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Receiver Sales - Who Carries the Risk and Ways of Mitigating the Risk?
There is concern around the level of risk attached to buying property assets from a receiver and in particular in relation to exclusions/limitations under the receiver sale contract. The commercial reality is that the purchaser from a receiver is typically buying a distressed asset which is often being sold at a competitive price and may represent “a bargain”. The commerciality of the transaction therefore dictates that in acquiring “a bargain” the purchaser must be willing to assume certain risks and by taking on some of the due diligence that might otherwise stay with the receiver/vendor of property.
Once the nature and extent of the risk being assumed by the purchaser is understood the purchaser and his advisors can through careful due diligence assess the risks. Ultimately a decision will have to be reached as to what risks can be accepted on the basis of an informed decision.
Awareness of the exclusions in respect of the protection provided by the general conditions of the Law Society contract for sale.
It is necessary to review carefully the special conditions of the receiver sale contract to understand the nature and extent of the exclusions provided for in respect of the protections typically available to the purchaser under the standard conditions of sale.
The back drop from a receiver’s perspective is that they have a limited knowledge of the property. Their exposure to the property arises in the context of being appointed a receiver by a Bank in the context of enforcement of the Bank’s security. There is likely to have been little cooperation or contact with the registered owner/borrower who would have direct knowledge of the property.
In such circumstances the receiver typically would not have access to tax information to include VAT CGT history and would be reliant on documents held with title. Likewise the receiver will have no knowledge of the planning status or any notices re disputes or in relation to boundaries etc.
Risks
The risks typically come under the following headings:
- Title
- Planning
- Tax
- Insurance
- Generally “Caveat Emptor / Buyer Beware” – applies to all aspects of the transaction
Title
In relation to title, a careful review of the title documentation should confirm that the title held by the registered owner/borrower was reflected in the Security taken by the Bank and in the Deed of Appointment of the Receiver.
There must be continuity in the description of the property and all rights and easement which will be relied on by a purchaser into the future on his acquisition of the property. If, for example, the property description does not coincide or there is an omission between the title held by the Vendor and the title secured to the Bank, then a Receiver will not be in a position to dispose of the interests that were not captured in the Bank’s mortgage. A practical example of this is where a property may have had the benefit of a right of way or partial rights over certain property reflected in the title but this was not captured in the mortgage taken by the Bank.
It is crucially important to establish that the Deed of Appointment is over all of the property captured by the mortgage and accurately reflects the vendor’s title as this underpins the Receiver’s entitlement to dispose of the property.
In relation to unregistered land and pursuant to the reforms implemented by the Land and Conveyancing Law Reform Act, 2009 (Section 52) the beneficial interest in the property passes on the signing of the contract for sale. There is a distinction between registered land and unregistered land in that puisne interests (judgement mortgages/lower ranking burdens), once registered, will be visible and apparent from an inspection of the land registry Folio file plan whereas such interests are not readily visible in respect of registry of deeds title. In the case of unregistered land first registration is now compulsory on completion of the transaction. Therefore the solicitor advising on a first registration application should carry out searches judgement and company registration office searches against the vendor/receiver on the day of signing of the contract.
Title maps should be reviewed carefully and approved by the purchaser and his architect.
Planning
A purchaser will always be advised to carry out a structural survey. This should be extended to include a planning survey. The planning survey will involve inspecting the property, viewing the planning file to include initial construction drawings, and reviewing the opinions on compliance provided with the contract.
The purchasers architect should be in a position to comment, based on a review of the documentation provided pursuant to the contract, a review of the planning file, planning searches coupled with an inspection of the property, if the building complies with planning legislation.
One would expect if this process is followed that issues relating to planning compliance would be identified and could be assessed in relation to possible remediation or whether the transacting be aborted.
Puisne interests (later /lower ranking burdens )
Section 52 of the Land and Conveyancing Law Reform Act, 2009 provides for the over stepping/over-reaching of puisne burdens/mortgages registered against the property in the course of the registered owner’s financial difficulties. Typically a scenario will emerge where the registered owner purchased the property and entered into security with a Bank to fund the purchase. The Bank’s security typically is registered as a first charge on the property. In circumstances where a borrower gets into difficulties judgement mortgages or other burdens are registered against the title. The key is if these burdens rank after the Bank’s mortgage they can be over stepped by the Bank delivering a deed direct to the purchaser who will then take the title freed and discharged from any such judgement mortgages or other burdens.
A key consideration for a purchaser and his solicitor is that appropriate searches are carried out in the appropriate registries to ensure there is full awareness of any such burdens and that there is certainty that they can be overreached on a subsequent registration. The effect of overreaching is that they do not appear on the purchaser’s title into the future and he starts with a “clean sheet”.
Certifying Title to Lending Institutions
A feature of the recovering property market was the presence of cash buyers in the market. There is now a change in the market place in that Banks are now back in the market and willing to lend against property secured assets. This has created its own difficulties in that Banks are now asked to accept qualifications on title which ironically, arise from Receiver sales taking place on foot of Bank enforcement actions. This causes concern for the Banks and Solicitors’ investigating title on behalf of the Banks and engaged in certifying title to the Banks.
The Law Society Conveyancing Committee has expressed the view that it is only after making due enquiry and finding that they do not have the relevant information, that receivers should restrict the contract for sale or issue refusals to requests for information.
For lawyers who are certifying title it is reasonable that they put the Bank on notice of the restrictions/limitations imposed in the receiver sale contract. The key issue for the Bank’s solicitor or a Purchaser’s solicitor is that they have asked the relevant questions and carried out the relevant due diligence. If they have sought information and this is declined in reliance on the terms of the contract for sale they can then make the point that the enquiry was made and declined and then it is a question of the purchaser and the Bank making a commercial decision on whether to proceed or not.
Balancing/sharing the risk
It is reasonable to expect a receiver to provide such information as is held with the title or is available following enquiry to a purchaser. Whilst a receiver wants to maintain the protection afforded by very restrictive special conditions in the contract there has to be reasonableness and a balanced approach in relation to sharing information to enable a purchaser and funders and their advisors reach a commercial decision and evaluate the risks that are being assumed by a purchaser.
There must be an element of commerciality about receiver sales and all parties to include the receiver and his advisors, the purchaser and his advisors and the Banks/Lenders have to be pragmatic in this context.
Remember that this article is for information purposes only and does not constitute legal advice. Case law is fact specific and readers should understand that similar outcomes cannot be assumed. Specific advice should always be taken in given situations.