When an LPA receiver is appointed over a property, it owes a duty of care to the mortgagor. These duties are there to ensure that, whilst the receiver is managing the property, with a view to repayment of the secured debt, it is obliged to take account of the interests of the mortgagor. However, the position is different if the mortgagor is bankrupt.
This recently came under review by the Court of Appeal in the case of Purewal v Countrywide Residential Lettings Ltd.
The case concerned a buy-to-let property acquired by Mr Purewal in 2001. In 2004 he remortgaged the property but, in 2009, fell into arrears and receivers were appointed by the bank. The receivers then informed Mr Purewal that they had taken out buildings insurance over the property and that he should cancel his own policy, which he did.
On 9 September 2009 a bankruptcy order was made against Mr Purewal. On 18 September 2009, Mr Purewal visited the property, which was by this time vacant, and found water damage. He informed the receivers about the damage but they did not do anything. In fact, they had still done nothing by February 2010, when Mr Purewal again contacted them to see what had been done about the water damage. At this point it appears that they took the view that it was too late to make a claim.
On 29 April 2010 the receivers' appointment was terminated, although Mr Purewal was not discharged from bankruptcy until 28 April 2011. The property was transferred back to Mr Purewal from the trustee in bankruptcy on 22 August 2011.
Between being discharged from bankruptcy and the property being transferred back to him, Mr Purewal carried out repairs to the property at his own expense. He brought an action against the receivers to recover the costs of these repairs. His claim was made on the basis that the receivers had breached their duty to him, as mortgagor, in failing to submit a claim on the insurance policy in respect of the water damage.
The Court of Appeal looked at the question of whether the receivers continued to owe a duty to Mr Purewal after the bankruptcy order was made. Whilst a duty is owed to a mortgagor by virtue of his continued interest in the property, this position changes following a bankruptcy order. From this point, the duty is owed to the trustee in bankruptcy. Therefore, any duties owed by the receivers in relation to the insurance claim were owed to the trustee in bankruptcy.
The Court of Appeal also looked briefly at the issue of causation. The court confirmed that, even if the receivers had made an insurance claim it could not be shown that the bank would have directed them to use the money on repairs to the property as opposed to the reduction of the mortgage liabilities.
Receivers will welcome this confirmation that, in bankruptcy situations, their duties are owed to the trustee in bankruptcy and not the mortgagor. The Court of Appeal did not consider whether the receivers should have submitted an insurance claim in the case, but, having been made aware of the damage, their failure to do so may have been more serious had the mortgagor not been bankrupt.
Contributor: Alexandra Holsgrove Jones
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at November 2015. Specific advice should be sought for specific cases. For more information see our terms & conditions on www.TLTsolicitors.com