By: John B. Newman
When a mortgage goes into default, the lender has many remedies available. Among them is the equitable remedy of appointment of a rent receiver. Appointment of a rent receiver should be seriously considered whenever there is a default on a mortgage securing income producing property because a receiver will collect the rents pendente lite and prevent diversion of the rents by the debtor.
Whether or not a lender holding a mortgage also holds an assignment of rents, it is entitled to apply to a court for appointment of a rent receiver in the event of default. Usually this is done by either an order to show cause or a motion filed in a foreclosure proceeding.
The trial court has a large range of discretion in determining whether or not to appoint a receiver. The basic inquiry of the Chancery Judge is whether or not the appointment of a receiver is necessary to protect the lender against losses which it otherwise might sustain. The key factors in making that determination are:
- Whether the lender actually needs such protection.
- Whether rents are being diverted by the mortgagor.
- Whether taxes and insurance are being paid.
- Whether the value of the collateral net of outstanding prior liens such as taxes is greater than the mortgage, i.e. is there equity.
Possible loss of the property in a tax foreclosure or through an uninsured casualty loss is a significant factor militating in favor of appointment of a receiver.
Most mortgages provide that appointment of a rent receiver is one of the stipulated remedies of a lender upon default. This provision is entitled to consideration by the court but is not binding upon the court.
Appointment of a rent receiver should be contrasted with the alternate remedy of taking possession of the mortgaged premises. Most mortgages typically provide for this alternate remedy as well. If the mortgaged premises are clean and free from any environmental risks, the better course may be to take possession.
The advantage of a rent receiver is that a receiver insulates the lender from claims that might arise from taking possession of the property, such as environmental or other liabilities related to ownership use and possession of the mortgaged premises. A rent receiver as an agent of the court is immune from such claims and appointment of same by a lender does not make the lender liable for such claims.
The only disadvantage of appointment of a rent receiver is the cost, which is usually nominal compared to the rents received. There may also be costs for separate counsel for the rent receiver although some courts will permit counsel for the lender to serve as counsel for the receiver.
In either case, it is important both for preserving the collateral and for increasing leverage with the mortgagor to take away the stream of income which the mortgagor is diverting from the mortgaged premises and servicing the debt. Appointment of a rent receiver is the safest way to achieve such an end and it should be considered in every case involving income-producing property.
This publication is intended for general information purposes only and does not constitute legal advice. The reader should consult legal counsel to determine how the law may apply to specific situations.