Managing distress: Structuring effective real estate enforcement

Enforcement of security over Real Estate in England and Wales typically involves one of two principal processes: receivership and administration. Liquidation can also feature in enforcement/distressed scenarios.

Each process has its own distinct consequences for property assets, rental income and portfolio strategy. We briefly summarise each process below before turning to considering how the processes interact (and can be optimised).

Fixed Charge Receivership

This is the primary remedy for fixed charge enforcement over income-producing property. Receivers are appointed by a secured lender to take control of charged property where the borrower is in default. The primary purpose is to recover the outstanding debt for the lender by managing the property and/or arranging its sale. Core responsibilities of a receiver include stabilising rental income, collecting arrears and preparing assets for sale.

The fixed charge receivership route can be a swift and lower-cost option and it is initiated without court involvement. However, receivers only control the secured property, not the company as a whole, and receivership does not trigger a statutory moratorium. This means the company remains vulnerable to enforcement action by other creditors.

Administration

Administration is a formal insolvency procedure which is designed to rescue a business, maximise returns for creditors and preserve value.

For property portfolios, it prevents disruptive actions from other creditors by imposing a moratorium, it enables trading and management and it allows for flexible exit routes. It also covers the entire company as opposed to specific assets. However, administration is usually more expensive than receivership or liquidation.

Liquidation

Liquidation is the process of formally winding up a company’s affairs. The liquidator’s role is to realise and collect the company’s assets and distribute them to creditors.

Liquidation offers finality; however, it is viewed as a more ‘terminal’ option as, typically, all operations will cease. Assets are often sold at a lower value as a result, resulting in poorer outcomes for creditors (unsecured creditors often only receive a small fraction of what they are owed, if anything).

Interaction between regimes

In today’s more fragmented Real Estate debt finance market, we are increasingly seeing secured lenders combining receivership with administration to optimise outcomes within a portfolio. Receivers offer immediate, asset-specific control and expertise, whilst administrators can simultaneously provide company-level oversight and management, using the variety of statutory tools and powers at their disposal (like the statutory moratorium) to manage creditors and other stakeholders (for example, employees) and capture value in other company assets.

However, that more diverse debt finance market also means that there is greater scope for opinions and approaches to differ between secured lenders within the same borrower structure. Whilst there are legal technicalities and formalities which need to be navigated when assessing whether two processes can be initiated concurrently, perhaps more significantly, those differences of opinion can result in friction and commercial uncertainty. As such, those situations require careful thought and planning and we frequently need to involve advice from experts in a number of fields, such as Real Estate, Restructuring and Disputes, when assisting clients in those circumstances.

If you would like to discuss any aspect of Real Estate enforcement strategy and planning, please feel free to contact one of the key contacts below or any member of our Corporate Restructuring and Insolvency team.