Key considerations when acquiring distressed real estate
When purchasing property, most buyers deal with the property owner. However, sometimes the seller is either a receiver or an administrator, appointed due to the owner’s financial distress or insolvency. It is critical for a buyer to understand what it means to buy from a receiver or administrator in terms of the greater risks compared to a standard property purchase.
Who are Administrators and Receivers?
Administrators are appointed when a company enters formal insolvency. Their job is to try to rescue the company and failing that, to sell its assets, such as properties, to pay back creditors. Administrators replace company directors and act as statutory agents of the company.
Receivers are appointed by a lender (e.g. bank or mortgage company) when the property owner defaults on their loan. Their job is to collect rent and sell the property to repay the lender. They act as agents of the property owner, not the lender who appoints them.
Buying from Administrators or Receivers: What’s Different?
- Availability of information
Acquiring from a “conventional seller” involves dealing with the property owner, who should have knowledge of the history of the property and be able to provide replies to industry accepted standard enquiries.
Administrators and receivers usually do not have this knowledge. They may have access to records of the owner, but these may be incomplete and unreliable, particularly given the owner’s insolvency. At best, an administrator or receiver may be able to provide limited replies to enquiries, usually with qualifications that anything the administrator or receiver has managed to find and disclose is “for information only”, with no guarantee of accuracy.
- No guarantees or representations
Because the administrator or receiver has limited knowledge they will require wide exclusions of representations and warranties. They will also transfer the property without providing any title guarantee. This means that the administrator or receiver does not provide any assurances about the property owner’s right to sell the property or that the property is free from any third party rights.
Administrators and receivers will also require the transaction documents to record that they are acting as agents, along with widely drafted exclusions of their personal liability.
- Vacant possession
An administrator or receiver is unlikely to sell a property with vacant possession. Vacant possession places an obligation on the selling party to ensure that a property is cleared of all occupiers and all contents. Instead, an administrator or receiver will expect a buyer to accept the property “as is”, with the buyer taking on the risks and costs of removing occupiers, clearing rubbish and dealing with other contents which may be owned by third parties.
- VAT
A buyer will want to know whether VAT will be payable on the purchase price for the property. However, an administrator or receiver will be unlikely to know. An administrator or receiver can contact HM Revenue & Customs (HMRC) to seek further information but the responses from HMRC (if they do respond) often do not provide sufficient certainty on the VAT position. Administrators and receivers will instead expect a buyer to remain liable to pay any VAT if it turns out that this should have been paid at the time of the transaction.
Conclusion
Purchasing property from an administrator or receiver carries significantly greater risks than buying from a conventional seller. This should factor into a lower price payable for the property and a buyer will need to evaluate whether that lower price is worth the risks. A buyer should carry out as much due diligence as possible and instructing a lawyer with experience of acquiring distressed real estate is critical.
If you are considering purchasing property from administrators or receivers, please contact Peter Hopkin or another member of the Real Estate Team.
