There's a New Sheriff in Town

The Receiver's powers are dictated by the court order. Once appointed, the Receiver will promptly notify tenants of the shopping center and will provide its contact information. Tenants are wise to request a copy of the Order to confirm the Receiver's appointment and authority. All leases will remain in effect, so tenants should thereafter report any issues directly to the Receiver, who will have the power to evict tenants in default and potentially modify payment terms during the pendency of the receivership.

The borrower/landlord is typically required to transfer immediately all of the funds in the property's operating accounts (including any security deposits) to the Receiver. The borrower should also provide the Receiver with copies of relevant documentation, including leases and service agreements affecting the shopping center. Unfortunately, the transfer of documentation may be slow or incomplete, so it is not unusual for a Receiver to request these items directly from tenants.

Though a Receiver's powers vary in each instance, they almost always include the ability to hire a property management company to collect rents, maintain the property, and pay expenses. As a practical matter, a tenant's primary interaction will be with the Receiver's property manager. In addition, the Receiver usually will hire a leasing agent to market the property and to negotiate leases. These marketing efforts often inure to the benefit of existing tenants as well. The court order, however, may limit the Receiver's ability to execute new leases or renew existing ones.

In many cases, a Receiver only is allowed to enter into new leases or extensions on a short-term basis (two years or less) without prior approval of the lender and/or the court. Thus, if a tenant is interested in a long term lease or extension, it can expect to wait longer than usual for the necessary “landlord” approval process to be completed.

The Receiver usually is not permitted to pay any expenses incurred by the borrower prior to the establishment of the receivership. The court order will, however, require that the Receiver preserve, maintain, and make ordinary repairs to the shopping center. In light of this, there is often a change in vendors servicing the shopping center. If the property is not generating sufficient income to fund operations, a Receiver will typically have to issue receiver's certificates, which are formal requests for money advanced by the lender, and are usually added to the amount of the secured debt.

Because the property is often challenged from a cash flow perspective, capital improvements are unlikely to occur during the pendency of the receivership. In fact, the Receiver generally is not permitted to incur such expenses absent consent of the lender (who rarely will agree to pay for this) and the court. This is true even though such capital expenditures may be required in order to cure a landlord default under a lease, or are necessary to attract new tenants to the shopping center.

The Receiver may or may not have the authority to sell the shopping center. Certain jurisdictions will not allow a receiver's sale, or will allow a borrower to object to the terms of such a sale. In these instances, the lender typically will have to complete the foreclosure process and acquire title to the property before a sale can occur. In either case, until the conveyance of the property occurs, tenants should continue to direct their rent payments, questions, and concerns to the Receiver or its property manager. In situations where the lender takes title after foreclosure, it often retains the Receiver's property manager, which can provide some stability for the shopping center and its tenants.

How Long Will the Receivership Last?

The duration of a Receivership can vary greatly, depending on the circumstances and the jurisdiction. If the lender and borrower have come to an agreement resolving the underlying debt and any guarantees, the receivership should last no longer than a typical foreclosure. The Receivership will terminate either shortly after the foreclosure takes place, or if a Receiver's Sale is permitted, after the receiver sells the property.

When the lender (and there could in fact be a group of lenders involved) and borrower have not yet agreed upon a resolution of the underlying debt, however, the Receivership and related foreclosure proceedings will last longer.

Because the administrative burden and costs associated with having a Receiver appointed are not insignificant, it is unlikely that a lender would request one if the property is facing imminent foreclosure. So, while it may be hard to predict the exact duration of a receivership, it is reasonable to assume that the Receiver will be on board for at least six to 12 months.

What Are a Tenant's Responsibilities to the Landlord/Borrower?

During the Receivership, a tenant owes its obligations under its lease to the Receiver and not to its landlord. The tenant's pre-Receivership obligations under the lease do not, however, evaporate. They remain in full force and effect and, to the extent that there are rent arrearages or other pre-Receivership obligations due from the tenant, those continue to exist and become assets controlled by the Receiver in the usual case. Conversely, to the extent that there are pre- Receivership breaches or defaults of the lease by the landlord, the Receiver takes subject to those and whatever defenses or offsets the tenant holds as a consequence thereof could limit a tenant's obligations to perform fully under its lease. For example, to the extent that the lease provided a period of free rent or some type of tenant credit, those terms and provisions would continue to remain in force and effect and would have to be honored by the Receiver. Likewise, if there was damage to the tenant's property for which the landlord was responsible that had not been adequately remedied prior to the Receivership, the tenant may try to use such for offset or withholding of rent otherwise due to the Receiver.

What Are a Receiver's Priorities with Respect to the Property?

1. Insurance

Immediately upon appointment, the Receiver's first priority is to make sure that the property is adequately insured against loss or injury. This would include a commercial general liability policy with appropriate limits for the size and scope of the project, property and casualty insurance and workman's compensation insurance to the extent that the Receiver continues the employment of existing personnel at the property. The borrower should have had in force and effect insurance meeting the requirements and policy coverage limits specified in the mortgage, but if these policies have been allowed to lapse, steps are taken to put them immediately back in force and effect.

The Receiver also makes an assessment of the listed insureds under the policies, obviously adding the Receiver as one of the named insureds. The policies are continued in force and effect for the benefit not only of the Receiver, but the original borrower and the lender.

To the extent that the property has suffered any casualty or there are pending claims for a casualty loss or personal injury or property damage, the Receiver usually has within the scope of its authority the ability to pursue those claims and negotiate resolutions thereof for the benefit of the Receivership assets.

2. Stabilization

a) Retain new management ' The Receiver does not usually wish to leave the borrower's management team for the property in place. In dealing with a distressed property, the Receiver wants to start with a clean slate and with its own management team. Depending upon the size of the property and the number of tenants, the Receiver may elect to have remote management through its own management staff or on-site management. Some Receivers have the ability to bring their own personnel on-site for the limited duration of the Receivership. However, local knowledge and resources are often of considerable benefit to the Receiver in taking over management of a project and, for that reason, attempts are usually made to locate property management staff with a local knowledge base and experience.

b) Address life-safety issues ' The Receiver will make a very early assessment of any life-safety issues about the property that could cause damage or injury. To the extent property management files still remain available to the Receiver, those can be reviewed for past claims histories and sources of potential injury identified. Some Receivers have their own in-house expertise available for physical review of the property or, if not, outside consultants can be contracted. If life-safety issues are identified, given the usual lack of funds for significant capital improvements, stopgap measures will be taken to try and guard against injury from any problems identified. Temporary patches or isolation of dangerous areas are the usual response rather than permanent fixes.

c) Generate rent stream ' A prime goal of the Receiver is to generate and collect rentals to try and make the property self-sustaining in the short term. This eliminates the need to make calls upon the lender for further cash infusions. In order to accomplish this, the Receiver makes a very early stage determination of rent delinquencies and capacities of the tenants to make rental payments at the property. Efforts to collect past delinquencies are initiated and, as soon as the Receiver is appointed, steps are taken to direct that all future payments come to the Receiver not to the original landlord. To the extent the tenants, due to their own distressed situations, cannot make payments required under the existing leases, the Receiver may consider short term lease amendments encompassing rent reductions. Some cash flow is obviously preferable to no cash flow. In order to accomplish this, the Receiver needs to have one-on-one discussions with the individual tenants, and the tenants need to be willing to produce sufficient documentation showing their current financial situation and cash flow projections. Such rent reductions are usually of fairly short duration (three or four months) because the Receiver will not want to saddle a prospective buyer with below market rent rates.

d) Create rapport with tenants ' The usual goal of the Receivership is to stabilize the property sufficiently so that it can be marketed and sold, either through direct private sale, private auction process or, in certain jurisdictions where it is required, ultimately a foreclosure sale. In trying to interest potential buyers and with the goal of obtaining the best price possible, the presence of a decent tenant base is a plus in marketing the project.

The Receiver will often find itself with dissatisfied tenants when it initially takes over the project. Prior to the Receiver's appointment, there's likely to have been minimal or no maintenance, minimal or no marketing efforts, lack of communication by the landlord. This type of distressed property situation moving toward foreclosure or receivership always creates great uncertainty in the minds of the tenants.

The Receiver can alleviate some of these concerns by having frequent and forthright conversations with the tenants. Tenants may want to request an initial tenant meeting to set forth the Receiver's short term plans for the property, if one is not scheduled by the Receiver itself. This meeting often quite beneficial in allaying tenant fears and is a good opportunity to assess tenant needs. Keep in mind, however, that a Receiver may have a very limited budget and resources with which to work.

3. Marketing

The endgame of the Receivership is almost always to find a suitable purchaser for the property. The Receiver's efforts outlined above in stabilizing the property are undertaken with that goal in mind. The steps that the Receiver will take in finding a suitable buyer would encompass at least the following:

• Gather financial and operational data on the property.
• Obtain a title commitment showing good, marketable and insurable title for the property, along with copies of record title documents.
• Prepare pro forma income and expense statements.
• Gather tenant information, particularly rent rolls and tenant financial data.
• Prepare an on-line or physical data base that potential buyers can access for information concerning the property.
• Determine the market area in which efforts will be made to sell the property and, from that, whether to involve local, regional or national brokers in the sales effort.
• Make provision for controlled, on-site visits by buyers.
• Prepare a draft purchase contract.

4. Selling the Property

During the course of the above-described marketing efforts, the tenants will become aware that the property is being marketed and they may very well come in contact with potential buyers. This will create uncertainty on the part of the tenants. Again, communication with the tenants is key to minimizing problems.

To the extent that prospective buyers, or even a buyer under contract, in trying to satisfy conditions or contingencies during its due diligence, wants to obtain conditional lease modifications or new leases with existing tenants, those negotiations with existing tenants can become contentious. If the sale does not close, then the Receiver is left with an unstable tenant base. Because of this, a Receiver will likely try and control buyer interaction with tenants. Such pre-closing negotiations between a prospective buyer and the tenants should be avoided if at all possible or, if not, should be closely controlled by having buyers' negotiations limited to a specified script to which the Receiver has consented.

Remember, until any sale closes, the Receiver is still the shopping center “sherriff,” so tenants should not rely upon representations or promises made by prospective buyers.

Aubrey Waddell serves as Vice President and Counsel for Jones Lang LaSalle's (JLL) retail management and leasing business. She provides primary legal support for receiverships. T. Bruce McGowin is a partner at Hand Arendall LLC in Mobile, AL. He has extensive experience in the fields of real estate and commercial finance. Reach Ms. Waddell at 404-995-6468; [email protected]. Reach Mr. McGowen
at 251-694-6342; bmcgowin@handar endall.com.

A real estate receivership is a judicial proceeding in which a court, typically upon the request of a mortgage lender, appoints a fiduciary to preserve and protect the property that collateralizes its loan. Receivership is a frequently used remedy for lenders faced with defaulted loans collateralized by income-producing properties, such as shopping centers. Often, a lender is concerned that its collateral may lose value during the pendency of a foreclosure action, or that the defaulting borrower, who has likely lost all of its equity, will stop properly maintaining the property.

Once appointed, the Receiver more or less steps into the shoes of the owner of the property, though it does not officially take title to the asset. The Receiver controls the shopping center in the same manner that an owner would, subject to certain limitations imposed by the court.

What Authority Does the Receiver Have?

The Receiver's powers are dictated by the court order. Once appointed, the Receiver will promptly notify tenants of the shopping center and will provide its contact information. Tenants are wise to request a copy of the Order to confirm the Receiver's appointment and authority. All leases will remain in effect, so tenants should thereafter report any issues directly to the Receiver, who will have the power to evict tenants in default and potentially modify payment terms during the pendency of the receivership.

The borrower/landlord is typically required to transfer immediately all of the funds in the property's operating accounts (including any security deposits) to the Receiver. The borrower should also provide the Receiver with copies of relevant documentation, including leases and service agreements affecting the shopping center. Unfortunately, the transfer of documentation may be slow or incomplete, so it is not unusual for a Receiver to request these items directly from tenants.

Though a Receiver's powers vary in each instance, they almost always include the ability to hire a property management company to collect rents, maintain the property, and pay expenses. As a practical matter, a tenant's primary interaction will be with the Receiver's property manager. In addition, the Receiver usually will hire a leasing agent to market the property and to negotiate leases. These marketing efforts often inure to the benefit of existing tenants as well. The court order, however, may limit the Receiver's ability to execute new leases or renew existing ones.

In many cases, a Receiver only is allowed to enter into new leases or extensions on a short-term basis (two years or less) without prior approval of the lender and/or the court. Thus, if a tenant is interested in a long term lease or extension, it can expect to wait longer than usual for the necessary “landlord” approval process to be completed.

The Receiver usually is not permitted to pay any expenses incurred by the borrower prior to the establishment of the receivership. The court order will, however, require that the Receiver preserve, maintain, and make ordinary repairs to the shopping center. In light of this, there is often a change in vendors servicing the shopping center. If the property is not generating sufficient income to fund operations, a Receiver will typically have to issue receiver's certificates, which are formal requests for money advanced by the lender, and are usually added to the amount of the secured debt.

Because the property is often challenged from a cash flow perspective, capital improvements are unlikely to occur during the pendency of the receivership. In fact, the Receiver generally is not permitted to incur such expenses absent consent of the lender (who rarely will agree to pay for this) and the court. This is true even though such capital expenditures may be required in order to cure a landlord default under a lease, or are necessary to attract new tenants to the shopping center.

The Receiver may or may not have the authority to sell the shopping center. Certain jurisdictions will not allow a receiver's sale, or will allow a borrower to object to the terms of such a sale. In these instances, the lender typically will have to complete the foreclosure process and acquire title to the property before a sale can occur. In either case, until the conveyance of the property occurs, tenants should continue to direct their rent payments, questions, and concerns to the Receiver or its property manager. In situations where the lender takes title after foreclosure, it often retains the Receiver's property manager, which can provide some stability for the shopping center and its tenants.

How Long Will the Receivership Last?

The duration of a Receivership can vary greatly, depending on the circumstances and the jurisdiction. If the lender and borrower have come to an agreement resolving the underlying debt and any guarantees, the receivership should last no longer than a typical foreclosure. The Receivership will terminate either shortly after the foreclosure takes place, or if a Receiver's Sale is permitted, after the receiver sells the property.

When the lender (and there could in fact be a group of lenders involved) and borrower have not yet agreed upon a resolution of the underlying debt, however, the Receivership and related foreclosure proceedings will last longer.

Because the administrative burden and costs associated with having a Receiver appointed are not insignificant, it is unlikely that a lender would request one if the property is facing imminent foreclosure. So, while it may be hard to predict the exact duration of a receivership, it is reasonable to assume that the Receiver will be on board for at least six to 12 months.

What Are a Tenant's Responsibilities to the Landlord/Borrower?

During the Receivership, a tenant owes its obligations under its lease to the Receiver and not to its landlord. The tenant's pre-Receivership obligations under the lease do not, however, evaporate. They remain in full force and effect and, to the extent that there are rent arrearages or other pre-Receivership obligations due from the tenant, those continue to exist and become assets controlled by the Receiver in the usual case. Conversely, to the extent that there are pre- Receivership breaches or defaults of the lease by the landlord, the Receiver takes subject to those and whatever defenses or offsets the tenant holds as a consequence thereof could limit a tenant's obligations to perform fully under its lease. For example, to the extent that the lease provided a period of free rent or some type of tenant credit, those terms and provisions would continue to remain in force and effect and would have to be honored by the Receiver. Likewise, if there was damage to the tenant's property for which the landlord was responsible that had not been adequately remedied prior to the Receivership, the tenant may try to use such for offset or withholding of rent otherwise due to the Receiver.

What Are a Receiver's Priorities with Respect to the Property?

1. Insurance

Immediately upon appointment, the Receiver's first priority is to make sure that the property is adequately insured against loss or injury. This would include a commercial general liability policy with appropriate limits for the size and scope of the project, property and casualty insurance and workman's compensation insurance to the extent that the Receiver continues the employment of existing personnel at the property. The borrower should have had in force and effect insurance meeting the requirements and policy coverage limits specified in the mortgage, but if these policies have been allowed to lapse, steps are taken to put them immediately back in force and effect.

The Receiver also makes an assessment of the listed insureds under the policies, obviously adding the Receiver as one of the named insureds. The policies are continued in force and effect for the benefit not only of the Receiver, but the original borrower and the lender.

To the extent that the property has suffered any casualty or there are pending claims for a casualty loss or personal injury or property damage, the Receiver usually has within the scope of its authority the ability to pursue those claims and negotiate resolutions thereof for the benefit of the Receivership assets.

2. Stabilization

a) Retain new management ' The Receiver does not usually wish to leave the borrower's management team for the property in place. In dealing with a distressed property, the Receiver wants to start with a clean slate and with its own management team. Depending upon the size of the property and the number of tenants, the Receiver may elect to have remote management through its own management staff or on-site management. Some Receivers have the ability to bring their own personnel on-site for the limited duration of the Receivership. However, local knowledge and resources are often of considerable benefit to the Receiver in taking over management of a project and, for that reason, attempts are usually made to locate property management staff with a local knowledge base and experience.

b) Address life-safety issues ' The Receiver will make a very early assessment of any life-safety issues about the property that could cause damage or injury. To the extent property management files still remain available to the Receiver, those can be reviewed for past claims histories and sources of potential injury identified. Some Receivers have their own in-house expertise available for physical review of the property or, if not, outside consultants can be contracted. If life-safety issues are identified, given the usual lack of funds for significant capital improvements, stopgap measures will be taken to try and guard against injury from any problems identified. Temporary patches or isolation of dangerous areas are the usual response rather than permanent fixes.

c) Generate rent stream ' A prime goal of the Receiver is to generate and collect rentals to try and make the property self-sustaining in the short term. This eliminates the need to make calls upon the lender for further cash infusions. In order to accomplish this, the Receiver makes a very early stage determination of rent delinquencies and capacities of the tenants to make rental payments at the property. Efforts to collect past delinquencies are initiated and, as soon as the Receiver is appointed, steps are taken to direct that all future payments come to the Receiver not to the original landlord. To the extent the tenants, due to their own distressed situations, cannot make payments required under the existing leases, the Receiver may consider short term lease amendments encompassing rent reductions. Some cash flow is obviously preferable to no cash flow. In order to accomplish this, the Receiver needs to have one-on-one discussions with the individual tenants, and the tenants need to be willing to produce sufficient documentation showing their current financial situation and cash flow projections. Such rent reductions are usually of fairly short duration (three or four months) because the Receiver will not want to saddle a prospective buyer with below market rent rates.

d) Create rapport with tenants ' The usual goal of the Receivership is to stabilize the property sufficiently so that it can be marketed and sold, either through direct private sale, private auction process or, in certain jurisdictions where it is required, ultimately a foreclosure sale. In trying to interest potential buyers and with the goal of obtaining the best price possible, the presence of a decent tenant base is a plus in marketing the project.

The Receiver will often find itself with dissatisfied tenants when it initially takes over the project. Prior to the Receiver's appointment, there's likely to have been minimal or no maintenance, minimal or no marketing efforts, lack of communication by the landlord. This type of distressed property situation moving toward foreclosure or receivership always creates great uncertainty in the minds of the tenants.

The Receiver can alleviate some of these concerns by having frequent and forthright conversations with the tenants. Tenants may want to request an initial tenant meeting to set forth the Receiver's short term plans for the property, if one is not scheduled by the Receiver itself. This meeting often quite beneficial in allaying tenant fears and is a good opportunity to assess tenant needs. Keep in mind, however, that a Receiver may have a very limited budget and resources with which to work.

3. Marketing

The endgame of the Receivership is almost always to find a suitable purchaser for the property. The Receiver's efforts outlined above in stabilizing the property are undertaken with that goal in mind. The steps that the Receiver will take in finding a suitable buyer would encompass at least the following:

• Gather financial and operational data on the property.
• Obtain a title commitment showing good, marketable and insurable title for the property, along with copies of record title documents.
• Prepare pro forma income and expense statements.
• Gather tenant information, particularly rent rolls and tenant financial data.
• Prepare an on-line or physical data base that potential buyers can access for information concerning the property.
• Determine the market area in which efforts will be made to sell the property and, from that, whether to involve local, regional or national brokers in the sales effort.
• Make provision for controlled, on-site visits by buyers.
• Prepare a draft purchase contract.

4. Selling the Property

During the course of the above-described marketing efforts, the tenants will become aware that the property is being marketed and they may very well come in contact with potential buyers. This will create uncertainty on the part of the tenants. Again, communication with the tenants is key to minimizing problems.

To the extent that prospective buyers, or even a buyer under contract, in trying to satisfy conditions or contingencies during its due diligence, wants to obtain conditional lease modifications or new leases with existing tenants, those negotiations with existing tenants can become contentious. If the sale does not close, then the Receiver is left with an unstable tenant base. Because of this, a Receiver will likely try and control buyer interaction with tenants. Such pre-closing negotiations between a prospective buyer and the tenants should be avoided if at all possible or, if not, should be closely controlled by having buyers' negotiations limited to a specified script to which the Receiver has consented.

Remember, until any sale closes, the Receiver is still the shopping center “sherriff,” so tenants should not rely upon representations or promises made by prospective buyers.

Aubrey Waddell serves as Vice President and Counsel for Jones Lang LaSalle's (JLL) retail management and leasing business. She provides primary legal support for receiverships. T. Bruce McGowin is a partner at Hand Arendall LLC in Mobile, AL. He has extensive experience in the fields of real estate and commercial finance. Reach Ms. Waddell at 404-995-6468; [email protected]. Reach Mr. McGowen
at 251-694-6342; bmcgowin@handar endall.com.