Two Traps for the Unwary in Ohio’s New Receivership Law

Lenders, receivers and buyers need to be aware of two changes that will affect the receiver’s sale of real property under Ohio's new receivership law, which takes effect on March 23.

A lender foreclosing an Ohio commercial mortgage will typically ask the court to appoint a receiver for the property. The Ohio Revised Code gives receivers broad powers to collect rents, and to manage, lease and sell the property, as granted or limited by the court. Commonly, the order will list certain acts that require the receiver to obtain prior consent from the court, the lender, or both.

One important power is the receiver’s ability to sell property at auction or at private sale, free and clear of all liens. Unlike some states, Ohio does not grant lenders the power to foreclose a mortgage without a court proceeding and sheriff’s sale. Sometimes a sheriff’s sale is too slow, or the lender does not expect the property to bring a bid for the statutory minimum price of two-thirds the appraised value, or simply does not want to take title to the property. The receiver’s power to enter a contract for private sale offers the lender a crucial alternative.

The receiver’s sale contract is subject to court approval before closing. When the sale closes after the court’s approval, all liens against the property are extinguished when the receiver’s deed is recorded. Any right to a lien transfers to the proceeds of sale.

The new law is a welcome improvement. The old law was last revised in 1953. The old law was sketchy, resulting in different procedures and powers from county to county and even from court to court. The new law clarifies the receiver’s powers, and sets uniform procedures across the state. Two new provisions of Revised Code Section 2735.04, however, can potentially disrupt the receiver’s ability to sell the property.

The first is minor. The court’s order approving the proposed sale must set a time for redemption of the property. The time must be at least three days. During that time, the borrower, or anyone else who has a right of redemption, can redeem the property by paying the greater of the sale price, or the total amount secured by all of the mortgages and other liens that would have been canceled by the sale, including all principal, interest, costs, and other amounts secured by those liens, through the date of payment to the receiver. Parties to the sale should make sure that their sale contract allows time for the redemption, and discusses what happens if the right is exercised.

The second is a game changer. As of March 23, the court can override the receiver’s promise not to solicit or accept backup contracts - offers to buy the property if the existing contract fails to close for any reason.  Buyers often want the sale contract to bar backup contracts, so as not to give the receiver additional bargaining leverage if issues arise before closing, and so as not to tempt the receiver to breach the contract and sell to someone else at a higher price. The new law lets the court order the receiver to keep the buyer on hold and look for a better deal from someone else. The court can approve the proposed sale contract, or can order the receiver to solicit and consider additional offers.

What happens to the original buyer? That depends on the court. “If the receiver ultimately sells the property to a party other than the original proposed purchaser, if approved by the court, the receiver may pay to the unsuccessful original proposed purchaser a reasonable amount of costs and expenses from the sale proceeds in an amount determined by the court to compensate that proposed purchaser for participation in the sale process to the extent that participation brought value to the receivership.” Ohio Revised Code 2735.04(D)(1)(c).

How long must the original buyer wait to find out if the sale contract is approved or if a new contract has replaced it? The new law does not say.

This change increases the buyer’s risk and potential expense. It’s too early to know how this change will affect the market for receivership property. Judges like to keep their dockets clear, and may prefer not to complicate the receiver sale if no one has objected to the price. But lawyers dealing with sales by a receiver should plan for this change and make sure that the sale contract spells out what will happen if the court orders the receiver to seek other buyers.

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