Buying from mortgagees in possession: juggling risk and reward

The financial impact on households from COVID-19 may create opportunities post-lockdown for buyers to buy property below market value from forced sellers. A forced seller includes those who have had their property repossessed by their mortgage lender or charge-holder for defaulting on loan repayments.

A mortgagee who has taken possession of a property may appoint an insolvency practitioner to sell the property to an arm’s-length buyer as soon as possible to recover any outstanding debt, plus the costs of repossession. Buyers can negotiate good discounts on repossessed properties, where they are able to transact quickly and on the insolvency practitioner’s terms.

However, buyers need to consider the bespoke risks in these transactions. In this article, I want to highlight some of these risks and how best to mitigate them.

Due diligence limitations

Insolvency practitioners will have limited, or no, knowledge of the property and the seller’s history of ownership. As a result, they will not usually provide responses to the usual standard-form property enquiries, or any additional enquiries raised by a buyer’s solicitor in the usual course of their investigation.

The buyer’s due diligence process is therefore limited to what they can discover, principally from title documents, inspections of the property and searches.

Here is a checklist of points for buyers to consider when carrying out this exercise:

• Title documents: Check that the name of the seller on the property’s title register matches with that of the insolvent individual or company named on the insolvency practitioner’s court appointment documents. Watch out for group companies with similar, but different, names, or co-owners.
• Inspections: Make these numerous and thorough. Look out for physical evidence of third-party occupiers living in the property. A buyer may take subject to an interest of a person in actual occupation on completion. Check to see who abandoned post is addressed to – the seller, or someone else. If the seller is not in occupation, make enquiries of the local authority or speak to neighbours to establish if anyone currently lives there.
• Incumbrances: Ask your legal adviser whether the interests of lesser-ranking charge-holders or beneficiaries under a trust of land will be overreached on completion.
• Fixtures and fittings: Buyers should check the terms of the mortgagee’s legal charge. Does the mortgagee have the power to sell and convey the fixtures and fittings in the property, as well as the land and buildings?
• Survey: The building survey should highlight any physical impediments to the property which may go to value (e.g. structural flaws, disrepair, damp, rot, infestation, unsound building works).
• Local search: The local search should reveal any planning enforcement notices or building contravention notices. Remedying illegal or sub-standard building works is likely to be time-consuming and costly.

Contractual flaws

The contract for sale is entered into with the insolvency practitioners, acting as agents on behalf of the seller. Contracting with parties other than the seller creates reliance and enforcement issues prejudicial to the buyer.

Reliance issues

Risk: Insolvency practitioners will likely sell the property with no title guarantee and give no representations or warranties that the seller has good title to the property and the fixtures and fittings and is able to legally convey them free from encumbrances.

This means a buyer cannot rely on the usual contractual obligations on the seller to disclose any defect in their title and any third-party interests which burden the property. A transfer from a mortgagee, acting under their power of sale, will overreach all interests appearing on the title register of registered property after the date the seller was registered as legal owner. However, a buyer will still take subject to any interest the seller may have created during their ownership which does not require registration at the Land Registry – for example, a lease with a term of less than 7 years, or an easement.

Mitigation: Thorough due diligence will help the buyer to validate the seller’s title and to discover third-party interests which burden the property. Additionally, buyers should try to limit their exposure under the contract to those interests existing prior to the date of the insolvency practitioner’s appointment.

Enforcement issues

Risk: In an insolvency scenario, the mortgagee must execute the transfer document to convey legal title to the buyer. However, the mortgagee is not usually a party to the sale contract. This creates an enforcement gap for the buyer; as there is no contractual relationship between the buyer and the mortgagee, there is no way to force the mortgagee to deliver the transfer document on completion and complete the sale.

Mitigation: Buyers should insist on contractual provisions requiring insolvency practitioners to procure delivery of the transfer document signed by the mortgagee on completion and obtain a confirmation from the insolvency practitioner’s solicitor that they have the mortgagee’s irrevocable and unconditional authority to date the transfer document on receipt of the purchase monies.

Risk: Additionally, insolvency practitioners will exclude their personal liability under the contract. This gives the buyer few options when it comes to suing for breach of the terms of the contract or seeking specific performance.

Mitigation: Buyers should insist on the insolvency practitioners warranting that: (1) the mortgagee’s power of sale has arisen and (2) they have been validly appointed. This gives the buyer comfort that the insolvency practitioners are not acting ultra vires.

If you have a query about buying from a mortgagee in possession, please do not hesitate to contact Johnny using the below details.