What is a receivership?

😀 Real Property • Security Interests in Real Estate PROP#219

Legal Definition

In cases where a mortgagee attempts to intercept rents before foreclosure, a court will appoint receivers for rental property, so long as the mortgagee can show: (1) waste is occurring, (2) the value of the property is inadequate to secure the debt, and (3) the mortgagor is insolvent.

Plain English Explanation

It is common for mortgaged properties to be rental properties, meaning the person who has a mortgage (the "mortgagor") on the property is not in possession of the property. Rather, they lease the property to a tenant, who then pays rent. When it seems clear that the mortgagor has no intention or ability to pay their mortgage, it is common for the lender (the "mortgagee") to attempt to claim the rents from the tenants as their own. In other words, they want to intercept the rent from going to the mortgagor in order to get their money back.

Rather than allow the mortgagee to directly take rents, courts will appoint a neutral party to receive the rents, otherwise known as a "receiver." In order to do this, however, the lender must show:

(1) Some form of waste is occurring (we discussed the types of waste in other cards);
(2) The value of the property is not enough, by itself, to pay off the money that is owed (which supports the argument that the lender should be able to intercept rent money to help pay off the debt); and
(3) The person who took out the mortgage is broke.

Hypothetical

Hypo 1: Amy owns a strip mall, Stripacre. Amy has the holy trinity of strip mall tenants: a laundromat, a nail salon, and a liquor store. Amy took out a mortgage from Bank in order to buy Stripacre, which she still owes $50,000 on. Each month, Amy's tenants pay her $2,000 each for a total of $6,000 per month. Amy has gotten behind on her mortgage payments to Bank and has gone broke. As a result, she has been unable to keep up on maintenance for Stripacre, which is slowly beginning to fall apart. At most, Stripacre is currently only worth $40,000. Due to her continuously refusing to pay her mortgage, Bank decides to pursue a foreclosure, however, it would like to try to reduce its losses since Stripacre is worth $10,000 less than what Amy owes them. Result: Bank can ask the court to set up a receivership. After all, why should Amy get the $6,000 per month from the tenants if she refuses to pay her debts or upkeep the property? Bank will be able to show that Stripacre has signs of waste, that its value is inadequate to pay off what Amy owes, and that Amy is insolvent. As such, the court will likely appoint someone to receive Stripacre's rents while things are sorted out in the foreclosure.

Related Concepts

How do states treat a mortgage without a note? How do states treat a note without a mortgage? How is a mortgage's priority determined? How may a party be a holder in due course of a note? In lieu of foreclosure, what do many installment contracts prefer and how do courts address this alternative? Under which theories may a mortgagee take possession of a property and begin receiving rents before foreclosure? What are the 5 types of security interests in real estate? What are the benefits of the holder in due course status? What are the limitations of a junior interest? What are the methods of transferring a note? What interests does a foreclosure destroy? What is a deficiency judgment? What is a due on sales clause? What is a foreclosure? What is an installment land contracts? What is a redemption in equity? What is a statutory redemption? What is the distribution order of proceeds from a foreclosure? What is the result of a grantee assuming the mortgage? What liabilities are associated with a mortgaged property that is transferred to another party? What occurs in intermediate theory states? What occurs in lien theory states? What occurs in title theory states? What results from a party purchasing a foreclosed property subject to a senior interest? What security interests exist under a absolute deed? What security interests exist under a deed of trust? What security interests exist under a installment land contract? What security interests exist under a mortgage? What security interests exist under a sale-leaseback? Who may transfer their interest in a mortgage?

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