July 2005
From December 2005 where spouse/former spouse is stated in this Case Help Manual part this should be taken to include civil partner/former civil partner.
i Introduction
(November 2007)
Where the bankrupt's interest in a solely owned property is of sufficient value and there is a willing purchaser and therefore the realisation of the property is not likely to be protracted, the case should be transferred to the RTLU for realisation of the property.
Where the realisation of the bankrupt’s interest in a property is likely to be protracted, usually where there is no willing purchaser, the official receiver should seek the appointment of an IP. The appointment of a liquidator or trustee may also be appropriate if there are other assets of a complex nature in the case, or where there has been a request from creditors for the appointment of a trustee other than the official receiver.
However, in those cases where the property is charged for more than the current realisable value (negative equity) or where the value of the property exceeds any debts charged over it by only a minimal amount, the case should be transferred to the RTLU.
ii Protecting the official receiver’s interest
In every case where a bankruptcy order is made, the official receiver notifies the Land Charges Department of the order on statutory Form 6.26, the registration being against the name of the bankrupt. Document Production form LRRABO is used for this purpose. It is the court’s responsibility to notify HM Land Registry of the presentation of the petition.) This registration serves to protect unregistered property as a search will be made against the name of the owner when any purchase is proposed.
In turn, the Land Charges Department provides the District Land Registry with the information and, once the bankruptcy order is made and it is aware that a bankrupt is the sole owner of a registered property, a bankruptcy restriction will be entered in the proprietorship register, a creditor’s notice having already been lodged on the presentation of the petition. (For further information, please see the Case Help Manual part: Freehold Property: Solely Owned – Registration of a Bankruptcy Restriction.)
The official receiver as trustee must also give early notice of the bankruptcy order to the secured creditors or charge-holders, using form MP3 on Document Production. The official receiver can then ascertain the amount due to each mortgagee and become aware of any steps that they may have taken to realise their interest in the property, e.g. possession proceedings. Details of insurances should also be obtained.
iii Conditions of the sale of the official receiver's interest in a bankrupt's solely owned property
In a case where the bankrupt is the sole owner of a property, the official receiver may sell the legal title, either back to the (former) bankrupt or to a third party introduced to the official receiver by the bankrupt. This is particularly appropriate where the property is still occupied by the bankrupt and his family. For information on how to deal with a property that is the sole or principal residence of the bankrupt, the bankrupt's spouse or former spouse, please refer to the Case Help Manual part The Family Home.
The official receiver can proceed to sell in such circumstances, provided that:
iv Costs of the sale
The costs associated with a sale will consist of the fee for valuing the property together with the legal costs incurred by the official receiver to convey the property and the proposed transferee’s own legal costs.
The official receiver will have to instruct solicitors to act on his/her behalf in the sale but, unlike in the sale of jointly owned properties, there is no property conveyancing scheme in operation with a fixed fee. TLT Solicitors, who act on the official receiver’s behalf in the sale of jointly owned properties, have indicated that they will be prepared to act on the official receiver’s behalf in the sale of solely owned properties and the fee they charge for this work is likely to be fairly constant. As a result, the official receiver may opt to use TLT Solicitors for this work or a local firm.
v Must the official receiver obtain a valuation?
Before embarking on a sale, the official receiver must be satisfied as to the value of the property to be sold. It may be that there is a current or recent valuation available already, which the official receiver is at liberty to rely on if he/she is satisfied as to the accuracy of the document, especially where the value of the bankrupt’s interest is minimal.
Otherwise, the proposed transferee should be asked to obtain an up-to-date valuation for which he must bear the cost. The main criterion is that the valuation must reflect the current market price of the property. It is possible that a valuation provided free of charge by a local estate agent in the belief that instructions to sell the property will be received, may be acceptable at the official receiver’s discretion. The official receiver may also consider using the drive-by valuation service operated by King Sturge, as a guide in deciding whether or not to accept a nominal offer on a property.
In the event that the official receiver is unhappy with any valuation provided to him/her, he/she is at liberty to seek another valuation, at the cost of the proposed transferee, before agreeing to go ahead with the transaction.
vi Using ‘subject to contract’ on all relevant correspondence
It is important when dealing with the potential sale of a bankrupt’s property that all relevant correspondence is headed ‘subject to contract’. This means that the parties are not contractually bound until another document is signed which will normally occur on the formal exchange of contracts. In effect, the matter is left open until it is concluded formally and if the matter is delayed, the official receiver is not bound to complete at a previously agreed price. In a small number of cases, the completion of the transfer has been delayed sometimes for several years and when the matter is revived the property interest has inevitably increased in value. On occasion, the proposed transferee has sought to complete the transaction based on an open letter from the official receiver accepting the offer (of £1) for the property interest rather than the current (often increased) value. The official receiver should resist such approaches but difficulties could be avoided if all correspondence on the potential sale of the property were marked ‘subject to contract’.
vii Consideration payable
Where a property has some equity, the consideration (or price for the transfer) should be equal to the full value of the equity in the property at the date that the sale is agreed. This means, for example, that where a property has been valued at £170,000 and the outstanding mortgage debt is £168,950, the official receiver should expect the proposed transferee to provide £1,050 in consideration of the proposed transfer.
Generally, the transaction should take place without any speculation as to any possible change in value in the future. However, if the local property market is unstable or if the property has particular features that may affect the short term value, the official receiver may enforce a reasonable time scale such as 3 months for completion of the transaction. This may be appropriate where the official receiver is of the opinion that the proposed transferee is delaying the transaction in an attempt to benefit from variations in the property market. If the transaction is not completed within this period, the official receiver can refuse to be bound by the existing valuation and ask that the proposed transferee obtain a current valuation at his own expense.
Where the property in question has negative equity, the consideration payable for the transfer is £1.
viii What about outstanding charges over the property?
Before the transaction to transfer a solely owned property has been completed, any charges outstanding over the property, such as the mortgage, must be dealt with. Generally, in the case of solely owned property, the mortgagees or chargeholders expect to be paid in full from the sale proceeds of the property. In the circumstances outlined in this part, where only a minimal sum will be paid over to the official receiver in consideration of the “sale” the mortgagees will not be paid anything at that time.
However, before proceeding with the sale, the official receiver must be satisfied that the proposed transferee has come to an arrangement with the existing mortgagees, who will usually consent to the transaction if an agreement has been made for dealing with their mortgage debt.
In the past, the mortgage debt has continued unofficially by agreement between the mortgagee and the proposed transferee, but this practice is unsatisfactory.
The official receiver should not become involved in any negotiations between the (former) bankrupt and the mortgagee(s), except to inform the (former) bankrupt by letter to take independent advice before entering into any arrangement with the mortgagee(s). A copy of the letter from the official receiver should also be sent to the (former) bankrupt’s legal representative instructed to act in the transaction.
ix Dealing with the mortgagees
There are two ways for a bankrupt to resolve the problem of satisfying the mortgagees of the property, either by way of a re-mortgage with the current or another mortgagee or by acknowledging the debt as a post bankruptcy order obligation, probably by deed.
x Assumption of responsibility for debts
Where an undischarged bankrupt comes to an arrangement with the existing mortgagees of a property to allow for a transfer of legal title to take place, he/she is likely to have to obtain credit and/or become liable for a debt which would generally have been released at discharge. The financial effect for the bankrupt of such an agreement should not concern the official receiver so as to prevent him/her from going ahead with the sale – it is a matter for the bankrupt and his advisors to consider.
In the same way, where a discharged bankrupt takes on the responsibility for a debt from which he was formerly released on discharge, the official receiver should not refuse to go ahead with the transaction.
xi What about other assets associated with the mortgage debt?
Official receivers should ensure that all parties to such a transaction are aware of the position being taken regarding all other assets related to the mortgage debt and the mortgaged property.
For example, in the case of an endowment policy 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 considerably. He/she may also wish to exclude the value of any such asset if, at the time of the transaction, it is not validly charged to the mortgagee and its value merely reduces an amount of negative equity and/or is not fully represented by the sale.
The official receiver should be aware that, even where there is no formal charge or assignment of the 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 for the life policy to be used for repayment of the advance, and it will not be available for realisation as a “free” asset.
xii Will the transferred property be an after-acquired asset?
The view is that, for an official receiver to become involved in a “sale” of property to a bankrupt, only to claim it later as an after-acquired asset would be inequitable. Once the house has been transferred to the bankrupt, there is an unwritten understanding that, subject to any mortgage commitment, the bankrupt is entitled to enjoy unhindered ownership of the property without the official receiver as trustee making a claim over it. In the event of a subsequent failure, however, a claim would be made.
However, 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 or via an IPO or IPA (undischarged bankrupts only).
xiii Income Payments Agreement (IPA) and Income Payments Order (IPO)
The transfer of legal title in a solely owned property should not operate so as to affect the pursuit of IPA/IPOs in appropriate cases. If, in the opinion of the official receiver, the mortgage commitment taken on by an undischarged bankrupt is disproportionate to the type of property that he will continue to reside in (where it could be rented for less than the mortgage payment, for example), the official receiver should inform the bankrupt of this at the time that transfer of the property is first mooted. The official receiver should then seek an IPA/IPO without completing the property transfer.
Where a choice has to be made by an official receiver, it is preferable to obtain an IPA/ IPO rather than to allow a property transaction which will mean that the bankrupt cannot meet the commitments to a mortgage.
For more information on the terms and conditions for an IPA please refer to the Case Help Manual part Income Payment Agreements. For information regarding the criteria to be considered when considering IPO, see the Case Help Manual part Income Payments Orders.
Notes
Where can I find out more?
Technical Manual:
Chapter 33 Dealing with a Bankrupt's Interest in the Family Home particularly 33.32 - 33.45: Solely Owned Property
Chapter 50 Dealings with the Land Registry
Case Help Manual:
Freehold Property: Solely Owned – Registration of a Bankruptcy Restriction
Sale of Bankrupt’s Interest in Jointly Owned Property
Technical Notices:
T5/94 – Bankruptcy: Property Conveyancing: A Single Supply Agreement for the Provision of Conveyancing Services to Official Receivers
T22/97 – Bankruptcy: Property Conveyancing: Dealing With Solely Owned Property: Valuations: and Related Issues
T2/03 – Property Conveyancing Scheme: Outcome of the Competitive Tendering Process and General Matters
Management Notice: M72/02 – Drive-by Valuations
OROS Bulletins
July 2004 Article no. 5: Low Cost Conveyancing Scheme
March 2005 Article no. 8: Drive by valuations
March 2005 Article no 14: "What will happen to my home" leaflet
Forms to be used:
LRRABO Land Registry, register BO or amend registration
LRCBI Land Registry, confirm bankruptcy restriction
MP1 Letter to bankrupt re purchase of OR's interest in property
MP2 Mortgaged Property (2)
MP3 Mortgaged Property (3)
Click HERE to view the flowchart for Dealing with the sale of Bankrupt's Interest in soley owned property
Procedure
For those properties that have been recognised as the principal residence bankrupt, the bankrupt's spouse or former spouse please refer, in the first instance, to the Procedural part of the Case Help Manual: The Family Home.
1. Receive file from examiner with instructions to deal with solely owned property.
2. Send notice of bankruptcy order to all mortgagees and charge-holders, where not previously done, using form MP2.
3. Check that the bankrupt is the sole owner of the property and, if it is a registered property, that a bankruptcy restriction has been registered by ordering an office copy of the register of title from the Land Registry.
4. If the bankrupt is not shown as the sole owner of the property and all address details, etc. are correct, refer the file to the examiner/B1.
5. If no bankruptcy restriction has been entered in the register, check that form LRRABO has previously been sent to the Land Registry. If not, send one immediately.
6. If it appears that the Land Registry has received all necessary documents and has acknowledged with the WO(B) number, but no restriction is in place, send 2 copies of form LRCBI - to the District Land Registry, quoting the address and title number.
7. For further detailed information on the registration of a bankruptcy restriction please refer to the Case Help Manual part Freehold Property: Solely owned - Registration of a Bankruptcy Restriction.
8. A current valuation of the property should be made. The examiner will be responsible for deciding on how this should be determined, e.g. drive by valuation, relying on the information provided by the mortgagee(s), etc. Where it appears that there is sufficient equity in the property and the circumstances outlined in paragraph i above are appropriate, a meeting of creditors must be called or an application for a Secretary of State appointment sought. Please follow the procedure set out in the Case Help Manual parts: Meeting: Calling a Meeting and Insolvency Practitioners - Appointment by the Secretary of State.
9. Where the official receiver remains trustee, forward form MP2 to all known mortgagees and charge-holders. Check the details in the bankruptcy preliminary information questionnaire(PIQ), to ensure that none has been omitted.
10. If the property is the subject of repossession proceedings, the official receiver need take no further action once satisfied that the bankruptcy restriction has been registered and that the mortgagees are aware of the official receiver's interest.
11. Where the official receiver is to remain trustee, send "offer to purchase" form MP1 to the bankrupt. This letter informs the bankrupt that he/she may make an offer to purchase the official receiver’s interest in the property and have it transferred either back to the bankrupt or to a third party nominated by the bankrupt.
12. Where there is any doubt as to whether an IPA or IPO could be a more suitable course of action, pass the papers to the examiner/B1 for consideration and instruction.
13. If necessary, on instruction from the examiner/B1, write to the bankrupt informing him/her that the transfer is not available. Commence IPA/IPO process. For further information please refer to the procedure outlined in the Case Help Manual parts Income Payment Agreements and Income Payment Orders.
14. The (former) bankrupt may approach the official receiver with a request to purchase the interest in a property. If it has been agreed that the property transfer is a possibility, write to the (former) bankrupt informing him/her of the conditions that will have to be met before any property can be transferred.
15. The (former) bankrupt must be informed in clear terms that he/she will be responsible for:
16. Before agreeing to a property transfer, the official receiver must ask the bankrupt to submit a current valuation of the property for the matter to be considered properly. It must be stressed to the (former) bankrupt that the official receiver will not bear the cost of the valuation. The main criterion is that the valuation must reflect the current market price of the property. It is possible that a valuation provided free of charge by a local estate agent in the belief that instructions to sell the property will be received, may be acceptable at the OR’s discretion. The OR may also consider using the drive-by valuation service operated by King Sturge, as a guide in deciding whether or not to accept a nominal offer on a property. The examiner/B1 will be responsible for deciding what method of valuation is acceptable.
17. Ask the (former) bankrupt to provide the name and address of their solicitors or other legal representative who will be acting in the transaction.
18. Work out the sum that the (former) bankrupt will be required to pay in consideration for the transfer. This can generally be done in a straightforward manner by subtracting the value of the outstanding mortgages and charges from the valuation figure provided by the (former) bankrupt.
For instance, on a property valued at £165,000 with an outstanding mortgage of £158,000 and a second charge of £6,250, the sum required in consideration will be £165,000 less £164,250, which is £750.
However, bear in mind any other assets associated with the mortgage such as an insurance policy, the value of which may be taken into account and increase the consideration payable. Where appropriate, include this in the calculation. In the event of uncertainty refer to the examiner for approval.
19. Send a letter to the (former) bankrupt informing him/her of the sum he/she will have to provide the official receiver for the transaction to proceed. Mark the letter "Subject to contract".
20. The sum requested should be clearly broken down into the amount required in payment for the property, (which may only be consideration of £1), and the separate amount required to cover the official receiver's legal costs.
21. Where there is any uncertainty as to how much will be needed to pay for the legal costs, ask the official receiver's solicitors to give an approximate figure. It is better to ask the (former) bankrupt for a sum which may subsequently require that a refund is made than to receive too small an amount and be forced to ask the (former) bankrupt for more money later.
22. The OR will need to see that there has been either a re-mortgage of the property or that there has been an acknowledgement of debt in the form of a deed by the (former) bankrupt.
23. Write to ask the (former) bankrupt for evidence that the debt to the existing mortgagees has been dealt with by him/her. Point out that the official receiver will not take part in any negotiations with the mortgagee(s) nor offer any advice as to the best course of action to be taken by the (former) bankrupt.
24. Inform the bankrupt, in writing, that he/she should take independent advice before entering into either a re-mortgage or acknowledgement of debt. Forward a copy of this letter to the bankrupt's legal representative dealing with the transfer.
25. Once the valuation has been received, pass it to the examiner/B1 for consideration as to its validity. If unsatisfied with the valuation provided, the official receiver can request that the (former) bankrupt provide another. The OR may consider using the services of King Sturge to provide a ‘drive by valuation’ the cost of which must be borne by the (former) bankrupt.
26. At the same time, pass the evidence supplied by the (former) bankrupt regarding settlement of the existing mortgage debt to the examiner/B1 for confirmation that it is acceptable.
27. Once confirmation has been received that the transaction can go ahead, ask the (former) bankrupt to let the official receiver have a cash deposit for the total costs and point out that, until that sum is received by the official receiver, no action will be taken to initiate the transfer.
28. When payment is received, ensure that the cashier posts the remittance to a suspense account.
29. Instruct solicitors to act on the official receiver's behalf in the transaction. Provide the solicitor with full details of the case. This will include:
Documents enclosed must include a certified copy of the bankruptcy order and proof that the official receiver is trustee together with any other relevant correspondence. Confirm that the official receiver is in receipt of funds to cover the legal costs and the agreed consideration.
30. Ask the solicitors to inform the official receiver once the transfer has been completed.
31. Once confirmation has been received, ensure that the legal costs are paid and that the consideration for the equity is posted to the appropriate estate ledger. Where the case is closed, the monies (which may be as little as £1) should be credited to the Indivisible Balances Account for eventual payment to the Treasury. Finance Section will arrange for this.
32. Return any overpayment of costs by the (former) bankrupt to him/her. Ensure that the suspense account has a nil balance and has been closed.
33. Note screens 8 and 15 on LOIS and file papers accordingly.