Perplexed by property law? Relax, Professional Support Lawyer Claire Haynes is here to answer your most pressing questions…
Q: I obtained development finance for a commercial real estate project. I have developed out the building but the units have not sold. I have not breached the loan-to-value covenants but I am in default on the payments and under other covenants in the loan agreement. The lender is losing patience. What Will happen?
A: If you haven’t already, I advise opening up a dialogue with your lender about the situation. sometimes it is possible to renegotiate the terms of a loan facility so that they are more favourable. Enforcing security is usually a last resort for a lender.
An event of default under your loan agreement will mean that the lender can cancel any further loan commitments, demand repayment of outstanding loans and enforce security granted over the property and your assets.
If your default is not remedied it is likely that the lender will appoint a receiver over the property pursuant to the powers in the Law of Property Act 1925 and those contained in the legal charge. I would expect the right to appoint a receiver to be set out expressly in the terms of the legal charge over the property.
The receiver is deemed to be the borrower’s agent and will usually have the power to do everything that the owner of the property could do, such as to manage the property and receive income from it. Assuming there is an express power in the legal charge (which there usually is) the receiver will also have the power to sell the property applying the proceeds of sale in satisfaction of the debt secured over the property.
The receiver has certain duties to the lender including to act in good faith and fairly, to take reasonable steps to obtain a proper price for the property and the best price reasonably obtainable, but this does not mean that the receiver will immediately seek to exercise a power of sale in respect of the property. A receiver could let out the property and take the income from the lettings for a number of years until there are favourable market conditions for the sale of the property.
If the lender decides to exercise its power of sale to appoint receivers it will first serve you with a notice of demand for all moneys due under the loan including unpaid interest. At the end of the prescribed period for remedying the default (which might be very short) the lender will exercise the power of sale to appoint.
Once the receivers have sold the property, the net proceeds of sale (after deducting the costs of the sale) must be applied to discharge any existing prior ranking security and to discharge the lender’s security. If there is a surplus it will be used to pay off any subsequent security and anything left at the end of the allocation process will go to you, as borrower.
As there is a lot at stake, I recommend obtaining formal legal advice to ensure your interests are best protected throughout the receivership process.