California Health and Safety Code Section 17980.7(c) Receiverships

By Michael Reiter, Attorney at Law

The California Health and Safety Code section 17980.7(c) receivership is a unique code enforcement tool, that should strike fear in the hearts of any property owner. The receiver, if appointed,

California Health & Safety Code section 17980.7(c) specifically authorizes a court to appoint a receiver over a substandard property if the property owner has failed to comply with a notice or order to repair issued by a local agency.  The receiver oversees the rehabilitation of substandard properties if the property owner has failed to comply with an order or notice to repair issued by a local code enforcement agency pursuant to Health & Safety Code Section 17980.6.

Section 17980.6 allows a local agency to issue an order or notice to a property owner to repair a building if  the building is a nuisance or is maintained in violation of the State Building Standards Code or similar State Law, or any provision of a local ordinance that is similar to that part of the Health and Safety Code. and the a violation and the extent and nature of the violations are such that “the health and safety of residents of the public is substantially endangered.”  If the owner does not correct the condition of the property after having a reasonable opportunity, after the notice or order is issued, Section 17980.7(c) authorizes the enforcement agency to petition the court for the appointment of a receiver to oversee the management, repair and rehabilitation of the property.  Section 17980.7 provides, in pertinent part that:

If the owner fails to comply with the terms of the order or notice pursuant to Section 17980.6, the following provisions shall apply: . . . “(c) The enforcement agency . . . may seek and the court may order, the appointment or a receiver for the substandard building pursuant to this subdivision.”

Appointment of the receivership petition must be personally served on all persons with a recorded interest in the property at least three (3) days prior to the filing of the Petition.  Health & Safety Code section 17980.7(c).

Section 17980.7 provides that in determining whether to appoint a receiver, “the court shall consider whether the owner has been afforded a reasonable opportunity to correct the conditions cited in the notice of violation.”

Pursuant to Section 17980.7(c)(4), a city can request that the court appoint a  receiver to oversee the rehabilitation of a substandard building and grant the receiver the following powers and duties:

  • to take full and complete control of the Subject Property;
  • To manage the Subject Property and pay operating expenses, including taxes, insurance, utilities, general maintenance and debt secured by the property;
  • To secure a cost estimate and construction plan from a licensed contractor and enter into contracts for repairs necessary to correct the conditions cited in the notice to repair;
  • To enter into contracts and employ a licensed contractor as necessary to correct the conditions;
  • To collect all rents and income from the Subject Property, and use those funds to pay for the rehabilitation work; and
  • To borrow funds to pay for the rehabilitation work and relocation benefits, and to secure that debt with a recorded lien on the Subject Property for any amounts borrowed.

In addition, Section 17980.7(c)(4)(H) provides that a receiver shall have all of the powers granted to receivers under Code of Civil Procedure section 568.  Section 568 provides that a receiver has broad authority, under the control of the appointing court, “generally to do such acts respecting the property as a court may authorize.”

A city may ask for an order prohibiting the owner from interfering with the receiver.  Section 17980.7(c)(3) provides that “if a receiver is appointed, the owner and his or her agent or the substandard building shall be enjoined from collecting rents from the tenants, interfering with the receiver in the operation of the substandard building, and encumbering or transferring the substandard building or real property upon which the building is situated.”

The receiver may be authorized to borrow funds to finance costs incurred during the receivership, including but not limited to property management and maintenance expenses, rehabilitation costs, and the receiver’s fees.  Health & Safety Code section 17980.7(c)(4)(G).  The receiver will borrow funds by issuing “receiver’s certificates” to project lenders.  The certificates will act as both promissory notes to evidence the debts and as deed of trust to secure repayment of the debts.  The receiver’s certificates will become recorded first liens on the property with priority over all other preexisting financing to the property, since lenders are unlikely to finance rehabilitation projects unless their security is in the most senior position.

A city will request that the amount disbursed under the certificates, along with interest, shall be immediately due and payable upon completion of the receiver’s duties with respect to rehabilitation of the Subject Property.  If the debt is not satisfied (either by the property owner securing permanent secured financing or from some other source), the receiver or the holder of the certificates shall be authorized to apply to this court, on notice and hearing, to sell the Subject Property free and clear of all subordinate liens and encumbrances pursuant to Code of Civil Procedure section 568.5.  Under the terms of the receiver certificate, this sale will be held as a publicly-noticed auction in the same manner as a foreclosure sale under a judgment lien. The Health & Safety Code is silent as to the method of foreclosing on the lien of the receiver’s certificates.  The City believes that the judgment lien sale process is the fairest and most expeditious process for selling the property following a failure by the owner to satisfy the certificates.  See Code of Civil Procedure section 568.5, section 701.510, et seq.  Moreover, the holder(s) of the certificates would be permitted to credit bid at this sale.  The proceeds of the sale will go first to pay the debt evidenced by the certificate, second to pay subordinate debts and third to the property owner.  See Code of Civil Procedure section 701.810. The sale would be final when confirmed by the court.

Any property owner should heed the words of the California Supreme Court:

Examination of the legislative intent underlying these statutes leads us to conclude that an enforcement agency’s failure to fully comply with the requirements specified in section 17980.6 does not necessarily invalidate a receiver’s appointment under section 17980.7, and that the particular instances of noncompliance here did not invalidate the receivership orders on appeal. We also find that, in view of all the circumstances presented, the trial court below acted well within its discretion in authorizing the receiver to forgo rehabilitation of the substandard property at issue and to instead contract for demolition.  City of Santa Monica v. Gonzalez (2008) 43 Cal.4th 905, 913.

A property owner, and anyone else with an interest in the property, facing a receivership needs to speak to an attorney immediately.  It is a drastic remedy for what sometimes already is a drastic situation.

The information you obtain at this blog is not, nor is it intended to be, legal advice. No attorney-client relationship is established by reading or commenting on this blog. You should consult an attorney for advice regarding your individual situation.

Milligan, Beswick, Levine & Knox, LLP
A: 1447 Ford St. #201
      Redlands, CA 92374
T: (909) 296-6708