What is property receivership and what does it mean for lenders and their customers?
With the recent and anticipated further interest rate rises, many individuals and businesses are facing increasing pressures to meet ongoing loan repayments. As it stands, mortgage rates have climbed to their highest levels in 15 years.
This, partnered with the ongoing increase in inflation and the cost of living, is creating a perfect storm for owners of residential and commercial properties which are subject to a mortgage.
If a property owner defaults on loan repayments, lenders may look to use the process of property receivership.
In this article, I explore what this means for both lenders and customers and how the economic climate dictates cases such as this.
What is property receivership?
In simple terms, property receivership is the process where a secured creditor (in the majority of instances, a mainstream lender such as a bank or building society) appoints a receiver to take control of a debtor’s property (i.e. the customer, such as company or an individual, they have lent money to) following the default on a mortgage.
Rather than taking the property into possession, the lender will often appoint a property receiver who essentially steps into the borrower’s shoes and whose remit is to take control of and manage the property.
In most cases, the receiver will sell the property to recover the sums due to the lender. In instances where existing tenancy agreements are in place, the property receiver will manage the tenancies and rental income.
Instances of property receivership most commonly relate to investment properties, where the receiver, who has been appointed by the lender, will manage the tenancies and the property income. This not only relates to residential properties, but also commercial properties such as shops, offices and industrial units.
Receivers can also be appointed over vacant properties and land, as well as part-built developments where, for example, the developer or builder does not have the financial capability to complete the project. Here, the receiver will support on completing the build and manage the final sale to maximise returns for the lender.
What’s the driving force behind property receivership cases?
There is a constant stream of cases relating to property receivership. However, in the majority of instances, the biggest driving force behind this is the macroeconomic situation.
During the banking crisis of 2008, there was a huge increase in the number of property receivership cases. We saw this from around 2007-08, all the way through to around 2014, and handled in excess of 5,000 cases over this period of time.
The rises in interest rates means the cost of borrowing money has increased. This, in turn, can impact a customer’s ability to service a loan and can force a lender into a position where they need to appoint a property receiver to look after the property and recover the sums due.
There are also instances where borrowers’ fixed-term agreements expire, which may also cause difficulties in servicing loans. On their current fixed deal, they may be paying an interest rate of, for example, 2 per cent, whereas when this expires, they may be faced with a rate of somewhere upward of the region of 5 per cent. Evidently, this has the potential to impact the financial ability to meet repayments.
If the markets were to stay as they are at the moment, it is inevitable there will be an increase in the number of property receivership cases over the coming months. Whether we will return to the levels seen previously during the heat of the 2008 economic crash is more difficult to predict, but is probably unlikely.
At large, this is heavily dependent on a lender’s discretion towards those borrowing from them and the approach they wish to adopt. Lenders will need to choose how lenient they want to be with a borrower and which type of recovery action they may wish to take.
What are the benefits of property receivership?
A property professional is usually appointed who has experience in dealing with such matters to ensure the property is effectively managed and a return for the lender is maximised.
The lender does not take the property into possession themselves and thereby, absolves themselves from any potential risks, liabilities and reputational damage that may arise.
A receivership appointment can typically be made within a short timeframe, enabling rental income from a property to be secured quickly and without the need for a court order or legal action.
The economic outlook driving property receivership
In the event of a mortgage default, property receivership is a course of action lenders can take to secure the rental income being derived from a property, appoint a trusted professional to manage the property and to recover the sums due through a disposal of the property.
With the current economic climate in the UK and the increases in interest and mortgage rates, lenders will need to react to this and decide how best to manage their customers and defaulted loans during this period.
The extent of whether property receivership cases will play out in a similar fashion to that seen during the 2008 economic crash is to be seen. However, it is certainly something lenders may need to plan for accordingly.
A trusted expert in handling property receivership cases
At Walker Singleton, we have a wealth of knowledge and experience when it comes to property receivership.
We have been delivering expert advice to lenders for more than 40 years and provide a full service offering to ensure all matters concerning a property receivership appointment are professionally handled and the best possible exit and recovery is secured
Our experienced team comprises registered property receivers, an accreditation which can further reassure clients on the high standards of service we provide our clients
We also offer lenders pre-appointment advice, providing our expert opinion on a particular matter prior to a potential appointment. We provide lenders with all the potential options available to ensure they are making the best decision to maximise the return from a recovery and in terms of an overall exit plan
Our team also has a wealth of knowledge in working with legal teams to consider and handle any potential issues which may be in the background before an appointment to help ensure the best available option is taken.
If you are seeking expert advice on property receivership matters, contact Paul Diakiw on e: firstname.lastname@example.org or t: 0113 848 0000.