As the Covid-19 pandemic has ripped through our local economy, certain types of commercial real estate have been adversely impacted. It is likely that many of these properties may be subject to foreclosure in the coming months. Every lawyer representing a lender or borrower will have to contend with the possibility of moving to appoint a receiver during the pendency of a foreclosure case—which conceivably has been made clearer with Florida’s recent adoption of the Uniform Commercial Real Estate Act (UCRERA).
Almost every single commercial real estate loan agreement provides for the appointment of a receiver upon default by the borrower. Prior to the passage of the UCRERA, however, in Florida, “[t]he appointment of a receiver in a foreclosure action is not a matter of right. Rather, it is an extraordinary remedy which must be exercised with caution as it is in derogation of the legal owner’s fundamental right to possession of his or her property. The role of a receiver is to preserve the value of the secured property. Although the appointment of a receiver is within the discretion of the trial court, it is an abuse of discretion to make such an appointment in the absence of a showing that the secured property is being wasted or otherwise subject to serious risk of loss.” This standard has been largely applied regardless of the explicit language in the mortgage and loan documents that generally provide an absolute right to have a receiver appointed.
UCRERA, which was passed by Florida in July of 2020 (Fla. Stat. Section 714.01 et seq.), has now been adopted by nine states since 2017. Those states are Oregon, Utah, Nevada, Tennessee, Michigan, Arizona, Maryland, North Carolina, and Florida. Further, a bill was introduced to adopt UCRERA in Connecticut this year. This adoption is important because it appears to swing the pendulum in favor of lenders with respect to the appointment of a receiver. The UCRERA Task Force in Florida determined that “existing receivership law in most states, including Florida, does not adequately provide a clear standard for receivership appointment… and that such lack of statutory guidance causes variation from one county to the next, as individual judges differ on when a receivership is an appropriate remedy.” Florida Staff Analysis, H.B. 783, 3/24/2020.
Importantly, the new standard articulated under UCRERA only considers waste or other serious risk of loss as only one factor to consider in the appointment of receiver. Florida Statutes Section 714.06 (2) provides, in relevant part, that the court may appoint a receiver:
“In connection with the foreclosure or other enforcement of a mortgage, the court shall consider the following facts and circumstances, together with any other relevant facts, in deciding whether to appoint a receiver for the mortgaged property:
(a) Appointment is necessary to protect the property from waste, loss, substantial diminution in value, transfer, dissipation, or impairment;
(b) The mortgagor agreed in a signed record to the appointment of a receiver on default;
(c) The owner agreed, after default and in a signed record, to appointment of a receiver;
(d) The property and any other collateral held by the mortgagee are not sufficient to satisfy the secured obligation;
(e) The owner fails to turn over to the mortgagee proceeds or rents the mortgagee was entitled to collect; or
(f) The holder of a subordinate lien obtains appointment of a receiver for the property.”
Sections 2(b) and (c) of UCRERA are a significant modification of the previous standard for the appointment of a receivers in Florida. There is likely to be significant litigation as to whether meeting a single factor of Section 2 will be sufficient for the appointment of a receiver (for example, the recorded mortgage provides for the appointment of a receiver) or whether the courts will require more than one factor to be met by reading additional requirements that are not found in the statute.
This litigation will likely focus on the meaning of the requirement “the court shall consider the following facts and circumstances, together with any other relevant facts…” as most lawyers know, this type of standard allows each judge to make an independent analysis in each case. However, it is likely that appellate courts will give immense importance to the factors listed in the statute. Accordingly, every well-drafted loan and mortgage agreement should include language necessary to trigger section 2(b) and 2(c) of the statute.
Awareness of the adoption of UCRERA is key as commercial defaults are expected to increase over the next few months driven by changes in demand and consumption due to the pandemic. Using the standard in the statute, lenders can take, until an appellate court rules otherwise, a more aggressive posture with respect to the appointment of a receiver. Often in commercial foreclosure cases, the appointment of a receiver will result in the end of the case.
Borrower lawyers will also need to be prepared to try and expand the requirements that a court must consider and remind the court that even with the new statute, the decision to appoint a receiver is still within the sound discretion of the court and is only mandated to consider certain facts. Additionally, if as expected the UCRERA makes the standard for the appointment of a receiver easier, borrowers will need to be keenly aware of 11 U.S.C. Section 543, which allows a borrower who files for bankruptcy to dispossess a receiver. However, the filing of bankruptcy requires a multifaceted analysis regarding the benefits and pitfalls for such a maneuver in response to the appointment of a receiver.
While the UCRERA will, over the medium term, bring greater stability and predictability to commercial foreclosure cases in relation to the appointment of a receiver, in the short term we can expect attorneys for both borrowers and lenders to try and shape the decisions that will interpret the statute in ways that benefit their clients.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
By Isaac Marcushamer and Darci Cohen are attorneys with Mark Migdal & Hayden in Miami.