal advice on their options at the outset.
To view original article, please click here.
Published 11 April 2023
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
