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PART 6
May 2008
DEALING WITH PROPERTY WITH MINIMAL/NO EQUITY
33.151 Introduction (amended February 2011)
In all cases where section 283A applies and the bankruptcy petition was presented on or after 1 April 2004, this part should be read in conjunction with Part 1. (Details of the provisions of section 283A are given in paragraph 33.7 in Part 1.)
In cases where the bankruptcy order was made on a petition presented before 1 April 2004 and section 283A applies, Part 6 should be read in conjunction with Annex 3. (Details of the transitional provisions of section 283A are given in paragraph 3 of Annex 3.)
Once the bankrupt’s interest in property has been established (see Part 2), the official receiver should take steps to deal with this interest at an early stage in the administration. Where that interest is negative or below £1000 (see paragraph 33.20), then the bankrupt and any joint owner should not be offered the interest for sale.
Property with equity below £1000, including negative and no equity properties, should be placed on a register for review at the two year 3 month point (see paragraphs 33.24 to 33.25 for solely owned property, and paragraphs 33.30 to 33.31 for jointly owned property).
33.151A Early re-vesting of property with negative equity (inserted February 2011)
The official receiver has discretion to effect an early re-vesting of the bankrupt’s interest in a property in tightly constrained circumstances (see paragraph 33.17A).
33.152 Mortgaged property (amended February 2011)
Disposal of the property by sale of the bankrupt’s interest by the official receiver, as trustee, should only be considered prior to the two year three months review (see paragraph 33.25 and 33.31) where an offer to purchase the bankrupt’s interest has been received which is clearly in the interest of creditors to accept. In practice, this is likely to be where the bankrupt’s interest in a property is in excess of £1000 (see paragraph 33.20 and 33.21A).
Where an offer is accepted in respect of a jointly owned property, the solicitors appointed under the terms of the Property Conveyancing Scheme must be instructed by the official receiver to provide the conveyancing services (see paragraphs 33.178, 33.182 and Annex 1 for details of the solicitors appointed). For information on solicitors in relation to solely owned property see paragraph 33.182.
If it is not possible to transfer the bankrupt’s interest in a solely or jointly owned property because the bankrupt’s interest in the property is less than £1000 or because no offer considered to be in the interests of creditors has been received (see paragraph 33.21A), then the property should be transferred to the RTLU for review at the 2 year 3 month stage. In the interim the mortgagee may take steps to realise the property [note 1]. The mortgagee’s ability to dispose of the property is likely to depend on the terms of the mortgage agreement and whether they have been breached.
Where the petition was presented on or after the 1 April 2004, the guidance in Part 1, paragraphs 33.22 to 33.23 and 33.28 to 33.29 should be followed where section 283A applies. (If the official receiver is dealing with a case where the bankruptcy order was made on a petition presented before 1 April 2004, then reference should be made to Annex 3.)
In the small minority of cases where the mortgagee is not legally in a position to sell the property (for example if the bankrupt has not breached any terms of the mortgage agreement), an acceptable offer has been received which is in the interests of creditors to accept (see paragraph 33.21A) (subject to contract), and there is a reasonable prospect of a surplus being obtained for the estate, the case should be transferred to the RTLU to deal with.
The RTLU official receiver should ensure that the mortgagee will give a written indemnity (and if appropriate a cash deposit) to cover all the expenses in connection with the sale.
If the official receiver remains as trustee and is requested by a secured creditor (or a receiver appointed by a secured creditor), to transfer or convey a property, he/she should charge the appropriate remuneration on a time and rate basis (see Chapter 36, paragraph 36.43) and instruct solicitors to carry out the transfer. The official receiver should ensure that any costs incurred will be covered by the secured creditor.
33.152A – Solely and jointly owned property – bankrupt’s interest less than £1000, disability/caring responsibilities (inserted February 2011)
Where a bankrupt makes an approach to the official receiver, as trustee, requesting that his/her interest in the property is dealt with prior to the two year and three month review (see paragraph 33.25 and 33.31) in the exceptional circumstance that the extended uncertainty in determining the interest may exacerbate a disability (especially mental health-related), or potentially cause a mental-health related disability as the uncertainty could cause undue distress, the official receiver may consider selling the bankrupt’s interest in the property for a nominal sum (in the case of jointly owned property the Property Conveyancing Scheme should be used)..
An example would be where a disabled bankrupt (or a bankrupt with caring responsibilities for a disabled person) may have made specific adaption to their home in order to cope with the disability, and the uncertainty with regards to their interest in that property may cause distress.
This discretion must only be exercised by the official receiver, as trustee, on a case by case basis. Similar provision should be considered for requests based upon caring responsibilities (including pregnancy and caring for young children) and age (65+), where the uncertainty could lead to mental health related concerns.
33.153 Arrangements with mortgagees – Solely owned property
In coming to arrangements with existing mortgagees, the bankrupt might obtain a remortgage, after the date of the bankruptcy order, of the existing debt or an acknowledgement to repay the balance of the mortgage debt as a post bankruptcy obligation (a deed of acknowledgement) (see paragraph 33.154).
Subject to the bankrupt receiving his/her own legal advice on these transactions, it is considered that the official receiver need not be concerned about the actions of the bankrupt. The transaction should not affect the official receiver’s pursuit of an income payments agreement or income payments order in appropriate cases [note 2] (see paragraph 33.159 and Chapter 31.7 for more information on income payments agreements and orders).
If the bankrupt remortgages the property, it is considered that such a transaction would operate to cancel the existing obligation of the bankrupt under the mortgage commitment which existed at the date of the bankruptcy order. If the property is subsequently sold giving rise to a shortfall, the mortgagee will not have a provable claim in the bankruptcy for that shortfall.
33.154 Deeds of acknowledgement of debt – Solely and jointly owned property (January 2009)
A secured creditor may request a bankrupt to complete a deed of acknowledgement of debt when the sale of the property results in a shortfall. They may also request such a deed be completed by any non-bankrupt joint owner/borrower when the property was jointly owned. A secured creditor may request this transaction so that no dispute will arise as to the amount of the shortfall or so that proposals to repay the unsecured portion of the debt by instalments can be settled. However, the secured creditor is entitled to claim in the bankruptcy for the unsecured balance of its debt and it will be up to the trustee to deal with such a claim. If the bankrupt completes such a deed, a new debt might be created on which recovery action might be based at any time within the limitation limit. It is not for the official receiver to influence the bankrupt about how to proceed in this matter. If the debt is a joint debt, any non-bankrupt joint owner will be liable for the appropriate portion of the debt whether a deed of acknowledgment is completed or not. The official receiver should not object to the completion of a deed of acknowledgement of debt and if he/she becomes aware that the bankrupt has been requested to provide such a deed, the official receiver should suggest that the bankrupt seeks his/her own legal advice.
33.155 Assumption of responsibility for debts – Solely owned property
It is almost inevitable that if an undischarged bankrupt were to come to an arrangement, e.g. remortgage or deed of acknowledgement, with the existing mortgagee(s) of the property, the bankrupt would be faced with the prospect of obtaining credit and/or taking on responsibility for a debt from which he/she would have been released on discharge from bankruptcy. The official receiver should not refuse to proceed with a transaction on either of these grounds. The financial effect for the bankrupt of such an agreement is a matter for the bankrupt and his/her own advisors.
33.156 Assets associated with the mortgage debt – Solely owned property
Official receivers should ensure that all parties to a remortgage or deed of acknowledgement are aware of the position being taken regarding all other assets related to the mortgage debt and the mortgaged property. For example, if the mortgage arrangement is supported by an endowment policy, which is charged or assigned to the mortgagee, the official receiver may wish to include the value of the policy as part of the negotiations to fix the value of the property to be bought by the proposed transferee, which may increase the consideration payable.
33.157 Equitable charge – Solely owned property
The official receiver should be aware that, even where there is no formal charge or assignment of the endowment policy to the mortgagee, the likelihood is that an equitable charge exists over the policy, if it is clear from documentation that it was intended that the life policy should be used for repayment of the mortgage advance, and it will not be available for realisation as a free asset (see paragraph 33.85). The official receiver should ascertain that all policies held by the mortgagee are either formally charged or that there is an equitable charge. In some cases the mortgagee, without any actual charge or assignment, holds on to policies. In such cases the policy will be a free asset available for realisation by the official receiver.
33.158 After-acquired property – Solely owned property
It would be inequitable for the official receiver, having been involved in the transfer, to claim the property later as an after-acquired asset. Once the property has been transferred there is an understanding that, subject to any mortgage commitment, the bankrupt is entitled to enjoy unhindered ownership of the property, subject to the mortgage contract, without the official receiver as trustee making a claim over it.
If the official receiver becomes aware that the transaction is being financed by a bankrupt from monies or assets which may have been withheld from the official receiver, or from surplus income that could have been subject to an income payments order, it can be claimed, even though this may defeat the property transaction, either as an after acquired asset [note 3] or via an income payments order [note 4] (undischarged bankrupts only).
33.159 Inter-reaction with income payments orders and income payments agreements – Solely owned property
If it appears to the official receiver that the assumption of a mortgage commitment by an undischarged bankrupt is disproportionate to the type of property the undischarged bankrupt will continue to occupy, because, for example, the property could be rented for a sum less than the mortgage payment, the official receiver should indicate this at the time of the dealings with the transfer of the property and should press ahead with obtaining an income payments order without completing the property transfer [note 4]. Obtaining an income payments agreement or income payments order should be preferred to allowing a property transaction to take place which would put the undischarged bankrupt in a position of being unable to meet the commitments to a mortgagee.
33.160 Sale of jointly and solely owned property – bankrupts interest is greater than £1000 (amended February 2011)
Where the petition was presented on or after the 1 April 2004, the guidance in Part 1, paragraphs 33.22 to 33.23 and 33.28 to 33.29 should be followed where section 283A applies. (If the official receiver is dealing with a case where the bankruptcy order was made on a petition presented before 1 April 2004, then reference should be made to Annex 3.)
If the bankrupt’s interest in the property is not to be dealt with by an insolvency practitioner and the interest is greater than £1000 (see paragraph 33.20) , the official receiver, as trustee, should give consideration to sending a letter to the bankrupt inviting an offer to purchase the bankrupt’s interest in that property from the official receiver. Form MP1 should be sent for this purpose (see paragraphs 33.22 and 33.28) . The most likely purchaser will be the spouse, civil partner, former spouse, former civil partner, cohabitant, other joint owner, a member of the family or dependant(s) of the bankrupt. The official receiver should establish, as far as practicable, that the bankrupt has a saleable interest in the property (see Part 2 and Part 3).
Once the official receiver is satisfied that there is a saleable interest, and any offer is likely to be in the creditors’ interest to accept (see paragraph 33.21A), the bankrupt should be asked whether any relative or friend is prepared to purchase the bankrupt’s interest in the property. Where the property is jointly owned, the bankrupt should be informed of the Property Conveyancing Scheme (see paragraph 33.178). It is the purchaser’s responsibility to investigate the title to the property and to verify that there is an interest to be sold. All correspondence between the official receiver and the proposed purchaser should be marked “subject to contract”.
In the case of jointly owned property two copies of form MP1, jointly owned property, offer to purchase, should be sent to the bankrupt and the co-owner. The bankrupt is required to sign and return one copy of the form to the official receiver to acknowledge receipt. This form sets out the procedure necessary for the transfer of the beneficial interest in the property to the co-owner or other third party, outlines the requirements regarding the official receiver’s legal costs and what will happen to the property in the event that the beneficial interest is not transferred.
33.161 Valuation of jointly and solely owned property
In any sale that the official receiver attempts he/she should ensure that there is a professional valuation of the property, unless a recent independent valuation has been obtained which he/she is satisfied is accurate. The official receiver must be satisfied as to the value of the property to be sold before he/she agrees to complete a sale, with or without any condition as to time. If the official receiver has any doubt as to the accuracy or propriety of a valuation but not solely by reason of the fact that it was supplied by the proposed purchaser, or there is doubt about the valuer’s independence or competence, he/she should consider his/her position and if necessary seek another valuation at the expense of the proposed purchaser, before indicating agreement to proceed with the transaction.
33.162 Consideration payable – jointly and solely owned property (amended February 2011)
The consideration payable for the bankrupt’s interest in the property being transferred by the official receiver, as trustee, prior to the two year three month review stage (see paragraphs 33.24-33.25) must clearly be in the interests of creditors (see paragraph 33.21A).
Where the bankrupt’s interest is greater than £1000, the consideration payable by the proposed purchaser should represent an offer for the interest in the property at the time the sale is agreed without there being any speculation as to what might happen to the value of the property in the future.
33.163 Limited period of offer – jointly and solely owned property
When accepting an offer, subject to contract, for an interest in a property the official receiver should explain that the agreement is for a limited period, e.g. three months, so that the official receiver is at liberty to review the position in the event of there being a delay. If the local property market is particularly volatile or if the property has unique features which might affect its value over a short period of time, the official receiver should set a time limit within which the transaction is to be completed. The official receiver will not be bound by the existing valuation once the period has expired. An up-to-date valuation should be obtained at the expense of the proposed purchaser before the transaction proceeds any further. This acts as protection to the official receiver in cases where the proposed purchaser is seeking to benefit from rising or fluctuating property conditions or is seeking to drag his/her feet.
33.164 Costs of sale – jointly and solely owned property
Solicitors should be instructed to deal with the transfer of the property, once the proposed purchaser has agreed to pay their costs (see Part 7). In all cases the proposed purchaser should meet the official receiver’s legal costs of the transfer and the costs of any valuation. If this is not possible, these costs must be covered by the sale and, ideally, the sale proceeds should be deposited with the official receiver, or his/her solicitor, at an early stage. The appropriate funds should be obtained from the purchaser before any expense is incurred by the official receiver and before instructions are given to solicitors, unless the costs are to be paid from the sale proceeds. When using the Property Conveyancing Scheme, the official receiver should attempt to have the costs deposit paid directly to the appointed solicitors under this agreement so that monies do not have to be handled by the official receiver. The money should be held in a suspense account in accordance with the guidance in Chapter 32.2, Part 1. Solicitors and the purchaser should be informed that the funds will not earn interest. A debit balance must not be incurred for the official receiver’s costs without the prior authority of Technical Section.
Where the property is jointly owned by the bankrupt and another person, it is only the bankrupt’s beneficial interest in the proceeds of sale (and rent and profits until sale) which vests in the trustee. The legal estate remains vested in the joint owners. If the property is to be sold, it will be necessary for the bankrupt and co-owner to convey the legal estate under their own signatures. If the official receiver as trustee is not arranging the sale, he/she may be asked by the solicitors dealing with the sale to sign a deed of concurrence to confirm that, as one of the beneficial owners, or otherwise (as necessary) in his/her capacity as trustee, he/she agrees to the sale. Such a deed is not strictly necessary but the official receiver may sign it if he/she is satisfied that the sale is in order and, in particular, that the arrangements for the payment to him/her of any surplus on the sale which is due to the estate are satisfactory. The official receiver should seek a small fee for dealing with the transfer, based upon his/her time costs, unless an asset realisation will accrue (See Chapter 36, Part 1 for more information on fees) [note 5].
33.166 Solicitor/conveyancer – jointly and solely owned property
It is not permissible for a solicitor or licensed conveyancer to act for more than one party in any conveyancing transaction and the official receiver should not suggest to proposed transferees that his/her solicitors can also act for them. The proposed transferee must find a different legal representative.
33.167 Bankrupt failed to surrender – jointly owned property
If the bankrupt has failed to surrender to the proceedings and therefore a signature cannot be obtained (or if joint owner cannot be traced), the official receiver as his/her trustee can apply to the court under the Trustee Act 1925, section 36 to replace him/her as trustee of his/her beneficial interest in the property so that the sale can proceed. The official receiver, as trustee, should consider instructing the contractor under the Property Conveyancing Scheme.
Where a property is solely owned by the bankrupt, the legal interest as well as the beneficial interest in the property will vest in the trustee who may therefore convey it to another party. A solely owned property can be transferred to a third party or even the bankrupt although in the case of a solely owned property, the official receiver will be transferring the legal title as well as the beneficial interest. Where the beneficial interest in the bankrupt’s solely owned property is held by the bankrupt and/or another or others, it is not clear whether the legal estate vests in the trustee (see paragraph 33.51).
Where the petition was presented on or after the 1 April 2004, the guidance in Part 1, paragraphs 33.22 to 33.23 and 33.28 to 33.29 should be followed where section 283A applies. (If the official receiver is dealing with a case where the bankruptcy order was made on a petition presented before 1 April 2004, then reference should be made to Annex 3.)
33.169 Mortgage to rent scheme (amended February 2011)
It may be proposed that the bankrupt should dispose of his/her interest in the property to the mortgagee under the ‘mortgage to rent scheme’. See Part 9 for more guidance on the mortgage to rent schemes. This scheme is where the mortgagee, or a company formed by the mortgagee, purchases the property from the bankrupt and then arranges to rent it out. The official receiver should not object to such a proposal if there is no equity in the property for the benefit of the estate and the mortgagee does not require a deed of continuing liability. Before informing the mortgagee that he/she has no objection, the official receiver may wish to obtain an independent valuation of the property or otherwise to satisfy himself/herself that the transfer is at a fair price. The transfer of ownership may be by the mortgagee exercising its power of sale under the mortgage or by a company formed by the mortgagee purchasing the property from the bankrupt. In the latter case, where the official receiver is trustee and has to become involved in the transaction, as the mortgagee is not exercising its power of sale, the official receiver should instruct solicitors (see Part 7) to deal with the conveyance. Such cases will be the exception rather than the rule. See paragraph 33.124 for information in relation to payment of the official receiver’s costs.
33.170 Shared ownership agreements
The official receiver may encounter a shared ownership scheme. This is a form of property purchase where a share of the value of the property is purchased, either by cash or by a mortgage, and the remainder is rented. These schemes are set up by housing associations. The bankrupt may have increased his/her share in the value of the property over time by purchasing additional amounts of the value of the property. The increases are usually a certain percentage specified by the housing association. This is referred to as ‘staircasing’. The official receiver will have to establish what percentage of the property the bankrupt owns and what percentage is rented from the housing association in order to calculate the bankrupt’s interest in the property. It is possible to assign any equity in the property the bankrupt may have accrued, but care should be exercised as some agreements may specify to whom the bankrupt’s interest must be transferred. The official receiver should also ensure that the usual covenants on the assignment of a lease are obtained from the purchaser. Details of these covenants are given in Chapter 31.3 - Dealing with Freehold and Leasehold Properties.
33.171 Transfer of beneficial interest only - jointly owned property (amended February 2011)
In a small minority of cases, the official receiver may be able to transfer by deed of assignment the bankrupt’s beneficial interest (which is of minimal or no value) in a jointly owned registered property. Such a transfer should only be considered in the initial stages of a case where an offer has been received, for the bankrupt’s interest, that is clearly in the benefit of creditors to accept (see paragraph 33.21A). Such cases are likely to be those where the mortgagee has refused to consent to the transaction taking place, or where the bankrupt has been discharged and there is a wish on the part of the joint owners of the property for it to be retained in joint names. The solicitors appointed under the terms of the Property Conveyancing Scheme may advise the official receiver that in a particular case a deed of assignment should be used by the official receiver in preference to the Property Conveyancing Scheme. Unless that advice is challenged by an official receiver, the transaction will then proceed under the Property Conveyancing Scheme but with the solicitors producing a deed of assignment of the beneficial interest only. This method of transfer does not affect the fee payable to the solicitors appointed under the terms of the Property Conveyancing Scheme, (see paragraph 33.180).
33.172 Transfer of beneficial interest only - solely owned property
Official receivers should not enter into any transaction the effect of which would be to transfer the beneficial interest (only) in a solely owned property. There is no benefit in proceeding to sell the beneficial interest in a solely owned property while the legal title remains vested in the official receiver as trustee in bankruptcy.
33.173 Application for charging orders
Where there is inadequate equity in a property to attract the appointment of an insolvency practitioner as trustee and the official receiver is unable to realise the bankrupt’s interest in the property, in some circumstances he/she may apply to the court for a charging order [note 6]. Full guidance on when charging orders should be sought and on the application to be made is given in Annex 2.
33.174 Disclaiming bankrupt’s interest in property (amended February 2011)
The official receiver, as trustee, may disclaim the bankrupt’s interest in freehold or leasehold property even if the spouse, civil partner or cohabitant are in occupation, in the circumstances outlined below [note 7]. Guidance on the procedure for disclaiming an interest in property is given in Chapter 34 - Disclaimer.
An interest in a family home may be disclaimed where:
(a) The property has some onerous condition or liability attached which makes the property unsaleable, e.g. it may be that there are substantial outgoings on the property for dilapidations or service charge payments under a lease or substantial renovation work is necessary before the property is fit to be sold. Reference should be made to Chapter 8, Part 7 regarding an occupier’s liabilities and possible liabilities to trespassers. It is not considered that onerous liabilities in respect of a property will fall upon the official receiver as trustee where the property is jointly owned as it is the beneficial interest (i.e. the interest in the sale proceeds) which vests in him/her and not the legal title; or
(b) There is insufficient equity (usually below £1000 – see paragraph 33.20) to enable the official receiver, as trustee to sell, the bankrupt’s interest in the property to any joint owner, relative or friend of the bankrupt or to transfer the bankrupt’s interest by deed (see paragraph 33.171), it is not considered appropriate to apply for a charging order and the official receiver is satisfied that the mortgagee will not be taking steps to realise his/her security in the immediate future, and there is no prospect of any value accruing to the estate. The official receiver must take into consideration whether, if the property is jointly owned, the latent liability attached to its continued undisclaimed ownership is slight and that if a disclaimer is made, all possibility of any interest from the property will be lost. It is more likely to be appropriate to effect an early re-vesting of the interest rather than issue a disclaimer under these circumstances (see paragraph 33.17A).
33.175 Serving notice of the disclaimer
Whenever a property is to be disclaimed, the official receiver should ensure that the guidance in Chapter 34 is followed and in particular that all persons who may have a beneficial interest in the property and/or occupy it (including minors), or claim a right of occupation, as well as those who may hold the property as security, are informed of the disclaimer [note 8]. Where the property is a dwelling-house, there are specific requirements for the trustee to serve notice on every person occupying a dwelling-house or claiming a right to occupy it (as far as the trustee is aware of their addresses) [note 9]. The disclaimer will not take effect until 14 days after the notice has been served on the occupiers of the property. If in that time an application is made for a vesting order, it will be a matter for the court to decide whether the disclaimer is to take effect [note 10]. See Chapter 34, paragraphs 34.70 to 34.73. Reference should also be made to paragraphs 33.27, 33.33 and 33.38 relating to the re-vesting procedure.
[Back to Part 5 – Protection of property by the official receiver] [On to Part 7 – Sale of property]