The District has reached a preliminary agreement with Sanford Capital—the Bethesda-based landlord it’s suing over terrible conditions at two of the company’s 18 D.C. properties—to have an independent entity conduct significant renovations at the Terrace Manor complex in Ward 8.

During a Superior Court hearing Tuesday, attorneys for D.C. and Sanford struck the deal behind closed doors as a partial settlement of litigation that Attorney General Karl Racine launched last October. Under the agreement, an experienced third party known as a “receiver” will address all housing-code violations at the 11-building property as well as any health and safety issues, such as mold or rats. Then the receiver will file a report on its work, subject to objections, to the court.

The specifics of this plan have to be ironed out over the next few days since the parties reached a verbal agreement. But it represents a victory for D.C. and the remaining tenants at Terrace Manor—about a dozen in total—who have endured lack of heat, unsecured doors, and squatters after Sanford Capital promised various repairs and acquired the property in late 2012.

“This is what’s fundamental: The complex has to be in habitable condition so people can live their lives and use their units,” Judge John M. Mott said, prodding the parties to make a deal.

The prospective plan for receivership replaces a different abatement plan Sanford and the District had brokered in January, which required the company to rectify code violations within certain periods of time depending on their severity. At the end of March, however, D.C.’s lawyers sought to hold Sanford in civil contempt for allegedly disregarding that plan. Lawyers for Sanford have denied this. On Tuesday, one of them insisted that “there are no code violations” at Terrace Manor, as “they have all been remedied.”

After that attorney, Nelson Cohen, made a similar assertion in court two weeks earlier, a City Paper reporter discovered broken ceilings and floors within unlocked vacant units at Terrace Manor, a foot-and-a-half of brown standing water in the basement of one building there, and a few inches of dirty water in another basement.

Now it’s up to the receiver to ensure the site is livable. Receivership is a relatively rare outcome among landlord-tenant cases in D.C., and it is typically financed by tenant rents. Some housing advocates say it should be used more frequently to resolve serious risks to life, health, and safety. Sanford’s affiliate for Terrace Manor has stated in federal court documents that the property generates roughly $9,000 a month in rental income.

It’s unclear how long the receiver will need to fix up the property given its deep state of disrepair. More than 50 of Terrace Manor’s 61 units were occupied before Sanford Capital bought the property.

The settlement is only a partial resolution because another component of Racine’s lawsuit against the company is still in discovery. His office has also sued Sanford via the District’s consumer protection laws, arguing that Sanford misrepresented to Terrace Manor tenants that it would maintain their homes in good order. At Tuesday’s hearing, both parties said the other had not provided pieces of information they had requested, including previous rent rolls, past housing complaints, former Sanford employees’ contact information, company emails, and government agency documents.

The District is seeking restitution of rents that tenants paid while Sanford neglected the property, and Judge Mott requested a status update on the discovery process from the parties by May 31. Racine is pursuing new legal ground in advancing consumer protection claims in housing cases.

“Mr. Nowell is not involved in providing the information—it’s his staff,” Sanford attorney Stephen Hessler told the court, referring to the company’s principal, Aubrey Carter Nowell, seated next to him. At a court hearing earlier in April, Nowell declined to comment on his business practices. He co-founded Sanford in 2006 with Patrick Strauss and lives in a $2.9 million Bethesda home. (In March the District moved to make Nowell personally liable for damages as part of the litigation.)

In addition to Terrace Manor, Racine has brought suit over a property Sanford Capital owns above the Congress Heights Metro station. That property is the subject of an active abatement plan, for which Mott scheduled a status hearing at the end of June, following future inspections.

Meanwhile, problems persist at the company’s other properties that are not in litigation. Recent inspections by the District marked upwards of 1,000 housing-code violations across its portfolio, which amounts to nearly $540,000 in potential fines. Sanford has appealed all of these citations.

Tax dollars have propped up the company through programs that subsidize low-income tenants and those transitioning out of homelessness, to the tune of more than $3.5 million a year. Most Sanford tenants are people of color and many are working-poor, with some paying market rents of above $1,300 a month for one-bedroom units. Elected officials have taken notice. In her annual State of the District Address last month, Mayor Muriel Bowser said Sanford must “fix the violations, face nearly half a million in fines, or see us in court.” The D.C. Council has also faulted the company.

Despite this, Nowell has filed for bankruptcy for Terrace Manor in federal court, claiming that the Sanford affiliate controlling Terrace Manor must reorganize and then sell the property to pay off its debt. The District alleges that Nowell is declaring bankruptcy “in bad faith”—in an effort to avoid its enforcement action—and the U.S. Trustee, a branch of the Justice Department, also opposes the action.

In court records, Terrace Manor LLC’s attorneys say bankruptcy would facilitate the sale of the property for about $5.8 million to a prospective purchaser called Equilibrium, run by developer Sofonias Astatke. This would apparently allow the LLC to cover less than $3 million it owes on its mortgage with EagleBank and on smaller, unsecured loans, and Astatke to refurbish the site.

“We are still of the belief that if we are able to move forward with this purchase, it will be beneficial for us as investors, beneficial for existing and future residents of the Terrace Manor property, and the community at large,” Astatke wrote in an email to City Paper earlier this month.

Nowell achieving bankruptcy would void the rights the tenants have under D.C. law to produce a buyer they trust to complete needed repairs. This has happened before, at other properties with other owners, leaving tenants crestfallen and angry.

Nowell’s attorneys have admitted in bankruptcy court proceedings that Terrace Manor LLC has previously received cash infusions from its parent company Sanford Capital—a fact the District has harped on in its own court arguments.

Another fact the District has emphasized? In the LLC’s bankruptcy petition, the affiliate checked a box stating that it does not possess “any real property … that needs immediate attention,” including property that “poses or is alleged to pose a threat of imminent and identifiable hazard to public health or safety.” Nowell signed the petition.

Alexa Mills contributed reporting.