As an unfortunate result of the COVID-19 pandemic, there will almost certainly be an uptick in mortgage defaults. Unlike in the consumer arena, there are presently no restrictions or moratoriums with respect to foreclosures of commercial real property. Once the dust settles, commercial lenders who are not able to work out an adequate solution with a defaulting borrower may be wondering how best to proceed in the event they decide to take the property back.
Traditional Methods of Realizing on Commercial Real Estate Security
Until a few years ago, lenders looking to realize on commercial real estate security would routinely resort to the traditional method of foreclosure, either judicially or by advertisement. Sales resulting from the foreclosure process are always subject to the borrower’s statutory right of redemption, which is typically six months for commercial property. Another method, although less common, appears as a remedy in most commercial mortgage documents. This method is to request the appointment of a receivership through the courts.
However, despite years of common law (which offered some guidance in this area), there has never been specific statutory guidelines (with the exception of the construction lien act) which clearly addressed the appointment, powers and authority of a receiver. Historically, while Michigan courts certainly could appoint a receiver in exercise of their equitable powers, some courts were less willing than others to grant such requests given the lack of clarity as to when a receivership should be granted.
Further, it was previously unclear whether a receiver could sell real property that was part of the receivership estate. If such a sale was allowed, it was unclear whether it could be made free and clear of liens and free of the owner’s statutory redemption rights.
Michigan’s Commercial Real Estate Receivership Statute
All of that changed, at least with respect to commercial property, when Michigan enacted the Uniform Commercial Real Estate Receivership Act (the “Act”), MCL §554.1011, on February 6, 2018. The Act, which took effect on May 7, 2018, plainly establishes the circumstances under which a court may appoint a receiver and also clearly enumerates the powers and authority of a receiver with respect to commercial real property.
One of the highlights under the Act is that a receiver may now, with court approval, clearly sell commercial real estate completely free and clear of any junior liens. Any such liens, which are extinguished by such a transfer, attach to the proceeds of the transfer and retain the same validity, perfection and priority that the lien had on the property even if the proceeds are not enough to satisfy all obligations secured by the lien. Further, and most importantly for lenders, such transfers under the Act are made free and clear of any statutory redemption rights of the property owner.
Any subsequent good faith purchaser under such a sale will not be adversely affected should any order granting the sale be modified or overturned. Thus, commercial lenders now have a more effective and efficient tool to realize on their security.
For a more detailed look at the Act, please join us on June 15, 2020, at 12:00 p.m. for a webinar presented by Ralph Colasuonno and Rozanne Giunta as part of Warner’s ongoing Restructuring and Insolvency webinar series. Please click here to register. In the meantime, if you have any questions regarding receiverships, please contact Ralph Colasuonno at rcolasuonno@wnj.com.