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RECEIVERSHIP OF OCCUPIED RENTAL PROPERTIES
At the same time that the Abandoned Properties Rehabilitation Act was enacted, New Jersey also adopted a new statute to govern receivership of occupied rental properties, the Multi-family Housing Preservation and Receivership Act, P.L.2003, c.295 (N.J.S.A.2A:42-114 through 42). Occupied rental properties often pose serious health and safety problems, which not only cause harm to their residents and neighbors, but often lead—if not corrected—to abandonment. While many of those problems can be successfully addressed through code enforcement and nuisance abatement procedures, those tools do not always bring about timely results. Although this statute by definition does not apply to vacant property, it is an important tool for preserving buildings and preventing them from becoming abandoned.
Receivership of occupied residential buildings is a tool that has been used in a number of states since the 1960s to address problem absentee-owned rental properties. While New Jersey has had laws permitting receivership on the books for many years, they were inadequate in many respects, and as a result, were rarely used. The enactment in January 2004 of the Multifamily Housing Preservation and Receivership Act, N.J.S.A.2A:114 through 142, has significantly strengthened the hands of those seeking to use receivership as a tool to preserve and restore problem rental properties. This section provides an overview of the provisions of this law, so that local officials, community organizations, and tenant organizations can determine whether it is worth pursuing with respect to specific buildings in their communities.
AN OVERVIEW OF THE MULTIFAMILY HOUSING PRESERVATION AND RECEIVERSHIP ACT
Briefly summarized, if an occupied residential building meets certain conditions under the act, the court may appoint a receiver to both operate and restore the property. The receiver has broad powers, including the power to borrow money to rehabilitate the property. Once the receiver has been appointed, the owner must meet stringent requirements to regain control of the property. If the owner fails to do so, the court can authorize the receiver to sell the property to a third party. The Q&A below addresses the most important features of the act, but parties interested in pursuing this remedy should study the entire act in detail before taking action.
- What conditions can trigger a receivership action?
A receivership action can be triggered by either of two conditions:
- The building violates a housing code requirement affecting the health and safety of the tenants, and the violation has remained unabated for 90 days; or
- The building shows a pattern of repeated code violations over a period of a year or more (N.J.S.A.2A:42-117)
In both cases, the complaint must show that the owner failed to take adequate and timely action. An owner can defend against a complaint by demonstrating that “repairs were made in a timely fashion to each violation, that the repairs were made to an appropriate standard of workmanship and materials, and that the overall level of maintenance and provision of services to the building is of adequate standard” (N.J.S.A.2A:42-122[a]).
- Who can bring a receivership action?
Many different entities have the legal right to bring receivership actions. They include the municipality, lienholders, individual tenants, organizations representing a majority of the tenants, and nonprofit organizations providing community services within the municipality (N.J.S.A.2A:42-116).
- Who can serve as a receiver?
The right to bring a receivership action is not the same as the authority to act as a receiver. The receiver must be a “qualified entity” with “demonstrated knowledge and substantial experience in the operation, maintenance and improvement of residential buildings” or a lienholder. While the Department of Community Affairs is charged under the Act to establish a registry of qualified entities, the court has the ultimate authority to designate receivers (N.J.S.A.2A:42-116, 123 and 142).
- What are the powers and responsibilities of the receiver?
Within 60 days after appointment, the receiver must submit a plan for the operation and improvement of the building to the court. The plan is not limited to correcting the specific violations that may have triggered the receivership, but includes “bring[ing] the property up to applicable codes and standards” (N.J.S.A.2A:42-125[a]). The receiver has all of the owner’s powers, including the power to borrow money to cover the cost of the improvements. The receiver must maintain the building in good order, implement the plan approved by the court, and apply all revenues from the property to the extent necessary to implement the plan. The receiver is entitled to reasonable fees for his or her activities (N.J.S.A.2A:42-125, 128-131).
- How can the receiver obtain funds to rehabilitate the property?
The receiver can borrow funds from public or private sources to operate or improve the property. When the funds are needed to improve a property which already has a mortgage on it, and where the senior lienholder has refused either to provide additional financing or voluntarily subordinate its loan, the court may authorize the receiver to borrow funds and secure them with a lien on the property. This lien takes priority over all other liens except for municipal liens (N.J.S.A.2A:42-130); moreover, under
N.J.S.A.55:19-100, receivers’ liens have the same recourse against other assets of the property owner as do municipal nuisance abatement liens.
- What must an owner do to regain control of the property?
The owner can petition at any time for termination of the receivership, unless the court has established a minimum term for the receivership, which can be no more than one year. In order to be reinstated, the owner must:
- Demonstrate that it will carry out any remaining features of the receiver’s plan
- Pay or deposit with the court all funds needed to meet the obligations of the receivership
- Agree to assume all legal obligations, including repayment of debt, incurred by the receiver
- Pay all municipal liens on the property, as well as any municipal costs incurred in connection with the receivership
- Post a bond in an amount determined by the court but not in excess of 50% of the fair market value of the property, which is forfeit in the event of future code violations
The court may waive the bond requirement for good cause, but must find that the reinstatement of the owner is in the public interest. The court may also impose additional requirements to protect the interests of the tenants and the residents of the neighborhood (N.J.S.A.2A:42-137 and 138). The court may also appoint the receiver or other qualified entity to monitor the owner’s operation and maintenance of the property, and reinstate the receivership in the event that the owner fails to carry out any of the conditions of reinstatement (N.J.S.A.2A:42-139).
- Under what conditions can the building be sold by the receiver?
The receiver can ask the court for authority to sell the building after one year, if the owner has not successfully petitioned for reinstatement, and if the sale will further maintaining the building as sound, affordable housing (N.J.S.A.2A:42-133).
- What rules govern the sale of the building by the receiver?
In applying to the court for authority to sell the building, the receiver must specify the manner in which it proposes to sell the building, including:
- Sale on the open market to a qualified entity
- Sale at a negotiated51 price to a qualified nonprofit entity
- Sale to an entity for the purpose of converting the property to condominium or cooperative ownership
- In the case of one to four family buildings, sale to a household that will occupy one of the units as an owner-occupant
The sale must be at market value. The court can authorize the receiver to sell the property free and clear of all liens and encumbrances, with the proceeds of sale distributed in order of priority as set forth in the act (N.J.S.A.2A:42-134-136).
- What is the role of the Department of Community Affairs?
In addition to being authorized to establish a Preservation Loan Revolving Fund to provide loans and grants to receivers to carry out their mission in situations where borrowing funds on conventional terms will either impose hardship on the tenants, or potentially impair the success of the receivership, the act gives the Department substantial responsibilities. The Department is charged with:
- Establishing a registry of qualified receivers, and defining the qualifications for listing on the registry. The qualifications are set forth in regulations adopted by the Department (N.J.A.C. 5:43-5.4)
- Establishing rules governing minimum insurance coverage and surety bonding for receivers (N.J.A.C. 5:43-5.2 and 5.3).
USING RENTAL RECEIVERSHIP
Receivership is a powerful tool - so powerful, that an owner who is even moderately concerned with retaining a property is likely to make a serious effort to improve the property in order to avoid having a receiver appointed. Where the owner is not willing to do so, an alert lender holding a mortgage on the property can step forward instead, in order to avoid the possibility of the receivership diminishing or even eliminating the value of his or her lien. As a result, the ability to bring receivership actions can be seen first as a tool to press owners and lienholders to carry out their responsibilities to repair and maintain problem rental properties under their control.
No one should bring a receivership action, however, on the assumption that the owner or mortgage holder will necessarily step forward. The party bringing the action should be prepared either to serve as receiver, if it possesses the appropriate qualifications, or to recommend a qualified receiver to the court. The potential receiver, moreover, should assess the state of the building to establish that it is a reasonable candidate for receivership. A building that is in such disrepair that it must be vacated in order to permit total rehabilitation and replacement of all building systems may not be an appropriate candidate for receivership.
Improving a building that has been allowed to deteriorate over many years, while protecting the interests of sitting tenants, is an extremely difficult task not to be undertaken lightly. Even when carried out by highly qualified individuals possessing of detailed information it can be highly problematic, for many reasons:
- Despite due diligence, repair and replacement needs cannot always be accurately estimated up front. Additional costs can undermine financial projections and jeopardize the financial feasibility of the receivership.
- Unit conditions may require some tenants to be relocated, triggering both additional costs and potential conflict between the receiver and the tenant body.
- The cost of repairs as well as providing adequate maintenance may require rent increases that may create potential hardships for tenants as well as becoming a further source of conflict.
In addition to being skilled in property management and rehabilitation, the receiver should have a detailed knowledge of potential public sector financial resources, both with respect to the capital costs of restoring the building, and the needs of tenants that may be financially affected by the receivership.
Difficult as it may be, the rewards of a successful receivership can be substantial. At best, a building is restored to sound quality and productive use while remaining affordable to its tenants, and placed in the hands of a responsible landlord or owner-occupant. Even if control is restored to its owner, the act gives the receiver, or the entity bringing the receivership, a strong role to ensure that the building does not revert to the conditions that triggered the receivership in the first place.
Receivership can be a major element in an overall strategy to address problem properties, either at the neighborhood or municipal level. It should be a partnership, involving municipal code enforcement and community development staffs working cooperatively with one or more CDCs or other community-based organizations, to identify appropriate properties, identify financial resources, and bring solidly documented court actions. The partners should include one or more qualified receivers, which may be CDCs, but may also be responsible property owners or property management firms within the area.
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