During the foreclosure process, any party may seek the assistance of a Receiver. The purpose of a Receiver is to maintain the status quo. They manage the property by overseeing maintenance and day-to-day operations, including collection of rent and payment of expenses. A Receiver has the ability to enter into leases, authorize repairs, retain attorneys, etc.
The party seeking a Receiver should consider a few things before making their decision. Does the property offer a substantial rental income? If not, there is a risk of being responsible for subsidizing the property’s maintenance. Balance that against the benefits of depriving the Mortgagor of the ability to collect rent during the pending foreclosure.
If the mortgage involved provides a standard clause that states “Mortgagee entitled to appointment of receiver,” RPAPL §254 provides that the Receiver may be appointed without notice (ex parte) and without regard to the value of the property involved. In such an event, the plaintiff’s attorney may apply for the appointment of a Receiver ex parte, immediately after the filing of the summons and complaint. In fact, an order appointing and transferring possession to the Receiver may then be served upon the Mortgagor simultaneously with the summons and complaint!
If the mortgage does not contain a notice provision, when the order appointing the Receiver is served on the Mortgagor, it may be the very first time that the Mortgagor becomes aware that a lawsuit has been commenced, since the notice requirements of RPAPL 1304 only apply to residential, owner-occupied properties!
If the Mortgagor posts a bond or can show that the property’s value sufficiently exceeds the mortgage amount, the court can vacate the order appointing the Receiver, but the Mortgagor must still transfer possession to the Receiver until the order is vacated.
The Receiver is compensated by retaining 5% of the rents collected (in addition to the fees paid to a management company or rental agent). If the income is not sufficient to maintain the property, the court may order the party that requested the Receiver provide sufficient funds to cover those expenses. Should that party fail to provide the funds needed, a judgment may be entered against them!
When the foreclosure is complete, any remaining funds in the Receiver’s account are added to the foreclosure sale proceeds and distributed in accordance with the Judgment of Foreclosure.
Should you wish to avoid the time and expense of appointing a Receiver, most mortgages contain an “Assignment of Rent” clause, where the fee owner assigns to the lender the right to collect rents in the event of default. This only encompasses the right to keep the rent that is collected if the tenant voluntarily pays it; however, it does not include the right to evict tenants who do not pay.
The benefit is that it is far more cost efficient to simply send a letter to tenants demanding rent, rather than to appoint a Receiver. While it is far less likely that a tenant will pay rent to the lender than to a Receiver, who has the power to evict, it is also far less likely that the tenant will continue to pay rent to the landlord until the foreclosure has been resolved. Accordingly, while there is often no direct monetary benefit to the Mortgagee resulting from sending rent demand letters, there can be a great deal of benefit obtained by cutting off Defendant’s revenue stream which may be the inducement to litigate and delay the foreclosure.
Finally, one must always consider the risk of becoming a “Mortgagee in Possession” and taking on a variety of potential liabilities as a result of making the demand for rent.