This article explores some key factors a bridging lender may consider when deciding whether to enforce its security, as well as the main methods of enforcement available to lenders.
Considerations for a Bridging Lender When Deciding Whether to Enforce Its Security
1. Has the borrower defaulted?
If so, is the breach serious enough to justify enforcement, or are there alternative solutions that should be explored first?
2. What is the borrower’s financial position?
Can the borrower realistically repay the loan within a reasonable period? Is there evidence to support this, such as an imminent property sale or a refinancing arrangement?
3. Personal circumstances of the borrower:
Has the borrower communicated any personal circumstances to the lender that could affect the lender’s decision to enforce?
4. Will the lender offer more time to repay?
Rather than enforcing its security, the lender may choose to extend the loan term or give the borrower additional time to repay.
Enforcing security is usually a lender’s last resort. Typically, they will exhaust other options before deciding to proceed with enforcement.
5. What type of security does the lender hold?
Is there enough equity in the secured asset to cover the outstanding loan balance?
The lender will also ensure that the security is valid and that it is clear on its enforcement rights.
What Enforcement Rights Does a Lender Have?
A security document usually contains detailed provisions governing when and how a lender can enforce its security. The main methods of enforcement include:
- Appointing a receiver
- Appointing an administrator
- Selling the secured assets
- Appointing an administrative receiver
- Taking possession of the secured assets
When Can a Lender Enforce Its Security?
Typically, a lender will issue a formal demand for payment before enforcing its security, even if not required to do so. This helps prevent any disputes about an implied obligation to make such a demand. The effect of this demand is to make the secured liabilities immediately payable.
Most security documents will specify that the security is enforceable once an event of default has occurred. Before proceeding with enforcement, the lender will usually verify that such an event has taken place.
Appointing a Receiver
A receiver is appointed to take control of the secured assets, usually to sell them to a third party and use the proceeds to repay the lender. A lender holding a fixed charge may appoint a receiver either under the terms of the security document or through statutory powers, such as those found in section 101 of the Law of Property Act 1925 (LPA 1925).
Statutory powers under the LPA 1925 are limited and do not include the power of sale, so the security document typically extends these powers. A lender may also apply to the court to appoint a receiver.
Appointing an Administrator
A qualifying floating charge holder (a person who holds one or more floating charges over most or all of a company’s assets) can appoint an administrator. The administrator takes control of the company’s affairs from its directors.
Administration allows the company’s assets to be reorganised or sold for the benefit of creditors. Once a company enters administration, a statutory moratorium prevents creditors from enforcing their claims.
One disadvantage for lenders is that they cannot directly control the administrator, as the administrator is required to act in the interests of all creditors.
Power of Sale
A lender may wish to sell the secured assets to repay the outstanding loan. Whether this is possible depends on whether the lender has a power of sale, either granted explicitly in the security document or under statute or common law. Without such a power, the lender would need a court order to sell the assets.
When exercising the power of sale, the lender must act in good faith, obtain the best price reasonably possible, and treat the borrower fairly. The security document usually outlines how sale proceeds should be applied.
If the lender exercises the statutory power of sale under section 101 of the LPA 1925, the proceeds must be distributed in accordance with section 105 of the LPA 1925.
Appointing an Administrative Receiver
In limited circumstances, a lender can appoint an administrative receiver. However, this is a rarely used remedy.
Taking Possession
A legal mortgagee has the right to take possession of the mortgaged property without needing a court order. This right arises as soon as the mortgage is executed, regardless of whether the secured debt is payable.
An equitable mortgagee, on the other hand, only has the power to take possession if the mortgage includes a requirement to create a legal mortgage and a contractual right to possession.
The holder of a charge does not have the right to take possession unless explicitly stated in the security document.
A lender becomes a mortgagee in possession either by physically taking possession of the property or by initiating possession proceedings.
However, the remedy of possession is rarely used in practice because of various factors that include concerns as to the liability of mortgagees in possession (for example, if the asset is land, the lender may become liable for environmental damage), and the fact that a mortgagee in possession has a duty to the borrower to account for any income and profit received.
What to Do When You’re at Risk of Defaulting on Your Bridging Loan
If you are at risk of defaulting on your bridging loan, please refer to our other articles on this topic:
Bridging Loan Default Solicitors – Contact Us
David Burns, Senior Litigation Partner at Ronald Fletcher Baker LLP, has extensive experience dealing with bridging loan defaults. For advice on this matter, please contact David Burns via email at D.Burns@rfblegal.co.uk or by phone at 07762318409.
David Burns
Senior Litigation Partner
