In late 2008, early 2009 when most buy-to-let lenders restricted lending or simply disappeared, landlords simply lost their ability to borrow.
For those with quality, working portfolios, this was merely a blip in their business plan and most were able to ride the storm.
But those landlords reliant upon lenders allowing them to remortgage their existing properties to purchase their next, or to pay the mortgage, their business plan failed. Any void periods led to unpaid mortgages and mounting arrears.
It was at this point that a number of lenders, without a great deal of strategic planning or consideration, instructed the services of LPA receivers.
Where all parties involved understand and conduct their role effectively a happy relationship can be had.
Where there are issues with either the landlord, lender or LPA, the LPA receivership model fails.
But at some point in the future, if mortgage interest rates start to increase, the LPA’s use of creativity and innovation when managing properties will be worth its weight in gold.
And now is a perfect time for lenders to procure the services of LPA receivers and agree the boundaries ahead of the rush.
How an LPA receiver works
The role of an LPA receiver was first brought about by the Law of Property Act in 1925.
LPA receivers are instructed by lenders where a landlord has failed to maintain their mortgage commitments against one or more of their properties.
While the world has rocked and rotated quite dramatically since this time, the act has been left pretty much left untouched, seemingly embroiled in over complicated property law which can see a lender running to the hills for cover. This needn’t be the case.
LPA receivers may be instructed to manage either residential buy-to-let or commercial buy-to-let properties.
While the law covers both types of properties, there are a number of nuances between these forms of instruction.
In the case of a commercial property, situations need to be taken into account such as; legal implications, complications of ownership, limited company issues, shareholder entitlement, stock, and so forth.
A residential buy-to-let portfolio should be more straightforward, baring any legal entitlements of existing tenants.
The difference between the two types is also demonstrated within the fee structure, typically commercial receivers work on an hourly rate, residential receivers tend to work on a far less generous fixed fee basis.
In very simplistic terms the role of a LPA receiver is to bring the buy-to-let property or properties under controlled management.
They act as a rational borrower taking a pragmatic, none emotive approach to managing the asset.
Over time the goal is to minimise losses for both the borrower and the lender. Depending on the lenders’ mortgage Terms and Conditions, the LPA can either let or sell the asset.
Where it fails
Where it can all go wrong is when one or more of the three parties engaged in the process – the landlord, the lender or the actual LPA – become too involved in what should be a fairly simple asset management solution.
The landlord – they may be in denial and actively seek to hinder the LPA receiver, by colluding with, and in some instances threatening a tenant, vandalising the property, refusing to allow access to communal doors, the list goes on. In the meantime, the disruption guarantees fees mount even further and the overall arrears situation worsens.
The lender– the role of an LPA receiver was somewhat mis-understood, and a naive lender might attempt to impose restrictions on the LPA. These restrictions range from not allowing them to make any improvements to a property, including essential repairs, failing to pass on vital information, to insisting that a property is sold even if a let strategy is clearly a more sensible solution. Whilst the LPA receiver is instructed and remunerated by the lender, the LPA is working as an agent of the borrower and need to be able to remain completely independent and make a transparent judgement of the property. When lenders interfere with the process, they risk the validity of the role of the receiver and as such the borrower could seek compensation. Again this interference can cause delay and lead to a growing arrears issue.
The LPA – the actual receiver may also let the side down by not securing the property effectively, not flagging up any issues to the lender and just simply not marketing the property accordingly can result in delays and add to a mounting arrears problem.
From my experiences in the past all three parties can be culpable.
But as the supplier of a service the finger of blame was usually pointed at the LPA, whose risks are high and rewards can be low, particularly for residential buy-to-let receivers.
The lender’s expectations of an LPA receiver are understandably high.
An LPA provides a wide range of benefits: it helps protect the landlord, provides transparent and honest feedback, timely yet informed exit strategies, up to the minute market knowledge and legal obligations, regular case updates, supplier management/capacity management, transparent pricing/fees/disbursements and expert support on complicated property matters.
As I mentioned at the beginning, back in 2008/2009 when buy-to-let finance dried up and many landlords found themselves in difficulty as a result, many lenders employed the services of LPA receivers.
But in essence they had merely moved the problem.
The LPAs received an influx of fairly dreadful instructions, such as properties that didn’t exist, had no registered title, houses in multiple occupancy that hadn’t been converted properly and dangerous properties.
Also, while the LPAs welcomed the work, not all were sufficiently resourced to manage the volume.
Without any clear disposal strategies, simple governance or even basic management information function, the communication in some cases between lenders and LPA receivers simply broke down.
This led to landlords and lenders challenging the effectiveness of LPA receivers and blighting the reputation of LPAs in general.
Reassuringly lessons were learnt during these difficult times and where a lender takes time to consider an outcome and holistically evaluate the whole situation ahead of instructing an LPA receiver, this appointment is highly likely to be a positive one with all parties baring fruit.
Effective engagement with the landlord saves precious time and assists in the smooth running of the process.
In my opinion, the benefits of an LPA receiver are significant to ensure all parties mitigate further losses.
In particular where lenders acknowledge their lack of expertise in both asset management and property law and recognise the effectiveness of a LPA receiver who can evaluate the portfolio risk and potential, reaching an independent decision on behalf of all parties.