The Irish property market is likely to be dominated by sellers of distressed properties over the coming years. The residential market has seen high-profile sales by secured lenders and while commercial property has not seen a revival in activity on the same scale – due in part to the lack of credit and to continuing valuation uncertainties – banks and insolvency practitioners will be in the vanguard of this market over the coming years.

The practical challenges

Any party approaching a property transaction with a bank, receiver or liquidator in an enforcement situation should appreciate from the outset that the opportunity to acquire a property in those circumstances comes at a price – the levels of information and legal comfort available from the seller in relation to the underlying asset are limited. The reasons for this are understandable:

  • The seller is unlikely to have all of the requisite knowledge of the property, and in many cases the seller will be relying on information that was gathered when security was originally taken. While a seller may have some opportunity to gather information in relation to a property, this exercise often relies heavily on the co-operation of the borrower.
  • Sellers of distressed properties will never wish to accept any liability for information provided in the course of the sale, as the entire purpose of the sale is to realise value for the asset that can be used in reduction of debt or discharge of creditors. If the seller needs to put any of the realised funds to one side to deal with potential warranty claims the utility of the entire exercise is compromised.
  • The absence of information concerning a property can be particularly marked in the case of fixed asset receiverships. Traditionally a "receiver and manager" would have full access to the books and records of the company concerned, and might well be able to garner a lot of information from those sources which might be of use to a prospective purchaser. Fixed asset receivers, however, rarely have access to the entire of the relevant borrower's records relating to a particular property, particularly when one is dealing with an individual over whose assets a receiver has been appointed.
  • A recurring feature in the current property cycle is the difficulty which banks and receivers and liquidators encounter in gathering information from professionals that may have advised the borrower in relation to particular properties. Professionals such as architects and solicitors are entitled to claim liens over documents until fees are paid, and in addition those professions often hold information that will be of significant use to those sellers.

In summary, buyers must be prepared to take an active role in their own due diligence in relation to the property concerned – this is certainly a case of "buyer beware".

The legal challenges

The basic legal risk in purchasing a property from a bank, receiver, or liquidator surrounds the fact that the buyer will be paying the purchase money to someone other than the 'owner' of the property. It is essential that the former owner's interest is legally extinguished and the property is acquired clear of third party interests:

  • It is critical to ensure that the legal documents which create the power for the relevant seller to dispose of the property are sound. In the case of a bank as seller, the relevant document will comprise the charge, and evidence that the bank's power to sell has arisen. Where a receiver is seller, the purchaser must see the relevant charge, evidence that the receiver was properly appointed by the owner of that charge, and evidence that the receiver is given the power to execute documents on behalf of the owner. Where a liquidator is seller the purchaser must be satisfied that the liquidator's appointment is valid.
  • When dealing with registered land, it is often the case that the lender's charge must be registered before a sale can be completed and delays in registrations can be significant.
  • It is common in enforcement sales that other creditors attempt to secure debt against property that might be charged to the lender, often by means of judgment mortgages, and purchasers will be anxious to know that such charges will not affect the property after closing.
  • A fundamental requirement is that the purchaser gets not only legal title but physical access to the property.

The legal landscape in dealing with sales and purchases of distressed properties has been upset considerably by the recent High Court decision in Start Mortgages –v- Gunn and others. The case turned on the implications of the repeal by the 2009 Land and Conveyancing Law Reform Act (the "2009 Act") of a provision in the Registration of Title Act 1964. The 2009 Act comprised a widely welcomed reform of conveyancing legislation dating back centuries, and included new provisions dealing with the law of mortgages whilst repealing or amending older legislation.

Conventional legal wisdom held that the repeal of older legislation by the 2009 Act could not affect charges which were entered into before the date of the relevant repeal. It was thought that the 'old' rules applied to 'old' charges, with the 2009 Act applying to post-2009 charges.

The Start Mortgages judgment, however, held that it could not be assumed that pre-2009 charges could continue to avail of the pre-2009 rules. In Start Mortgages, a statutory provision for obtaining possession on foot of a charge was repealed by the 2009 Act and the High Court held, to the dismay of lenders, that the repealed provision was only available to lenders that had issued formal demands in respect of charges prior to the date of the repeal.

The ability of lenders to recover possession of properties has been severely affected by this judgment, and while obtaining possession is usually less of an issue when dealing with commercial properties, this judgment has created particularly acute problems where homeloans are concerned.

While the powers of receivers was not in issue in Start Mortgages, the legal principle set out in that judgment has wide ranging application to the powers of receivers and charge holders generally. Where a charge holder relies on the pre-2009 Act rules to appoint a receiver or sell a property, a very careful analysis of the charge and the pre-enforcement dealings with the borrower must be undertaken to establish if the pre-2009 rules are available in the circumstances of that case.

A recent decision of the High Court (albeit at an interim stage rather than a full hearing) in Kavanagh v Lynch & ors. has provided some comfort to receivers. This case held that the repeal of the older statutory provisions by the 2009 Act should not affect powers of receivers where those powers are contractually granted by the relevant charge, even where those powers refer to and incorporate the provisions of the (repealed) legislation.

One final difficulty raised by the Start Mortgages decision concerns the ability of banks to deal with properties which are subject to second and subsequent charges. The relevant pre-2009 legislation contained useful provisions which allowed a lender holding a first charge to sell a property freed from "junior" charges, but this legislation has now been repealed and replaced by new legislation that only applies to post-2009 charges. Applying the Start Mortgages principles, there must be some doubt at this point over whether the power to clear "junior" charges remains available. This power is particularly useful where unsecured creditors have registered judgment mortgages against a property and, absent power to clear "junior" charges, court applications may be required in order to clear those charges from a title.

If it is the case that the pre-2009 legislation is only available to those who had issued formal demands prior to that repeal, then there is now a significant gap in the legal infrastructure available to those lenders holding pre-2009 mortgages who may not have taken enforcement steps sufficiently far prior to the date of the relevant repeal.

As matters stand, pending clarification of the applicable law by the courts or amending legislation, a detailed analysis must be carried out in each case to establish whether receivers and banks have the requisite power to effect transactions following this judgment.

This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.