A How-To Manual for Preventing Commercial Properties from Going into a Court-Appointed Receivership Photo by Spencer Platt/Getty Images

A How-To Manual for Preventing Commercial Properties from Going into a Court-Appointed Receivership

Approximately 25 years ago, the California Legislature recognized that government agencies lacked the tools to properly deal with substandard properties. Residential and commercial buildings would sit in disrepair for months and years.

In response, in 1990 the Legislature passed Health & Safety Code section 17980.7, which added receivership to the options available to public agencies. A receiver takes possession of the property, rehabilitates it and then sells it if necessary to pay receivership expenses.

Over the last eight years, we have been appointed as receiver in over 80 Health & Safety Code cases throughout California. The purpose of this article is to pass on some of the lessons learned from our experiences, with the goal of helping property owners avoid becoming a defendant in a Health & Safety Code receivership case.

Since prevention starts with an appreciation of the underlying process, we first describe how regulatory agencies identify properties that may become receivership candidates. Then we discuss five simple best management practices you should consider.

How government identifies properties that are viable candidates for a receivership case

The first thing that many regulatory agencies do when they decide to clean up the community is to create a list of those properties with significant, obvious violations. The most common way to land on an agency’s watch list is to ignore exterior maintenance, i.e., trash/debris, dead landscaping, holes in a roof, etc. And, unlike residential properties, government agencies may enter commercial buildings without an inspection warrant, which could lead the agency to find additional problems.

Once the agency identifies a problem property, its next “due process” step is to put the owner on notice by posting notice on the property and mailing that notice to the owner. The agency must allow the owner a “reasonable time” to correct the conditions. If it does not, then the agency starts a second noticing process that could lead to a receiver’s appointment.

Once a receiver is appointed, it is very difficult for an owner to have the receiver discharged, short of seeking bankruptcy protection. Should the owner decide to appeal the receiver’s appointment, it must post a bond (another expense) in order to stay the receivership during the appeal; otherwise, the receiver moves forward even during an appeal. Because it is so difficult to undo the appointment, owners should take every reasonable precaution to avoid having control over their properties and finances placed in a receiver’s hands.

The receiver’s duties include taking possession of the property; managing the property (i.e., paying taxes, insurance, etc.); collecting rents and income; preparing a rehabilitation plan and obtaining construction bids; contracting for the rehabilitation work; borrowing funds to complete the work; and then, unless the owner redeems the property, selling the property to pay receivership costs. Receivership expenses can be and often are significant and can completely erode any owner equity in the property.

Five common sense ways to avoid becoming the defendant in a receivership case

  1. Regularly inspect your properties or hire a third party to do so. An ounce of prevention is worth a pound of cure: the best way to prevent a receiver from being appointed is by not allowing the property to fall into disrepair in the first place.


     
  2. Pay particular attention to exterior conditions. The easiest way to get on an agency’s radar is to advertise that you have a substandard building. By regularly maintaining the exterior, you greatly minimize the chance of an agency bothering to see if there are interior (and often more costly) substandard conditions.


     
  3. Respond immediately to all notices. Agencies particularly dislike being ignored and they have the full weight of the law and the courts on their side. Don’t unnecessarily irritate a sleeping giant. If you receive a notice of violation, reason dictates that you promptly contact the agency and commit to a schedule for redressing the agency’s concerns. This approach puts you in greater control of the “what,” “when,” and “how much.” The surest way to bureaucratic inflexibility is to ignore the agency’s notices or break commitments.


     
  4. Never complain that your neighbor’s property is worse than your property. Nearly every code enforcement officer has heard an owner complain that the owner’s property is no worse than the neighbor’s, a universally unavailing argument. The fact that your neighbor’s property is substandard is irrelevant, although the code enforcement officer (if not your neighbor) may thank you for the additional case to work on.


     
  5. Never stop trying to fix the problem. Although it is difficult to undo a receiver’s appointment once made, the opposite is true prior to the appointment. If an owner fully corrects the property’s substandard conditions before the receiver’s appointment hearing, the court may not appoint the receiver. Oftentimes, a court will postpone the receiver’s appointment if an owner is making good faith progress towards remediation.


     
  6. Bonus. One final thought—most governmental fines, penalties and attorneys’ fees are negotiable, but only if you follow Step 3.

Nicholas Firetag and Kevin Randloph are shareholders at Gresham Savage, a law firm based in Southern California. Nicholas Firetag has served as the receiver’s attorney. He was also the lead attorney in the published opinion entitled, City of Riverside v. Horspool (2014) 223 Cal.App.4th 670, 167 Cal.Rptr.3d 440. Kevin Randolph is a member of the California Receivers Forum and has served as a court-appointed receiver or in a similar capacity in over 80 cases.

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