Fall/Winter 2020 • Issue 70, page 13

Receivership Remedy: Solving Dangerous Problems Created by Abandoned Properties

By Griswold, Richardson "Red"*

There are countless vacant lots and abandoned properties across California. There are just as many countless explanations as to why these commercial and residential properties are abandoned. Abandonment can come at the hands of death (tenant or owner), a business or personal relationship gone sour, financial distress, or simply by owner’s choice. Regardless, abandoned properties are an eyesore for the surrounding community. Beyond the displeasing aesthetic, vacant properties pose a significant danger to the health, safety and welfare of the neighborhood. Abandoned properties invite trash dumping, graffiti, vandalism and trespassing. Further, overgrown vegetation and unabated weeds can increase the risk of fire—an ever-increasing urgency in California.

Abandoned properties and neighborhood blight are not new problems. However, these problems will continue to grow and pose even greater complexities amidst the COVID-19 pandemic and ongoing economic distress. Many anticipate substantial distress in the coming months for motels, retail centers and stalled construction projects. Retail tenants and their commercial landlords are facing severe financial pressures, which will lead to business closures and empty retail centers. With the hospitality industry taking huge hits, motel operators are struggling to hold on—with some opting to simply hand over the keys to the lender now.

The receivership remedy can and will play a key role in securing and preserving these real estate assets. Typically, the stakeholder party seeking the appointment of a receiver will be a local municipality requesting a health and safety receiver (pursuant to California Health & Safety Code section 17980.7, et seq.) to abate the building, health and safety violations at the property, or alternatively, a lender seeking a receiver to preserve the status quo while the lender pursues foreclosure pursuant to its deed of trust on the property (pursuant to Code of Civil Procedure §564(b)(11)). In many cases, the local municipality and the property lender may be waiting for the other to act. Meanwhile, the neighborhood suffers.

Municipality Approach: Health & Safety Receivership

A health and safety receivership is an effective legal remedy under California law that facilitates the reestablishment of substandard properties, including abandoned properties that become a public nuisance. Pursuant to California Health & Safety Code § 17980.7, a receiver may be appointed after a property owner has failed to comply with a municipality’s notices and orders to abate substandard violations at a property. If appointed, a receiver has the right to take full and complete control of the property, secure the property, abate all violations and borrow funds to pay for the costs of the receivership.

The health and safety receivership remedy is a powerful tool in any California municipality’s toolbox. A receiver can reduce the number of blighted vacant properties, thereby allowing the municipality to demonstrate to its community members that it is taking steps to rehabilitate problem properties and ensure the safety of its neighborhoods. Vacant properties can quickly become a magnet for nuisance conditions and criminal activity, requiring consistent police and code enforcement service calls and a never-ending cycle of neighborhood degradation. Putting the property into a receiver’s hands can halt this drain of code enforcement and police department resources and rehabilitate the property once and for all.

Lender Approach: CCP § 564 Receivership

Per California law, should a borrower default (be it waste, payment default or other breach), a real property lender with a security interest in real property has various legal remedies available under the terms of its loan agreement and deed of trust, including the option to seek the appointment of a receiver. Pursuant to California Code of Civil Procedure § 564(b)(11), a receiver may be appointed by a court:

In an action by a secured lender for specific performance of an assignment of rents provision in a deed of trust, mortgage, or separate assignment document.  The appointment may be continued after entry of a judgment for specific performance if appropriate to protect, operate, or maintain real property encumbered by a deed of trust or mortgage or to collect rents therefrom while a pending nonjudicial foreclosure under power of sale in a deed of trust or mortgage is being completed.

The appointment of a receiver in these circumstances can benefit a lender in that the lender avoids holding legal title to the property, but still achieves its goal of securing the collateral and maximizing the pay-off of its loan through a potential receivership sale. As discussed above, retail centers and hospitality properties are struggling. Loan workouts and forbearance agreements will aid many commercial borrowers, however, many others may not be revived. Identifying the properties in the latter category and tracking their conditions will be a challenging task as we navigate the present economic distress. The appointment of a receiver plays a key role in preserving the value and safety of a lender’s collateral.

In closing, whether the appointment of a receiver is sought by a municipality or a lender, the underlying purpose of the appointment will become increasingly urgent in the coming months when dealing with nuisance properties abandoned by their owners and/or tenants. Swift attention to dangerous properties restores hope and pride in neighborhoods—something we all need right now.

*Receiver Richardson “Red” Griswold of Griswold Law, APC has been appointed by California courts over 100 times across 14 counties to act as a Receiver for substandard properties.