When a foreclosing mortgagee believes that the real property collateral may decline in value during the course of the action, or that the defaulting borrower may allow or cause the premises to deteriorate, a Bank may contemplate appointment of a temporary receiver to preserve the premises. The role of the receiver is to preserve the integrity of the collateral. It maintains the property physically by providing for repairs, and financial security is obtained through payment by the receiver of taxes, utilities and other expenses. Once a receiver is in place, the income of the property goes not to the mortgagor, but to the receiver.
A receiver may be appointed to take charge of mortgaged property in default if it appears that the mortgaged property is in danger of being lost, removed or materially injured; or a condition of the mortgage, or deed of trust is not being performed (e.g., an assignment of rents provision) and the property’s value is probably insufficient to pay the secured debt.
To obtain the appointment, the mortgage must first bring an action to foreclose the mortgage and sell the property.
Courts are reluctant to appoint receivers for income producing properties pending a foreclosure. If the loan is in default, however, and it can be proved that the borrower has withheld net operating income from the property and the Bank has recourse only to the property (including rent), then the Bank may be able to establish that the property (rent) is in danger of being lost and obtain the appointment of a receiver. If the mortgage or deed of trust authorizes appointment of a receiver to collect rents, the court may appoint a receiver to enforce the provision under its equitable powers.
When the property is not generating income (e.g., a partly completely building) and a receiver is not needed to preserve and protect the property, simply foreclosing under the deed of trust may suffice. However, a trustee’s sale will take several months (and might be further delayed by bankruptcy or a state court injunction) whereas a receiver may be quickly empowered to continue construction of a partly finished building if the Bank is willing to advance the necessary funds.