Tag Archives: receivers

Receivers owed no duty of care directly to bankrupt mortgagor

Where a mortgagor is subject to the appointment by the mortgagee of a receiver over the mortgaged property the receiver owes a duty to the mortgagor to look after the property if and to the extent that the mortgagor retains an interest in what remains of the property after the mortgage debt and the receiver are paid off {the equity of redemption).

Where the mortgagor becomes bankrupt, the mortgagor ceases to have any such interest. The equity of redemption becomes vested in their trustee in bankruptcy. Though the mortgagor retains a legal liability under the mortgage, that is limited in nature and duration. Upon his discharge from bankruptcy it is automatically extinguished. The mortgagor walks free from the mortgage and the benefit of the equity of redemption stays vested in the trustee in bankruptcy for the benefit of the general creditors.

In the event of a surplus in the bankruptcy, then under section 330(5) of the Insolvency Act 1986, the trustee must return that surplus to the bankrupt: But the bankrupt has no right to the mortgaged property as such and his interest in any possible surplus can be and is protected by the duties which both the receivers and the mortgagee will owe the trustee in bankruptcy as to their management of the property and its realisation.

The creditors and the bankrupt mortgagor have a shared interest that the property should be managed and disposed of for the best price reasonably obtainable but that does not mean that they are owed any duty by the receivers.

In the Court of Appeal case of Purewal v Countrywide Residential Lettings Ltd & Anor [2015] all the foregoing factors were in play. The residential property had been subject to water damage but the receivers had failed to take timely action to stop the problem, which the mortgagor had told them about, or to claim the insurance proceeds in time. On getting the property back the mortgagor had spent £16000 fixing it.

The court said no legal precedents suggested the receivers’ duty being owed to a bankrupt mortgagor nor was there any justification for imposing such a duty. The mortgagor has ceased to have any interest in the equity of redemption and his ultimate entitlement under s. 330(5) to any surplus in the bankruptcy did not require the imposition of a duty to anyone beyond the trustee in bankruptcy so the receivers were not liable to him.

This blog has been posted out of general interest. It does not replace the need to get bespoke legal advice in individual cases.

Receivers could serve Section 21 notice to end Assured Shorthold Tenancy

Section 21(4) of the Housing Act 1988 (“HA 1988”), imposes a duty on the court to make a possession order of a dwelling held under an Assured Shorthold Tenancy (“AST”) if it is satisfied that any previous fixed term AST no longer exists and the landlord or, at least one of them, has given to the tenant not less than two months’ notice in writing that he requires possession of the dwelling-house.

In McDonald v McDonald & Anor [2014] the landlords were the tenant’s parents. The parents had borrowed off Capital Homes Ltd (“CHL”), to buy the property and the loan was secured by a mortgage over the property. The tenant paid the rent with housing benefit and her parents used that money to pay the sums payable to CHL.

The mortgage conditions forbade any tenancy to a tenant assisted by social security. Other tenancies had to be ASTs previously approved by CHL. The parents failed to apply for approval. A further condition said the parents must advise CHL if they proposed to let to a family member. They did not do this either. They later fell into arrears and CHL appointed receivers of the property, (“the receivers”).

Under the mortgage conditions, they had the same powers as CHL, and they were the agents of the borrowers.

When the receivers were appointed, the tenant was in possession under the terms of an AST expiring on 14 July 2009. She kept possession after then under a statutory periodic tenancy which was subject to the landlord’s power to terminate and get a possession order under section 21(4) of the HA 1988.

The receivers claimed to use their powers under the mortgage to serve a notice (“section 21 notice”) in their own names on the tenant under section 21(4)(b) of the HA 1988 and to commence possession proceedings in the name of the landlords.

The section 21 notice was given by the receivers and not the landlords. Had they power to do this?

If the receivers had power to give the section 21 notice, they could do so in their own names because under section 45 of the HA 1988 the word “landlord” includes any person deriving title from the original landlord, and that would include CHL. Also, under the mortgage conditions the receivers could exercise all the powers that CHL were able to exercise.

On the other hand if they did not have power to give the section 21 notice, then their section 21 notice would be of no effect and the tenant’s statutory periodic tenancy would have continued as before.

The Court of Appeal said that the mortgage conditions had to be interpreted purposively. Their purpose was to enable the receivers to realise the mortgaged property in an orderly and efficient way.

The powers specified in clause 9.2.1 of the mortgage conditions included the power to sell the property and to take possession of it.

The powers conferred on the receivers must include power to do anything which is necessarily incidental to the exercise of the powers specified in the mortgage.

Here, service of the section 21 notice was an act which the receivers had to do to get vacant possession and thereby to sell the property at the best price.

The fact that:

– the mortgage conditions might have been drafted more widely so as to confer an express power on the mortgagee to give a section 21 notice; or

– that the mortgagee might have been able to serve the notice by virtue of being within the definition of “landlord”

did not mean that the receivers could not do so where they had that power under the mortgage conditions.

So the receivers had been entitled to serve the section 21 notice on the tenant and the tenant lost the appeal.

This blog has been posted out of general interest. It does not remove the need to get bespoke legal advice in individual cases.