Understanding Receivership: What Happens When a Mortgage Goes into Default

When interest rates rise, the chances of mortgage defaults inevitably increase. If a borrower defaults or breaches the terms of the mortgage, the lender may appoint a receiver to enforce its security over the property in order to recover the loan. A receiver can be appointed either under the terms of the mortgage deed or under the Law of Property Act 1925 (LPA).

Under the 1925 Act, a lender has a statutory right to appoint an LPA Receiver. This right is automatically implied into any mortgage or charge executed as a deed. LPA Receivers are primarily empowered to collect rent, pay disbursements, insure the mortgaged property, and repay the lender. However, they do not have a statutory power of sale.

In practice, lenders typically rely on the terms of their security rather than solely on the 1925 Act. When a fixed charge receiver is appointed under the mortgage deed, their authority comes from both the deed and the LPA. In addition to the powers granted by the LPA, they usually have extended powers conferred by the mortgage deed. These extended powers often include the ability to sell the property, take possession of it, grant or vary leases, and carry out repairs or building works.

Once a borrower defaults or breaches the mortgage terms, the lender is entitled to appoint a receiver. This approach is cost-effective and efficient as it avoids the need for court involvement, allowing the lender to quickly take action to recover the security.

The receiver’s primary responsibility is to preserve and realise the asset to repay the lender’s liabilities. In doing so, the receiver must act in good faith and with reasonable competence. Although the receiver acts as the borrower’s agent, their main duty is owed to the appointing lender.

While receivers have a duty to obtain the best price reasonably achievable for the property, they are not required to make improvements or wait for market conditions to improve. Once they are satisfied with the valuation and marketing advice, they will likely proceed with the sale.

For any advice regarding the appointment of receivers by a lender, please contact our experienced Property Dispute team on 0330 822 3451 or request a callback.