February 2010
by Michael Wright
Michael Wright of leading title insurance firm, First Title, identifies some of the issues faced by receivers and administrators involved in the disposal of distressed assets, and looks at some practical solutions.
The process of selling distressed property assets is replete with challenges. Typically, receivers and administrators are expected to preserve asset value (or better still enhance it); deliver maximum return; mitigate risk; obviously meet all legal requirements; and complete everything as fast as possible.
Added to these challenges are technical considerations such as the lack of title reps and warranties, which can seriously undermine the saleability and price of distressed properties. Similarly, a quick sale is usually important in retaining value. Any issues raised by a purchasers' lawyers during lengthy due diligence will often lead to costly 'price chip' negotiations.
As you will know all too well, these challenges can delay, and even prevent, sales from happening at all.
In our experience, receivers and administrators are increasingly using the strategic and tactical advantages of title insurance to help them expedite the swift and efficient disposal of distressed properties.
Title insurance can cover not just the usual identified risks, but also unknown risks such as fraud, forgery, and incapacity of prior owners. In short, it can cover virtually any potential challenges to legal ownership. This makes it a highly effective tool. The receiver can sell property with a 'title guarantee' for the benefit of buyers and their lenders; removing unnecessary hassle for receivers and, ultimately, achieving successful outcomes for the appointers. The benefits generally far outweigh the costs of a one-off premium, which can also be an allowable cost of the receivership.
Several cases with which First Title has been involved illustrate the point.
One high-profile example was the disposal of the 221-commercial property portfolio of the Dawnay Day companies. Working with the receiver and their lawyers, First Title adopted a sampling approach, but then guaranteed title on every single asset. This overcame the issue of a lack of reps and warranties and enabled the receiver to sell the portfolio with the benefit of cover for prospective purchasers and lenders. It also substantially enhanced the sale price, significantly speeded up the transaction and avoided any potential price chip. The receiver paid the insurance premium, as an allowable cost, which was easily covered by the eventual, much increased sale price.
The purchaser gained too, because (a) First Title's solution avoided the need for lawyers to investigate all the titles; and (b) the title guarantee eliminated the need to take a view on risk on any of the properties. Result: the purchaser benefited from substantial cost savings on their legal bill.
Smaller in scale but equally significant in outcome, are two further cases where the provision of bespoke insurance solutions helped to ensure swift and profitable deals.
The first concerns a single distressed property with a sale value of circa £500,000. The lawyers for both parties were unable to agree on warranties clauses; and there was a particular concern that the limited warranties clauses would cause problems for any future re-sale. For a premium of only £375, First Title drafted a policy to cover all unknown defects and any procedural defects from an administrator sale affecting the transfer. This modest outlay ensured the property value was preserved and a deal was completed at the original sale price.
The second case involves a developer in receivership whose land bank of 10 sites - worth £10 million - was required by the receiver to be sold rapidly to maintain value. There were no title warranties to be granted. First Title underwrote an £8,500 policy to provide peace of mind to the buyer and their lender, and this helped secure a sale at the asking price.
And there is one salutary lesson, which First Title learnt about after the event. The receivers of a hotel company in administration sought to sell the business for £2 million. However, the debtor could not prove access ownership rights so the eventual purchaser was able to reduce the sale price by £50,000. Had the receiver taken title insurance at a cost of around £4,000, there would have been no opportunity for a downward price re-negotiation.
These cases evidence the fact that the use of carefully thought-through and expertly underwritten insurance policies can help speed up and enhance the value of distressed property sales. For the buyer and lender, such policies are a helpful way to manage risk and provide added surety; for creditors and banks they can help to bring about a clean exit; for receivers and administrators they are a valuable additional tool to improve the process and relieve some of the pain.
Michael Wright is Business Development Director at First Title. He has a wealth of experience in banking, including corporate debt recovery. For more details about how First Title could help you help your clients, call Michael on: 07917 770621, or email him at: mwright@firsttitle.eu or recoveries@firsttitle.eu