Maximizing Recovery: The Use of Receiverships

by Emily Honsa Hicks, Esq.
 
An owner of commercial property defaults on the underlying mortgage. Tenants, uncertain of who to pay, and what will happen next, begin to look for other space. Rents trickle to a stop, repairs are delayed, and the property’s condition declines. Spaces are vacated, and eventually, the property is sold by sheriff at a deeply discounted cost.

It doesn’t have to be this way.

It is in both the borrower’s and lender’s best interest to consider receivership or enforcement of an assignment of rents, long-standing remedies that have re-emerged as effective tools for recoveries involving income producing residential or commercial properties or businesses.

In some cases, rental income may be available that would mitigate the creditor’s loss. Property will usually benefit from continuous occupancy, and a new owner inherits stable tenants. With receivership, the lender can maximize these benefits while avoiding liabilities associated with ownership, possession or management.

In Ohio, receivership is governed by the contract between the parties and by statute (O.R.C. 2735). The receiver can provide continuity, objectivity, and oversight in what might otherwise be a confusing situation.

The receiver, as an officer of the court, can perform any or all acts in the purview of the order granted by a judge—his or her power is limited only by the court’s order and direction of the judge. (O.R.C. 2735.04). This can include authority to protect the property, collect the rents, and may even authorize the receiver to sell property and distribute proceeds. Because of this latitude, essential to the efficacy of your receivership is a comprehensive Order, drafted by a knowledgeable and experienced creditor’s rights attorney.

In many counties, any party in interest can request a specific receiver for appointment. Legal knowledge, finance background, property management and real estate expertise are desirable in a receiver.

In some counties, however, judges, in the tradition of cronyism, may appoint a receiver that is less than cost effective. Also, where rental income is limited or where the property is in an advanced state of disrepair, fees charged by a receiver may exceed the income or value preserved.

Where both parties are act in good faith and in concert, an assignment of rents alone may preserve regular income and maintenance without a receiver.

Emily J. Honsa Hicks is an associate practicing in the Integrated Real Estate Default Group at Weltman, Weinberg & Reis co., LPA. She can be reached at 216.685.1083 and ehonsa@weltman.com.

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