The Basics of the Receivership Process – Part I

By Alexandra S. Jackiw, CPM®, CAPS, C3P

Most real estate experts believe that the next several years will spawn robust receivership activity.  While the current economic downturn has already created significant financial strain for the retail, office, and hospitality sectors – the multifamily sector will begin to see increased financial pressure in the coming year.  As lenders become pessimistic that their loans will be repaid either because of non-payment or a borrower’s inability to refinance as a result of values decreasing, they will avail themselves of the receiver provisions in their loan documents to preserve their interests and protect their collateral.

What is a receiver?

A receiver is an individual appointed by a court to manage a property that is the subject of a pending bankruptcy or foreclosure.  A receiver’s role is to preserve a property that has been abandoned or for which there have been allegations of fraud or mismanagement by the owner.  People often confuse receiverships with bankruptcies.  The two legal remedies are distinctly different.  In a bankruptcy, a borrower avails himself of legal protections from creditors.  A receivership, on the other hand, is a legal means for secured creditors to protect assets that are being used as collateral to obtain a loan.

Most loan documents for commercial real estate include a provision that the holder of the mortgage can have a receiver appointed if the lender starts a foreclosure action.  Once a foreclosure action is filed with the court, the lender can request that a receiver be appointed to take control of the property away from the borrower.  The appointment of a receiver is a critical first step in the foreclosure process and dramatically changes the relationship between the lender and borrower.

Generally, a lender is entitled to the appointment of a receiver to take possession of the real estate if:

  • The borrower is in default under the mortgage,
  • The value of the real estate is inadequate to satisfy the mortgage obligation, OR
  • The mortgagor is committing waste.

How does a receiver get appointed?

Subject to the specifics of a particular case, a foreclosure action is typically brought in the county in which a property is located, while state receivership actions are brought in the state in which the property is located.  Federal receivership actions may also be undertaken in certain circumstances.  Each state has statutes for how a receiver is appointed and who is eligible to be a receiver.  However, most states have not outlined specific qualifications that receivers must meet other than that they must be a disinterested third party.  Some jurisdictions prefer local receivers and in some instances, a receiver is required to be a citizen of that state.

A receiver is authorized to act once the Order Appointing Receiver is entered by the court.  In most jurisdictions, the receiver must post a bond and file an oath before taking over responsibilities for the asset.  The purpose of the bond is to protect the stakeholders in the legal action from any malfeasance by the receiver, while the purpose of the oath is for the receiver to affirm that he/she will act responsibly and abide by the requirements of the receiver order.

The Order Appointing Receiver places the property in the possession of the receiver for the benefit of the persons ultimately proved to be entitled to it.  The receiver does NOT become vested with any title or estate in the property.  A receiver is merely an “officer of the court.”  The property in a receiver’s hands is in “custodia legis” (in the custody of the law).  The appointment of a receiver does not determine or even affect the rights of the parties, except so far as it preserves and retains control of the property to answer a final judgment.

What are the powers and duties of a receiver?

The receiver only has such powers as are conferred by statute and the court order appointing the receiver.  The receiver can undertake activities that are normally associated with being a “landlord.”

  • Take possession of bank accounts and open, transfer, and change accounts in the name of the receivership estate
  • Hire personnel to assist with managing and operating the property
  • Collect rents
  • Make repairs
  • Purchase insurance
  • Pay real estate taxes and other senior liens
  • Create, enforce and terminate leases
  • Enter into contracts necessary to manage the property
  • Borrow money, if needed to manage the property
  • Sell the property, if allowed by statute and the receiver order
  • Carry out such other functions as may be authorized by the court to enforce the receivership

The receiver is entitled to collect rent accruing after the date of appointment and if the mortgagor has also mortgaged the rents, any unpaid rent that accrued before the appointment.   The rents from the real estate, fewer amounts paid for maintenance and repair, real estate taxes, senior liens, and other reasonable expenses incurred in its management, are generally credited to the mortgage obligation.  There are periodic reporting requirements and final accounting and reports before the receivership is discharged.

A talented, capable receiver can bring stability to a troubled asset and often provide expertise to recover lost value through intensive management and strong oversight.  There are numerous opportunities in the industry to step into the role of the receiver or to manage on behalf of a receiver, for those with the experience and knowledge to take on these very unique assignments.

In Part II of this blog, the actual process of managing a property in receivership will be explored – before the appointment, after appointment, due diligence procedures upon takeover, asset stabilization, unique challenges that arise in the course of the receivership, and post-receivership duties.