Know what is in your management agreement and where you stand legally if your landlord defaults on mortgage payments and a Law of Property Act receiver is appointed. Solicitor Janice Northover explains the finer points.
I run a hotel under a management agreement that gives me the exclusive right to run the business in return for a turnover rent paid to the owner. I have received a notice from the owner’s bank informing me that the owner has failed to keep up with the mortgage payments, and it is looking to appoint a Law of Property Act (LPA) receiver. What will this mean for my business?
A receiver appointed under the Law of Property Act 1925 (commonly referred to as an LPA receiver or a fixed-charge receiver) is appointed by a lender who has money secured against the property and wants to take back control of the property because the borrower has defaulted on the terms of its loan.
LPA receivership is not a form of insolvency and so should not be confused with an administrative receiver or an insolvency receiver. While LPA receivers are commonly appointed where the borrower has failed to repay the loan, it can also occur where there have been other breaches of the loan, for example, a breach of the loan-to-value covenant.
The receiver is usually given extensive powers in the loan document to run the business at the property to divert the business income to the lender. This is common when the property in question is a hotel.
Although the receiver is appointed by the bank, he acts as an agent for the borrower. The receiver is entitled to do anything the owner can do under your management agreement.
Most management agreements will give the occupier the exclusive right to operate the business for a fixed term unless there is a breach of the terms. Accordingly, unless you have breached the terms of your agreement, the receiver will not be entitled to terminate your agreement or interfere with your business. However, he will probably require you to pay all future management fees or rents to him directly as he will want to pay these to the bank.
Even if the receiver is entitled to terminate your agreement because, for example, there is a break clause, he may still be keen for you to continue running the hotel. The receiver is unlikely to want to take on the responsibility of running the hotel where he intends to sell the property to a third party, particularly since this would involve him having to take on personal liability for the staff. It is more likely he will want you to continue operating the business until he has found a buyer.
While your agreement may allow you to terminate in the event of the owner’s insolvency, LPA receiverships are not a form of insolvency. You may not, therefore, be entitled to terminate the agreement.
- Check the terms of your agreement carefully and, in particular, the circumstances under which you or the owner can terminate or sell the business and whether you are entitled to any compensation or goodwill for the business.
- Check whether the owner is insolvent. If so, you might want to invoke the termination provisions under the agreement.
- Try to establish the receiver’s plans for the hotel as early as possible, including whether he proposes to sell and, if so, whether this will be as a going concern or with vacant possession.
- If a purchaser has been identified, try to make contact with them to discuss their intentions for the property and whether they see you as having a future in the business.
Do not rely on a non-sale clause in your agreement, which usually includes strict conditions that must be satisfied before the owner can sell the property to a third party. Foreclosure by the owner’s bank does not normally count as a sale, and so you might find yourself with a new owner who does not satisfy the strict conditions.
Janice Northover, partner, real estate litigation, Davenport Lyons
020 7468 2600