Consider a Receiver's Sale as an Alternative to a Sheriff's Sale in Ohio

Receivership has traditionally been used in foreclosure cases in order to collect rents from tenants while the foreclosure case is pending. Ohio's recently amended receivership statute¹, which becomes effective on March 23, 2015, establishes new grounds for the appointment of a receiver, expands the scope of authority and powers of the receiver, and authorizes a receiver, under certain conditions, to sell the real estate free and clear of liens.

Courts in Ohio reached different conclusions as to whether the prior statute authorized the court to order a receiver's sale in lieu of a sheriff's sale. The amended statute removes the uncertainty, authorizes the courts to empower the receiver, and gives lenders a more reliable alternative for liquidation of distressed real estate.

The amended statute provides that generally, a receiver may be appointed when the mortgage is in default and either (1) the property is probably insufficient to discharge the mortgage debt, (2) the mortgagor has consented in writing to the appointment of a receiver, or (3) there is a contractual assignment of rents and leases.

The amended statute does not require the borrower's consent to be stated in the mortgage or in an accompanying assignment of rents. Hence, even if the mortgage does not contain such a provision and there is no assignment of rents, lenders negotiating a subsequent loan modification or forbearance agreement may require the borrowers to consent to the appointment of a receiver in the event of a default. While the foreclosure is pending, the lender may also obtain the borrower's consent by stipulation.

The receiver's powers are limited to matters involving the property itself, such as preserving the property, collecting rents, and selling the property. The receiver is not responsible for any matters not directly pertaining to the maintenance and sale of the property, such as seizing bank accounts and performing audits of the property owner.

The receiver's expenses will be treated as administrative expenses to be taxed as court costs in the foreclosure case. Therefore, the lender will not be required to advance funds to cover the receiver's expenses unless the lender expressly agrees to do so. 

The court may authorize the receiver to conduct a private sale, hold a private or public auction, or sell the property by any other method the court determines to be fair to all parties having a legal interest in the property. Although the court may require the receiver to provide evidence of the value of the property, the amended statute does not expressly require the receiver to obtain a full appraisal or to set the sale price at two-thirds of the appraised value as is required for a sheriff's sale. More options for the sale can translate to a better sale result.  

The right of redemption will be established in the order appointing the receiver. The court may limit the borrower's right of redemption to a "reasonable time", which can be as little as three days. This is a significant improvement over the time frame for confirmation of sheriff's sales², which in some counties can take in excess of thirty days. 

The alternative of a sale by a receiver can, in many cases, promote a more expeditious and better result compared to a sheriff's sale. Lenders should review their pending foreclosure portfolio and consider the benefits of pursuing a receiver's sales in lieu of a sheriff's sale in an appropriate case. 

Please contact the attorneys at Weltman Weinberg & Reis, for further information regarding receiver's sales as an alternative to sheriff's sales.