Proposed bill gives lenders’ rights in the real estate sector platform for discussion

The Bill proposes the following key changes to the law:

• Limiting the powers of a receiver – The Bill restores the scope of a receiver’s powers to the powers legislated for in section 109 of the LPA. Broadly speaking, this would only permit a receiver to demand and recover income from property and to keep such property insured.

It is common practice for lenders contractually to extend the powers of a receiver under a mortgage deed to include the power of sale. The Bill would preclude a receiver from exercising a power of sale or receiving any proceeds of a sale unless an order for possession of the property has been granted by the court. However, a receiver would not be able to commence such possession proceedings – this would need to be undertaken by the mortgagee directly.

• Extending the court’s powers for the granting of possession orders – At present, a mortgagee only needs to seek a possession order in relation to residential mortgages. The Bill proposes to extend this requirement to cover commercial premises. Were the Bill to be enacted, in order for a mortgagee to obtain a possession order in respect of a commercial property, the court would need to be satisfied that a mortgagor has had adequate opportunity to raise counter claims, rights of set-off and any other defences available and that the court has determined the merits of any such defences.
  

• Abolition of peaceable re-entry – The Bill proposes to abolish the right of a mortgagee or receiver peaceably to re-enter a commercial property over which a lender has a fixed charge.

• Affirming the duties of a receiver – The Bill sets out that the duties of a receiver appointed under the LPA would be owed to a mortgagor, a mortgagee and any person for the time being interested in the equity of redemption.

• Repeal of section 31 of Agricultural Tenancies Act 1995 – The Bill seeks to return to the position under the LPA, which prevents mortgagees from stopping land owners granting tenancies over their land.

• Extending the court’s powers to vary the mortgage deed – Perhaps most controversially, the Bill proposes to allow a mortgagor or mortgagee to apply to the court for a variation of the terms relating to the rate of interest, schedule of payments and the value of repayments.

While the content of the Bill is likely to be unpopular with the banking sector, the Bill may be welcomed by small to medium-sized enterprises and their employees. It is assumed that the aim is to rebalance the respective powers of the lender and borrower in favour of the borrower, perhaps at least to encourage lenders to consider consensual work out of alternatives rather than going straight to enforcement when there is a problem.

The concern is what effect, in practice, the provisions of the Bill, if enacted, may have. It is hard to be sure that it will encourage a rescue culture and may stifle – rather than stimulate – new lending. Banks and financial institutions lending to the commercial real estate sector would have to re-evaluate their pricing and risk analysis, factoring in the additional time and costs which would be incurred in any enforcement relating to a mortgagee seeking possession.

Ultimately, this may translate into increased costs for borrowers. More fundamentally, the banks and financial institutions may have real concerns determining lending margins in circumstances where a court is given a right to override the agreed payment terms of the mortgage deed.

It may be that this Bill is moot. The Bill has received no published official coalition support, which significantly reduces the likelihood of its success. It has also been given the last position in priority as part of the ballot process, which may explain why the second reading has been delayed for over a year.

Most primary legislation originates from bills introduced by the government; private members’ bills rarely become law. The private member’s bill can allow relatively unknown backbenchers an opportunity to voice controversial subjects on which a member feels strongly. This is typically a procedure used by MPs to create publicity about an issue with a view to stimulating discussion in the market and, at best, having the issue taken up in the government’s legislative reform programme.

Jayne Backett is a senior associate and Shaeron Yapp an associate at Mayer Brown.