Michael Cruz assists businesses and individual clients achieve their legal objectives in a variety of legal matters including administrative and regulatory issues, business formation and governance, commercial transactions, criminal, landlord-tenant, personal injury, wrongful death, probate, and residential real estate transactions. He also handles motor vehicle matters, including operating under the influence and suspension hearings before the Department of Motor Vehicles. He provides advice to entrepreneurs paying special attention to their unique set of circumstances with consideration to their business objectives.
In addition, Michael has represented clients before the Connecticut Small Claims and Superior Courts as well the Connecticut Workers' Compensation Commission and various other administrative agencies.
Holding the Key in Foreclosures
New England Real Estate Journal, 09/13/2010
In a real estate climate that has seen the drastic reduction in the value of real property and, by extension, the security offered by that collateral, a commercial lender often finds a rent receiver to be a valuable companion on the road to foreclosure. In Connecticut, the Practice Book sets some fairly vague guidelines to be followed by the court when considering an application for a rent receiver, mostly designed to protect the value of the property being foreclosed. However, while its title suggests that the rent receiver is primarily appointed to collect rental proceeds, the benefits of such an appointment often run much deeper, serving simultaneously as a method to protect the value of the collateral and demonstrate to the borrower that it will be forced to play by the rules pending full foreclosure.
While the benefits of a receiver in a foreclosure by sale scenario are readily apparent, Connecticut's concept of strict foreclosure is fairly unique and not necessarily understood by those outside of the state's borders (sometimes not very well by those within it). While the ability to have a receiver appointed is by no means unique to the state, the concept of the mortgagee taking title to the property by operation of law, rather than through a foreclosure sale, often merits heightened attention to having a receiver appointed to protect the collateral for which absolute title may vest with the lender shortly thereafter. Indeed, especially in the current climate, it is common for both parties to a commercial mortgage to realize very quickly that the value of the loan to property value may leave a significant deficiency for the foreclosing party. In the case of a single asset entity in a non-recourse scenario, particularly, the lender therefore has every incentive to be certain that the collateral is adequately cared for during the foreclosure action.
Enter the rent receiver. While the appointment of the receiver is within the court's discretion, several factors play a significant role in its consideration of such an appointment, and the party seeking the appointment bears the burden of demonstrating the need for it. Although there is somewhat of a split of authority in the Superior Courts as to the weight given to mortgage documents providing for a receiver in the event of default, the presence of the language is certainly one of the determining, if not dispositive, facts for most courts. Any lender writing commercial mortgages in the state would do well to account for this fact.
Among other considerations, courts also consider whether the property will be able to satisfy the debt owed in the event of a successful foreclosure action, and the borrower's ability to satisfy any subsequent deficiency. Courts generally look to the payments of tax and utility bills, the potential misappropriation of rents leading to a decline in the property value, and whether the borrower is complying with other mortgage provisions (e.g., providing access to property inspectors) in connection with adjudicating what is, in essence, a balancing test. Thus, there is no silver bullet that will lead to appointment of a receiver of rents by the court, but courts have taken a common sense, practical approach to such applications. Most courts, while sensitive to the inherent property rights of borrowers, are equally vigilant of the need for lenders to have assurances that their collateral is adequately protected.
However, a receiver is not only a valuable court resource to protect the value of the property by securing rents and making sure that the borrower is prevented from using the rental proceeds to gorge the property, but also to ensure a much more efficient adjudication of the foreclosure action. The most practical benefit is, of course, access to the property. In order to foreclose, the mortgagee must appraise the property and engage in various inspections. In cases where the borrower is uncooperative, an increasing phenomenon with commercial foreclosures, a rent receiver will obviate the need to file motions to compel access or otherwise involve the court, especially when the mortgagor has failed to appear in the case. The receiver can provide detailed rent rolls, and even market vacant units, all prior to transfer of title to the property, all the while providing peace of mind to the mortgagee. The existence of the receiver has the side effect of ensuring that other provisions of the mortgage provisions are satisfied and gives the lender a substantial leg up in stabilizing the property once the successful foreclosure has run its course.
Of course, many borrowers cry foul when faced with the proposition that they may not be able to collect their rental proceeds by virtue of the receiver doing it under the court's supervision, often arguing that granting the receiver application effectively decides the foreclosure action. The reality, of course, is that the receiver, perhaps to the dismay of both parties is ultimately answerable only to the Court. Notwithstanding the literal obligations of the receiver to remain independent as an agent of the Court, it would be disingenuous to fail to recognize that the receiver itself is generally selected by the foreclosing plaintiff, subject to the Court's approval. As a safeguard to the receiver being unrestrained in its activities, it is required to post an appropriate bond with the Court to provide some assurance of its commitment to the property and its obligations, and generally to provide periodic status reports to the Court detailing its activities.
Especially in the present real estate climate, where borrowers file an increasing, some would say troubling, number of dilatory motions to grind the foreclosure process to a halt, counsel representing commercial lenders would be remiss not to consider having receivers appointed in connection with foreclosure proceedings. Despite whatever difficulties and cost concerns such lenders may be confronted with regarding their appointment, rent receivers remain the most powerful tool to protect their interests short of foreclosure itself.
Brian Rich practices in the Commercial Litigation Department of Halloran & Sage, LLP, where he represents commercial lenders and financial institutions in connection with commercial debt collection, foreclosure and litigation matters. (Resident, Middletown)