By Justine Lara Konicki

Amidst worry over COVID-19, many borrowers are prudently reviewing their loan documents to ensure that they remain compliant and as secure as possible in these uncertain times. But what happens if a default on your loan is triggered during this crisis—whether due to an ill-timed maturity date with no refinancing options, a failure to maintain the proper debt-coverage ratio or because a mechanics lien was filed against the property that could not be timely released? Given current events, such scenarios are all too real.

Whatever the reason, now your loan is in default, cash management protocols may have been triggered, a special servicer may be in the mix and any attempts at a loan work-out are either falling on deaf ears or have been rejected by the lender. What next?

Likely, a lawsuit. But also, a request from the lender. Will you consent to the appointment of a Receiver? Before you can answer that question and determine the effect on your business, there is a more fundamental question.

What Is a Receiver?

A Receiver is a third party appointed by the Court to oversee and administer certain assets. And while common in real estate deals, they can arise in any commercial loan if the borrower is in distress. The Receiver, calling upon the Court’s equitable powers, may literally take the keys to your business—and will now control your property and business, take an inventory, manage your business for a period of time, take any income for the benefit of creditors and then sell your property, business and assets through a receivership sale. And all of this can occur before a trial has occurred and a final judgment has been entered.

In light of the powers a Receiver has, do you have to say yes to the lender’s request for a Receiver?

It depends. And it depends because the language in your loan documents will determine what rights, if any, you have to contest the appointment. Likely, your loan documents fall into one of the following three scenarios:

  • Your loan documents are silent on the appointment of a Receiver;
  • Your loan documents expressly provide that you must consent to the appointment of a Receiver if a default has occurred but there are no other provisions related to Receivers; or
  • Your loan documents contain covenants that require you to cooperate with the lender and not object to the appointment of Receiver, and if you do it would trigger the “bad boy carve-outs” to your non-recourse loan and full liability to the guarantors could be triggered.

Under the first scenario, congratulations, you can contest the appointment of the Receiver and assert all of your rights to the continued management and operation of your business. Whether you are successful in challenging the request will depend on a number of factors, including the nature of your business, the size of the loan and the type of default that has occurred, among others. But contesting the request for appointment of a Receiver gives you the best chance of remaining in control of your business.

Under the second scenario, you can refuse to consent to the Receiver and try to contest the lender’s right in Court but the failure to consent may be used by the lender as another default of the loan documents. The lender could seek judgment on your refusal alone. And, under these circumstances, a Court will be more likely to enter an order for a Receiver. But, depending on a number of factors, contesting the right to a Receivership still may be in your interest. You should consult your legal advisor concerning the alleged defaults before having any discussions with your lender or special servicer – and certainly before making any decision regarding the requested Receivership.

Under the third scenario, tread lightly and carefully. This scenario often arises in non-recourse real estate transactions, where the loan is only secured by the real estate. Consenting to a Receiver under these circumstances may be the wisest course of action, as it will ensure that the lender cannot seek personal liability against the individual guarantors. Failing to consent may lead to bigger headaches, including a possible lawsuit against the guarantors personally.

Understanding your rights under your loan documents is crucial in these uncertain times. If you have question regarding your loan documents, compliance with loan covenants, default risk and general management of your finance relationships during this turbulent time, please contact Justine Lara Konicki at or 216.736.7211.