Lenders, investors, and mortgage servicers will have a more favorable and standardized framework for protecting their interests in distressed debt when applying for appointments of commercial receivers beginning July 1, 2023, when Connecticut’s Uniform Commercial Real Estate Receivership Act (UCRERA) becomes effective. Connecticut joins 11 other states in adopting UCRERA or a similar act. Enacting UCRERA will provide a more streamlined and less discretionary process for obtaining appointments of receivers over property in foreclosure. The new law applies to receivership applications and appointments involving commercial real property and residential real property containing more than four residential units made on or after July 1, 2023, regardless of the date of default or the date the litigation was commenced. It does not apply to appointments made before this date.
Under the new law, a mortgage holder is entitled to the appointment of a receiver in a foreclosure action if (1) it is necessary to protect the property from potential waste or loss; (2) the mortgagor agreed to it in a signed record; (3) the owner agreed, after default and in a signed record, to the receiver appointment; (4) the property and other collateral do not satisfy the secured obligation; (5) the owner fails to turn over proceeds or rents the mortgagee is entitled to; or (6) a subordinate lienholder obtains a receiver appointment.
Prior to the enactment of UCRERA, Connecticut applied the amorphous equitable standard set forth in Antonio v. Johnson, 113 Conn. App. 72, 77-78 (2009), which balanced the interests of the parties using a number of equitable factors. Now, under UCRERA, the mortgagee is entitled to the appointment of a receiver even if only one of the statutory conditions exists. This gives commercial mortgage holders, investors, and servicers more outcome certainty; leaves less room for judicial discretion; and, hopefully, expedites the process.
Commercial real estate lenders should continue to include a covenant from the borrower in loan documents agreeing to the appointment of a receiver on default. Specific reference should be made to the UCRERA and Conn. Gen. Stat. § 52-624(b) to leave little room for doubt on an application for the appointment of a receiver.
UCRERA does more than just ease the burden in seeking a receivership; UCRERA also gives more powers to the receiver. Under UCRERA, the receiver may be given the power to (1) collect, control, manage, conserve, and protect receivership property; (2) continue operating a business that is receivership property, including to execute the sale of property in the ordinary course of business; (3) incur debt and pay expenses in the ordinary course of business; (4) assert claims, causes of action, and defenses related to receivership property; (5) seek instruction from the court; (6) subpoena third parties for testimony, the production of records, or inspection of tangible things that may affect the administration of the receivership; and (7) apply to the court of another state for the appointment of an ancillary receiver for property in such state. UCRERA further allows for receivership sales to sell the receivership property, with the court’s authority, free of mortgages, junior liens, and the borrower’s right of redemption. A receivership sale remains subject to any senior lien. Previously, receivership sales would only be authorized if they fully discharged all lienholders.
UCRERA also establishes statutory standards for the owner of the receivership property, which are enforceable by the court through its contempt power, including an award of legal fees. Under UCRERA, the owner of the property in receivership must (1) assist and cooperate with the receiver; (2) preserve and turn over receivership property; (3) make available to the receiver the records relating to the receivership property; and (4) upon subpoena, “submit to examination under oath by the receiver concerning the acts, conduct, property, liabilities and financial condition of the owner or any matter relating to the receivership property or the receivership….” In the event the owner “knowingly” fails to comply with these standards, a court is permitted to award actual damages that were caused by the owner’s failure, which include attorneys’ fees and costs, and the court may issue the sanction of civil contempt.
UCRERA, ultimately, is a powerful new law in Connecticut for mortgage holders, investors, and servicers managing distressed commercial mortgage debt. Connecticut’s adoption of UCRERA will likely prove to be beneficial to lenders foreclosing on defaulted assets.