The Role of a Receiver in a Commercial Foreclosure

Much like with a home loan, if a borrower who has a mortgage on a commercial property doesn’t make the payments, the lender will likely initiate foreclosure proceedings. Once a commercial property goes into foreclosure, the lender will want to ensure that:

• the borrower isn't damaging the property's value in any way, and
• the income from the property is going towards paying off the loan and maintaining the property—and not being used for any other purpose.

To ensure that these objectives are met, a lender might seek the appointment of a receiver as soon as a commercial mortgage loan goes into default.

What Is a Receiver?

A receiver is an unbiased third party that the court appoints to protect the property from damage or lost rental income. Typically, the receiver is an individual person, though it could be a company.

What is Receivership?

The receivership process ordinarily begins when a commercial property owner goes into default. The lender submits a petition to the court to appoint a receiver either before an action to foreclose or concurrently with the foreclosure. The court-appointed receiver is then responsible for managing the property until the foreclosure is complete.

Once appointed, the receiver is generally able to:

• manage existing leases or enter into new leases
• collect all rental income
• maintain the property by arranging for repairs and maintenance
• secure the property to protect it from vandalism or damage by tenants
• obtain insurance and pay taxes
• take control of the bank account associated with the commercial property, and
• sell the property, with the court’s permission and if the lender, borrower, and any junior lienholders consent.

Furthermore, the duties of the receiver include:

• honoring the rights of tenants in the commercial property
• safeguarding the welfare of the tenants, as well as guests
• managing continued operations and expenses, while maximizing profitability, and
• submitting financial and property reports to all parties, including the property owner, the lender, and the court. (In a report, the receiver must describe precisely what actions were taken, how much income was received, and how any money was spent.)

Why Would the Lender Want a Receiver?

The main reason a lender might want a receiver is because, once appointed, the receiver (rather than the borrower) manages the income-producing commercial property. Having a receiver reduces the risks of rent skimming and waste.

What is rent skimming?

Rent skimming is the use of rental income for a purpose other than paying the mortgage or maintaining the property.

What is waste?

Waste is the unreasonable or improper use of property that damages the value of the property or allowing the property to deteriorate to the point of neglect and decay. An example of waste is if the borrower holds off on needed maintenance, like fixing a broken elevator or replacing broken windows.

Downsides to Using a Receiver

Hiring a receiver can be costly for the lender. Generally, receivers are paid on an hourly basis, with rates typically being several hundred dollars per hour. (Rates vary quite a bit based on the geographic location of the property.) The lender is required to cover the cost of a court-appointed receiver.

Moreover, a court-appointed receiver answers to the court, not the lender. This means that the lender must give up some control, which is of particular concern to lenders when it comes to selling the commercial property, setting a minimum sale price, and distributing the proceeds.

When to Seek Counsel

If you're a commercial property owner facing foreclosure, it's important to keep in mind that a foreclosure involves many legal intricacies. It might be beneficial to employ the services of a qualified attorney to help you through the process and ensure that you fully understand your rights under the law.