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Unfortunately, circumstances arise where creditors, including real estate investors, developers, shareholders, lien holders and traditional lenders reach a point wherein a debtor or owner is unable, or unwilling, to properly manage their assets. That failure or unwillingness can take the form of not paying debts as they become due and/or allowing for waste of corporate assets. If such a situation arises, that creditor, shareholder, lien holder or investor can look to have a receiver appointed over the debtor’s assets to provide some comfort that its investment or collateral will be protected. While receivership is oftentimes a last resort, it can serve as a comforting prospect for these parties.
In Michigan, the appointment of a receiver is governed by the Michigan Receivership Act, MCL 554.1011, et seq. and Michigan Court Rule 2.622. The Receivership Act (originally called the Uniform Commercial Real Estate Receivership Act) initially only applied to receivers over commercial real estate located in Michigan. However, in 2020, the Receivership Act was amended and now the Act applies to all operating businesses located within Michigan, even if real estate is not involved and even if the party seeking to have a receiver appointed does not actually hold a mortgage.
What is a Receivership for Commercial Real Estate?
The overarching goal of receivership is for the court to appoint a neutral third party that is responsible for maintaining the powers and responsibilities — particularly determined by the court — on behalf of a neglectful or defaulting party. In the context of commercial real estate, a court-appointed receiver will take on many of the duties of the owner, including payment of utilities and expenses, collecting rents and profits and generally maintaining the property until either the creditor is paid or the owner is in a position to properly maintain the property again. In many instances, a receiver is sought because the rental income is not being properly utilized to pay expenses. The receiver is a fiduciary whose actions are to benefit the debtor, all creditors and any third-parties who are interested in the property.
If a receiver is appointed, there are specific powers and duties that receiver must be responsible for under Section 12 of the Receivership Act, which include the responsibility to:
(1) prepare and retain appropriate business records, including a record of each receipt, disbursement, and disposition of receivership property; (2) account for receivership property, including the proceeds of a sale, lease, license, exchange, collection, or other disposition of the property; (3) disclose to the court any fact arising during the receivership that would disqualify the receiver; and (4) perform any duty imposed by court order, the Receivership Act, or law of this state other than the Receivership Act.
There are many reasons why a commercial real estate creditor will seek the appointment of a receiver. As said above, if a receiver is appointed, the owner will no longer be able to financially benefit from the receipt of income generated by the property. Additionally, in many instances, bankruptcy and foreclosure can be avoided if a receiver is appointed. The overall management and conditions of a property in disrepair can also improve with receivership, which benefits all parties involved. Even further still, in some instances, the receiver will be given the ability to liquidate or sell the underlying asset thereby maximizing the return to investors and creditors, and limiting the total exposure for the defaulting borrower. The qualified attorneys at Hirzel Law, PLC have significant experience representing both creditors and receivers, and as a result of this experience, can provide valuable insight into the process, assist in the retention and appointment of a receiver and provide guidance to both creditors and receivers in the powers, responsibilities and limitations of a real estate receivership.
Why Does Commercial Real Estate Go Into Receivership?
With respect to commercial real estate, receivers can be appointed in various circumstances, including business fraud, the property in question being subject of a voidable real estate transaction and even general mismanagement by the owner. “What is Receivership? What You Need to Know About the Recent Changes to the Michigan Receivership Act” states:
“Individuals and businesses with interests in real estate may consider seeking the appointment of a receiver if the property is being subjected to waste, or if there has been fraud or other mismanagement committed by the persons in control of the property. Similarly, individuals with interests in real estate that is made part of a receivership must be diligent in protecting their rights and careful to comply with the many requirements of the new Receivership Act.”
Other circumstances in which commercial real estate creditors and investors can benefit from receivership include:
- Defaulted loans or the failure to pay vendors, employees and/or utilities
- Delinquent tenants
- Mortgage fraud
- Poor property management
- Poor property conditions, including building code violations or the threat of demolition
- Property liens
- Risk of bankruptcy
- Risk of foreclosure
Generally speaking, a lender whose collateral includes a pledge of an interest in real estate will have an easier threshold to meet to get a receiver appointed. The attorneys at Hirzel Law, PLC possess extensive experience representing commercial real estate creditors in receiverships, as well as the receivers themselves, and by way of this experience, are able to understand how unique each circumstance may be and anticipate issues before they arise.
What to Expect When Commercial Real Estate Goes Into Receivership?
Given the court’s authority to appoint a receiver, the underlying documents at issue and the receiver’s specific duties, each circumstance will be unique. The Receivership Act does, however, outline specific procedures for the selection, appointment, removal, and compensation of a receiver. However, in most instances, a court will have a hearing on whether a receiver should be appointed, who the receiver will be, and what responsibilities the receiver will take on with the appointment. Under the Receivership Act, the court can only appoint a qualified, neutral third party as a receiver, and the owner will generally be entitled to notice before a receiver is appointed.
In most instances, the party seeking to have a receiver appointed can request a particular receiver be appointed. The attorneys at Hirzel Law, PLC can assist with the selection process and provide insight into potential receiver candidates. The borrower/owner will generally be provided an opportunity to object to the appointment or to a particular receiver. If the objecting party is objecting to the appointment of a proposed receiver, Section 7 of the Receivership Act provides:
(a) The party filing an objection to a nominated receiver shall submit an alternative nominee for appointment as receiver and serve the objection on all parties, as required by the court rules, with a notice of hearing.
(b) If the court appoints a different receiver under this section, within 14 days after the appointment, any party may file an objection to the receiver and submit an alternative nominee for appointment as receiver.
(c) An objecting party shall describe how the alternative nominee meets the requirements for a receiver under this section.
(d) The court may, in its discretion, with or without motion or notice, order the period for objection to a receiver reduced. If the court exercises this discretion, the court shall identify and show good cause for the reduction.
Determining whether an alternative nominee would meet the receivership requirements and how to file an objection may prove as a challenge. Eventually, the court will ultimately decide which receiver is best for that particular asset or borrower, and may end up selecting a receiver that neither party has an experience with. The attorneys at Hirzel Law, PLC can educate lien holders on qualities that make for a strong receiver and make recommendations throughout the objection process if necessary.
The order appointing the receiver is also a critical step in this process. Although there are standard provisions that must be included (compensation of the receiver, bonding requirements, identification of the receivership estate), there are times where the order must be tailored to the specific issues that arise on the underlying property or asset(s). Careful drafting of this order can save countless court appearances when and if certain issues arise during the course of the receivership.
If you are a court-appointed receiver, having an attorney experienced in receivership is also important. Courts expect that receivers, and their counsel, act professionally, stay impartial, and provide the court will unbiased reports about what is in the best interest of all parties involved. Over the course of many years, the attorneys at Hirzel Law, PLC have shown to be able to do that on behalf of their receivership clients thereby providing a level of reliability and credibility that can reduce conflicts in even the most contested dispute.
Contact a Hirzel Law Lawyer Today
There are many aspects to take into consideration when considering whether to seek the appointment of a receiver over commercial real estate or when you are being considered as a receiver over real estate. The process does not have to be daunting, however. Having a Hirzel Law, PLC attorney on your side can provide clarity on the receivership process and peace of mind knowing that you have taken advantage of a right given to you and that, to the best of your ability, your security is protected and the provisions of the Receivership Act are being followed. We stand by our clients, offering quality legal representation and promptly responding to our clients’ needs. Contact Hirzel Law online or call 248-986-2921 (Farmington) or 231-486-5600 (Traverse City) or 616-319-9964 (Grand Rapids) to learn how our Michigan receivership attorneys can help.