In late June, Governor DeSantis approved Florida’s version of the Uniform Commercial Real Estate Receivership Act (“UCRERA”) and the Act became effective July 1, 2020. This law begins its life in a time of great uncertainty for the Florida business community as the Sunshine State’s recently-relaxed business restrictions underwent a near full reversal as COVID-19 cases spiked around the state. This retightening of COVID-19 business restrictions and the uncertainty associated with it will likely mean Florida businesses may continue to struggle. This is where UCRERA comes in.
UCRERA codifies Florida common law around receivership and even expanded it in some cases. Those involved in Florida’s commercial real estate industry, whether on the lending or the borrowing side, would do well to take note of these changes as an increase in foreclosures is predicted as a result of COVID-19’s negative impact on Florida’s businesses.
What do Florida lenders need to look out for?
If you are a commercial lender, this law is definitely in your favor due to the expansive powers it gives receivers to help pay back the commercial lenders who appoint them. Lenders should focus on three things:
- the mandatory receivership duties under UCRERA;
- what actions receivers are allowed to do “in the ordinary course of business” and outside of it; and,
- what actions they need court approval for.
The latter two things often go hand in hand as you will see below.
Impact on Borrowers
Although this sounds bad for borrowers, borrowers should be on the lookout for language like “with court approval” because that means a borrower will likely have the chance to contest whatever the receiver is trying to do.
Borrowers should also be aware that when a court considers whether to allow a receiver to do something, it will likely be easier to prevent the receiver from doing it pre-judgment as opposed to post-judgment, which is where a lot of UCRERA’s expansion of receivership power lies. To put it differently, the standards that receivers must meet for court approval are usually higher pre-judgment than post-judgment.
Now, let’s have a look at the main provisions of the law. The provisions focus on jurisdiction, the duties of a receiver, expanding the authority to appoint a receiver, expanding the authority of a receiver, and expanding the protections of a receiver. “Expansion” means that the powers now beyond those powers the receivership previously had under Florida common law.
Duties of a Receiver
First, UCRERA establishes mandatory duties for receivers, including: preparing and obtaining business records for things like receipts, disbursement, and dispositions of receivership property; account for receivership property; file with the recording office of each county where receivership property is located a copy of the order appointing the receiver and the legal description of the property; disclose any facts arising during the receivership which would disqualify the receiver under section 714.07; and perform any duty imposed by court order.
Authority to Appoint a Receiver
Next, UCRERA expanded authority to appoint a receiver by allowing for appointment of a receiver after a final judgment, which was not something that normally happened under common law. Now, UCRERA authorizes the appointment of a receiver to: execute a final judgment, preserve nonexempt real property pending appeal, or after an unsatisfied execution where the owner refuses to apply the property in satisfaction of the outstanding judgment, preserve real property sold in a foreclosure sale and secure its rents during the mortgagor’s right of redemption; or on equitable grounds.
Authority of a Receiver
Now, without a court’s approval, a receiver can:
- operate a business constituting receivership property, including preservation, use, or transfer of property in ordinary course of business;
- incur unsecured debt and pay expenses incidental to the receiver’s preservation, use or transfer of receivership property in the ordinary course of business;
- assert a right, claim, cause of action or defense of the owner which relates to receivership property;
- seek instruction from the court regarding receivership property, exercise of receiver’s powers, and performance of receiver’s duties;
- upon subpoena, engage in discovery related to receivership property, exercise of receivership powers, and performance of receiver’s duties; engage a professional, such as an accountant or lawyer; and
- apply to a court of another state for appointment as ancillary receiver for receivership property located in that state.
UCRERA also permits the receiver, with court approval, to:
- incur debt outside the ordinary course of business;
- make improvements to receivership property;
- use or transfer receivership property other than in the ordinary course of business;
- adopt or reject executory contract of the owner;
- pay compensation to the receiver and to any professionals engaged by them;
- recommend allowance or disallowance of a creditor’s claim; and,
- make distributions of receivership property.
New Protections for Receiverships
The new protections for receiverships focus on several areas, including the the use or transfer of property outside the ordinary course of business. Florida common law generally prohibited the sale of receivership property, except where the owner agreed to it. However, UCRERA allows for the sale of receivership property both pre-judgment and post-judgment so long as the property is free and clear of liens at the time of transfer. Both pre- and post-judgment transfers are subject to court approval.
The pre-judgment standards are stricter than the post-judgment standards because it preserves the Florida common law principle of requiring consent of the owner, but if the owner fails to give that consent or reject the transfer once they have advance notice, the court will allow the sale or transfer if the receiver establishes they are executing the transfer to prevent waste, loss, substantial diminution, or a voidable transaction involving the property.
The post-judgment standard does away with owner’s consent and allows the receiver to take action on a showing to the court that they are executing the judgment, preserving nonexempt real property pending appeal, or after the owner refuses to satisfy the judgment.
Second, the new protections focus on expanding the authority of state court judges to stay proceedings related to receivership property and enjoin any acts that may be wasting or misappropriating receivership property.
Third, receivers have the ability to enter orders against other creditors including: ordering a person owing a matured debt on receivership to pay that debt to or on the order of the receiver; order a person in possession of property to turn that property over to the receiver except where they have a valid lien dependent on their possession. The receiver may do an end run around a valid lien by having the court enter an order that gives the third party creditor protection.
Finally, UCRERA mostly encodes and preserves the Florida common law around adopting and rejecting executory contracts.