Receivership Sales: How Lenders Can Protect Their Security and Minimize Liability
By James H. Donell, CPM CCIM, James.Donell@FedReceiver.com
When a commercial real estate property goes into foreclosure, the effects can be damaging for all parties involved – not only for the owner of the property who has defaulted, but also the lender and any additional creditors who may have a lien on the property.
Unfortunately, distressed properties are a fact of life within the real estate industry, particularly with the current sluggish economic climate. Lenders who find themselves faced with the prospect of commencing foreclosure proceedings on a loan secured by real property may think their options are limited to common remedies such as workouts, deeds in lieu of foreclosure and foreclosure sales. Yet perhaps the most effective way to minimize costs, save time, preserve the value and the income being generated from the property and minimize potential exposure to liability, is to ask the court to appoint a rents and profits receiver to take possession and control of the property and to sell it through the receivership with final court approval.
Unlike equity receivers who are typically appointed over an individual or an entity, rents and profits receivers are typically appointed by the court to take custody and control of one or more properties, collect the income, maintain adequate insurance coverage, address health and safety issues, and manage, maintain and pay all necessary operating expenses of the property until the default is cured or the foreclosure is completed.
Appointing a rents and profits receiver provides the lender with the assurance that the security for its loan is not being allowed to deteriorate during the foreclosure process; then several months later when the foreclosure sale is finalized, the lender can take ownership and control of the property and start to begin the process of marketing and selling the property as the owner.
An alternative to this, however, is to have the Receiver sell the property with court approval as well as the consent of the lender, borrower and any junior lien holders. Although the law concerning a sale of real property by a rents and profits receiver is subject to different interpretation, the courts are continuing to approve these sales on a regular basis. This process can save a considerable amount of time, preserve the value of the property, reduce costs, and eliminate potential future liability for the lender and the borrower. Borrowers and junior lien holders will generally agree to a sale by a receiver if there is little or no equity in the property to satisfy any junior lien holders.
Also, if there are existing valid personal guaranties and the lender and borrower come to an agreement concerning the guaranties, the borrower will generally cooperate and not object to a sale of the property by the Receiver.
The power to sell the real property can be made a part of the appointing court order, subject to notice to all parties involved – buyer, lender/owner and all known creditors – which ideally will lead to a sale wherein a specific sales price is agreed upon by all. Careful negotiations and open communication between the receiver and the parties in question will help ensure that any objections are dealt with early on and not later in the process when such controversy could delay or derail the sale.
Receivership sales also effectively absolve lenders from liability when it comes to the sale of the property since a receivers sale should be “as is” and “where is” with no representations and no warranties. Essentially this means that the buyer’s only remedy to assert future claims involve going back to the court that approved the sale and asserting those claims against the receivership, rather than the owner or lender.
In a rents and profits receivership, the only assets are generally the net cash flow generated by the property and the property itself. Once a sale is confirmed by the court and the escrow is closed, the receivership is terminated by court order and any cash is distributed as determined by the court, leaving the buyer with no assets to assert claims against – and protecting the owner and lender from a potentially hazardous legal situation since they were not the seller of the property.
Another advantage of a rents and profits receiver sale is that trustee’s fees are minimized since a foreclosure sale of the property is not necessary. Depending on the value of the property, this cost savings can be considerable.
There are some precautions, however, that receivers must take in order to properly complete a sale through the receivership, including careful coordination with the title company. This is particularly important when there are disputed liens on the property – a variable that can severely delay a sale or the distribution of the sale’s net proceeds. It is also absolutely vital to make sure that the title company is willing to issue a policy of title insurance based upon the order approving the sale and the recording of the receiver’s deed; failure to do so may preclude the receiver’s ability to close the sale.
Similarly, giving notice of the motion to approve the sale to any and all parties with potential claims against the property – including any creditors, lien holders, agencies, or government or municipal bodies who may have any sort of claim, however obscure – is the other main precaution that must be taken by a receiver tasked with selling a distressed property.
Distressed properties may be unavoidable, but receivership sales offer an ideal alternative for lenders who find themselves with no other alternative but to foreclose. By carefully choosing a reputable and experienced receiver, lenders can protect themselves and their property and ensure the best possible outcome for everyone involved.
James H. Donell is a state and federal court-appointed receiver and CEO of FedReceiver, Los Angeles. He can be reached at James.Donell@FedReceiver.com or 310.207.8481.
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