Because of the normally slow process of a foreclosure action, most foreclosures in New Jersey, even uncontested ones, are taking upwards of a year or more to complete. In addition, many of the sheriff’s offices in the State are back-logged which is causing delays in scheduling of sheriff sales. Coupled with both the debtor’s obligatory exercise of his right to two statutory adjournments and the reduced stigma of filing for bankruptcy in order to delay the foreclosure process, the secured lender in most cases is dealing with a non-performing asset which is quickly eroding in value.
To combat these situations, a secured lender should consider taking some control over the real estate which serves as its collateral while continuing to shield itself from any liability that traditionally would accompany such control. Lenders, in many instances, can accomplish this by controlling the rental income stream on commercial properties. By far the best mechanism to control the rental income is through the use of a court-appointed rent receiver.
What is a Rent Receiver?
A rent receiver is a court appointed professional who takes complete control of a property away from a mortgagor, including control over collection and application of rental income from the property. A rent receiver is not an agent of the foreclosing mortgagee. He is independent of any party to the foreclosure and is answerable to the court. His responsibility is to stabilize the property for a definitive period, usually the term of the foreclosure action. He is required to report to the court and is usually required to post a bond to protect against any mismanagement or wrongdoing by the receiver.
Why should I seek the appointment of a receiver?
As set forth above, a good strategy for dealing with income producing property is the ability to control the rental income. In many cases, under a standard assignment of rents, upon default by the mortgagee, the lender can take constructive possession of the mortgaged property by giving notice to the mortgagor’s tenants of such assignment and demanding the payment of rents directly. This in essence makes the lender a “mortgagee in possession”. While effective, this designation is not always the preferred mechanism in controlling the mortgagor’s rental stream. Many lenders do not realize that becoming a “mortgagee in possession” exposes themselves to a host of potential liabilities. As the party in active control of the property, the lender may be liable to:
- Third parties injured while on the property;
- Municipalities for zoning violations as well as violations of certain municipal ordinances;
- The mortgagee and/or junior mortgagees for misapplication of rents to their detriment;
- The mortgagee and/or junior mortgagees for deterioration of the property due to the action or inaction of the mortgagee which could lead to the elimination of surplus funds available to junior mortgagees or the mortgagor or the increase of a potential deficiency judgment against the mortgagor by the mortgagee in possession;
- State and Federal agencies for potential environmental cleanup claims.
The preferable mechanism to control the rents is therefore the appointment of a rent receiver. The appointment of a receiver virtually eliminates the exposure to the above liabilities to the lender. As set forth above, the receiver is an officer of the court and not an agent of the mortgagee. He is bonded to protect against any of the above mentioned liabilities.
Although the exposure to liability is the biggest benefit to having a receiver appointed, there are many other benefits:
- A receiver insures that, to the extent rental income is available, real estate taxes, insurance and necessary repairs are maintained on the property;
- A lender has the peace of mind that the mortgagor is not siphoning the rents for his use for things other than the maintenance and upkeep of the property or the payment of mortgage payments;
- It allows the lender to monitor the status of the tenancies during the foreclosure;
- The receiver is responsible for evicting any non-paying tenants and marketing any vacancies, thereby eliminating waste and vandalism to the property and thus preserving the integrity of the property;
- The appointment of a receiver may protect the rental income from collection efforts by other judgment creditors of the mortgagor;
- A mortgagor faced with the possibility of losing his rental income will normally be compelled to discuss possible workout alternatives with the mortgagor.
Are we entitled to appointment of a receiver in every case?
The appointment of a rent receiver lies within the sound discretion of the court. Historically, Courts have looked to whether the appointment is necessary to protect the interest of the mortgagee. In making this decision, the courts have placed emphasis on whether the collateral is in a precarious or uncertain position.
There is no single factor relied upon by the Court in determining whether the lender’s security is in jeopardy. Instead the Court looks to several factors in determining whether to appoint a receiver:
- Inadequacy of the property to satisfy the outstanding debt;
- Inability of mortgagor to respond for deficiency;
- Failure by mortgagor to pay real estate taxes and water rents;
- Failure by mortgagor to keep property in good repair;
- Failure by mortgagor to insure property;
- Misappropriation of rents;
- Decline in property value; and
- The presence of stipulations in the mortgage document consenting to the appointment of a rent receiver or the assignment of rents to the mortgagee upon default.
It is the moving party’s burden to persuade the Court that the appointment of a rent receiver is warranted. For this reason it is imperative to prove at least one or more of the above factors. In preparing for this, a lender should review the appraised value of the property, the amount to pay off the mortgage, whether mortgagor has maintained taxes and insurance, the physical condition of the property and the status of the leases and rental payments for each unit of the property.
How does the receiver get paid?
Typically, a receiver is compensated a percentage of the funds collected, 5%-10%. This figure is agreed to and placed in the order appointing the receiver. The compensation of the receiver is within the sound discretion of the Court and the receiver is entitled to his reasonable expenses for the care and management of the property. Factors to be considered are the amount of money collected by the receiver, the extent and character of the services provided, and the degree of care used by the receiver.