Inspecting a property in an insolvency context

The physical inspection of the property will differ little from the practitioner's usual method of inspecting property for valuation, agency or landlord and tenant purposes but, depending on the nature or type of instruction, the practitioner may be attentive to different aspects.

Environmental concerns

A mortgagee would not generally take possession of a property where there is any possible risk of the land being contaminated, or there is a risk of activity on the land contaminating adjoining sites, water courses, etc. This is because the mortgagee may become liable as the landowner after taking possession – particularly where the actual polluter cannot be traced or is insolvent – and in such circumstances may be liable for the cost of any clean-up required. It is therefore unwise for a practitioner to advise a client (the mortgagee) to take possession of such a property given the level of risk attached.

A receiver/insolvency practitioner may have a greater understanding of the environmental risks of the appointment, as these matters would generally have been considered prior to the appointment being taken as long as the issues were known about at the time, and in the case of properties with a significant environmental risk may have been a determining factor in the method of enforcement. Insolvency practitioners will be wary of taking an appointment where there are significant environmental issues if there is any risk of personal liability.

This is an area where specialist advice is best sought either from a chartered surveyor who specialises in environmental matters or from solicitors. RICS’ Find a Surveyor includes an option to search by specialisation.

Who is in occupation of the property?

Obtain full knowledge as to who is in occupation of the property to ensure that no third party obtains or is obtaining any rights to occupation, including security of tenure. In most cases, the charge taken by the mortgagee makes provision for the mortgagee to consent to any letting or other formal occupation of the property by a third party other than the borrower. If an occupier is in place where mortgagee consent to that occupation has not been granted, it may be possible for the mortgagee to take action for possession even if, for example, that occupier has obtained the usual security of tenure by way of their relationship with the landlord. This is a complex issue, and the practitioner should refer to a solicitor with the appropriate insolvency experience.

Physical security of the property

Both a receiver/insolvency practitioner and a mortgagee would want to ensure that the property is secure; consider the possibility of trespassers or third parties unlawfully entering the site. Third parties may cause damage to the site or cause injury to themselves on entering. For example, there may be a risk of:

• squatters entering residential property
• travellers entering land or the car park of a commercial property, or
• children possibly entering a site and harming themselves.

Additional costs (in terms of legal action and possible clean-up of the site afterwards) and reputational damage might result from any such scenario.

What is on site

Consider what is physically on site. This is generally an easy issue to deal with if the property is vacant. If the property is still operational, it is necessary to attempt to distinguish between:

• items owned by the borrower (and receivers will also need to consider whether those items are subject to the fixed charge pursuant to which they were appointed)
• items owned by a third-party tenant, and
• items on site being leased from third parties and/or which are subject to third-party finance agreements.

Validity of insurance

The client should keep the insurance company informed of developments on site to minimise any grounds for the insurance company to either refuse to meet a claim or to seek to reduce a claim in the future. It is essential that the validity of any insurance policy is preserved. If the property is still operational and therefore occupied, insurance is generally relatively straightforward (although the practitioner should ensure that the conditions of the insurance policy are met).

If the property is vacant, the insurance provider is likely to have very stringent conditions attached to continuing cover, such as:

• regular inspections
• draining down water
• turning off gas and/or electricity
• sealing of all windows and doors
• sealing of other openings such as letter boxes, and
• removal of any combustible material onsite.

The insurer may also decline cover or only offer limited cover.