Understanding Connecticut’s new commercial real estate receivership law
A new law concerning the creation of receiverships for cases involving commercial real estate in Connecticut went into effect on July 1.
The law, which closely follows a draft proposal put forward by the nonprofit Uniform Law Commission (ULC), will update rules and procedures in Connecticut regarding situations where receiverships are required for commercial properties that are the subject of legal disputes.
“The bill was designed to fill several gaps in our statutes concerning the rules for the appointment and powers of receiverships over commercial matters,” said State Rep. Steven Stafstrom, the sponsor of the 2021 bill proposing the act.
Stafstrom, who represents House District 129 in Bridgeport, is also the chairman of the Judiciary Committee and an attorney at Pullman & Comley, LLC.
“Among the things it does is establish rules for appointing a receiver, including when a court is authorized to appoint one, what a receiver’s powers and duties are, and what the duties of the owner of a property in receivership is,” Stafstrom said, noting it also clarifies when a receiver can operate as a stay on certain court proceedings.
Receiverships are set up during legal disputes – typically involving repayment of loans – over commercial real estate to maintain services to tenants. They are entitled to the rent that would typically be collected by the property owner in return for maintaining tenants access and fulfilling other terms of the lease.
Connecticut joins 11 other states in enacting a version of the Uniform Commercial Real Estate Receivership Act (UCRERA) as proposed by the ULC. The organization proposes many bills to U.S. states and administrative regions, with the goal of implementing laws which are both best practices in the related fields while reducing confusion and ambiguity arising from differences in state law.
In the case of the Connecticut implementation of UCRERA, the law will also have important implications within the state.
“It’s not just the predictability across state borders,” said John Loughnane, a partner in the business department at White and William LLP in Boston. “The sponsors of these uniform laws definitely try to promote predictability across state borders so there’s generally the same rules of the road as you move from state to state, that’s definitely helpful.”
“But,” continued Loughnane, “I would say that just as helpful is promoting uniformity within a state. What you have here with commercial real estate receiverships in states that have not adopted this act is a lot of unpredictability from judge to judge, from court to court and from case to case within the state.”
Loughnane described the current system as being one where judges are largely left to make their own decisions, which can occasionally benefit one party or another in disputes over commercial real estate loans.
“I’d say that the greatest benefit is promoting uniformity within Connecticut as to the use of receiverships,” Loughnane said. “The values are the virtues of a predictable set of rules that promote consistency, try to curtail cost, and promote transparency. It can be good for everybody involved including the borrowers or the lenders, unsecured creditors or other parties that may be affected by a distressed party. It’s good for the court system – frankly, it’s good for the lawyers as well.”
“The immediate effect you are going to see from this,” added Steven Coury, who is also a partner at White and Williams, “is that lenders are going to now put a provision in their loan documents that specifically authorizes the appointment of a receiver under the exact terms of the law. That’s going to change immediately. By putting this specifically into a mortgage or the loan agreement you now have the right to appoint the receiver.”
Coury noted that rules like this may be welcome by many under current economic conditions, saying “office owners now don’t have the rental incomes that they once did. They can’t service the mortgages that were entered into several years ago and they don’t want to put in more equity to save the property. At the same time you do have existing tenants who have their needs. You have to keep the lights on, you have to keep the grass cut. You have to service those tenants.”
Under the terms of Connecticut’s UCRECA, the terms of receiverships in place prior to July 1 will not be altered, but all established after that date must adhere to the new law.