the assignment of rental income to the lender

Assignment of Rents – What, Why, and How?

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Madelaine prescott, esq., share this post:.

November 29, 2023

These days, almost all commercial loans include an Assignment of Rents as part of the Deed of Trust or Mortgage. But what is an Assignment of Rents, why is this such an important tool, and how are they enforced?

An Assignment of Rents (“AOR”) is used to grant the lender on a transaction a security interest in existing and future leases, rents, issues, or profits generated by the secured property, including cash proceeds, in the event a borrower defaults on their loan. The lender can use the AOR to step in and directly collect rental payments made by the tenant. For an AOR to be effective, the lender’s interest must be perfected, which has a few fairly simple requirements. The AOR must be in writing, executed by the borrower, and recorded with the county where the property is located. Including an AOR in the recorded Deed of Trust or Mortgage is the easiest and most common way to ensure the AOR meets these requirements should it ever need to be utilized.

When a borrower defaults, lenders can take advantage of AORs as an alternative to foreclosure to recoup their investment. With a shorter timeline and significantly lower costs, it is certainly an attractive option for lenders looking to get defaulted borrowers back on track with payments, without the potential of having to take back a property and attempting to either manage it or sell it in hopes of getting your money back out of the property. AORs can be a quick and easy way for the lender to get profits generated by the property with the goal of bringing the borrower out of default. But lenders should carefully monitor how much is owed versus how much has been collected. If the AOR generates enough funds so that the borrower is no longer in default, the lender must stop collecting rents generated by the property.

Enforcement of an AOR can also incentivize borrowers to work with the lender to formulate a plan, as many borrowers rely on rental income to cover expenses related to the property or their businesses. Borrowers are generally more willing to come to the table and negotiate a mutual, amicable resolution with the lender in order to protect their own investment. A word of warning to lenders though: since rental income is frequently used to pay expenses on the property, such as the property manager, maintenance, taxes, and other expenses, the lender needs to ensure they do not unintentionally hurt the value of the property by letting these important expenses fall behind. This may hurt the lender’s investment as well, as the property value could suffer, liens could be placed on the property, or the property may fall into disrepair if not properly maintained. It is also important for lenders to be aware of the statutes surrounding the payment of these expenses when an AOR is being used, as some state’s statutes require the lender to pay certain property expenses out of the collected rents if requested by the borrower.

In addition to being shorter and cheaper than foreclosure, AORs can be much easier to enforce. In California, the enforcement of an AOR is governed by California Civil Code §2938. This statute specifies enforcement methods lenders can use and restrictions on use of these funds by the lender, among other things. Under CA Civil Code §2938(c), there are 4 ways to enforce an AOR:

The appointment of a receiver;
Obtaining possession of the rents, issues, profits;
Delivery to tenant of a written demand for turnover of rents, issues, and profits in the correct form; or
Delivery to assignor of a written demand for the rents, issues, or profits.

One or more of these methods can be used to enforce an AOR. First, a receiver can be appointed by the court, and granted specific powers related to the AOR such as managing the property and collecting rents. They can have additional powers though; it just depends on what the court orders. This is not the simplest or easiest option as it requires court involvement, but this is used to enforce an AOR, especially when borrowers or tenants are uncooperative. Next is obtaining possession of the rents, issues, profits, which is exactly as it seems; lenders can simply obtain actual possession of these and apply the funds to the loan under their AOR.

The third and fourth options each require delivery of a written demand to certain parties, directing them to pay rent to the lender instead of to the landlord. Once the demand is made, the tenant pays their rent directly to the lender, who then applies the funds to the defaulted loan. These are both great pre-litigation options, with advantages over the first two enforcement methods since actual possession can be difficult to obtain and courts move slowly with high costs to litigate. The written demands require a specific form to follow called the “Demand To Pay Rent to Party Other Than Landlord”, as found at CA Civil Code §2938(k). There are other notice requirements to be followed here, so it is essential to consult with an experienced attorney if you are considering either of these options. California Civil Code §2938 specifically provides that none of the four enforcement methods violate California’s One Action Rule nor the Anti-Deficiency Rule, so lenders can confidently enforce their AORs using the above methods with peace of mind that they are not violating other California laws.

Whether you are looking to originate a new loan, or you are facing a default by your borrower, understanding what an Assignment of Rents is and how it operates can be extremely beneficial. Enforcing an AOR can be an easier option than foreclosure and can help promote a good relationship with your borrower when handled correctly. If you have any questions about AORs, or need further details on how to enforce them, Geraci is here to help.

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Properly Enforcing an Assignment of Rents

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In Florida, lenders typically obtain an “assignment of rents” if the property produces income by collecting rent, such as an apartment complex, rental home, rental space, or office building. An “assignment of rents” allows the lender to collect the rent payments, if the borrower defaults on their loan payments. Although the lender and borrower may agree to the assignment of rents in the loan documents, the procedure for enforcing the assignment of rent is governed by Section 697.07, Florida Statutes .

assignment of rents enforce assignment of rents actual assignment of rent sequestration of rents

The Assignment of Rents Should be Recorded

If a lender and borrower agree to the assignment of rents as security for repayment of debt in a mortgage document, the lender will hold a lien on the rent payments. However, to perfect its rents lien against third parties, the lender must record the mortgage in the public records of the county in which the real property is located. Fla. Stat. § 697.07 (2).

How Can a Lender Enforce the Assignment of Rents?

Section 697.07 provides two methods for the lender to enforce the assignment of rent: (i) the actual assignment of rent to the lender, and (ii) the sequestration of rents into the court registry. Wane v. U.S. Bank, Nat’l Ass’n , 128 So. 3d 932, 934 (Fla. 2d DCA 2013) (“Section 697.07 draws a clear line between a motion seeking sequestration of rents into the court registry [under subsection (4)] and a motion seeking an actual assignment of rents to the lender pending foreclosure [under subsection (3)].”).

(i) Actual Assignment of Rent to the Lender

The first method, the actual assignment of rent to the lender, is provided in Section 697.07 (3). If the borrower defaults on the loan, the lender can make a written demand to the borrower to turn over “all rents in possession or control of the [borrower] at the time of the written demand or collected thereafter,” minus any expenses authorized by the lender in writing. Fla. Stat. § 697.07 (3). If the borrower does not turn over rent payments after the lender has made a written demand, the lender may foreclose on the rents lien and collect rent payments, without having to foreclose on the underlying mortgage. Ginsberg v. Lennar Fla. Holdings, Inc. , 645 So. 2d 490, 498 (Fla. 3d DCA 1994) (“[A]n assignment of rent creates a lien on the rents in favor of the mortgagee, and the mortgagee will have the right to foreclose that lien and collect the rents, without the necessity of foreclosing on the underlying mortgage.”).

To receive a court order for the actual assignment of rent, the lender will have to prove that there was a default, and that it made a written demand to the borrower to turn over rent payment. Wane , 128 So. 3d at 934. Additionally, an evidentiary hearing will be required.

(ii) Sequestration of Rent Into the Court Registry

The second method, the sequestration of rent into the court registry, is provided in Section 697.07 (4). This method can only be used if there is a pending mortgage foreclosure lawsuit. Unlike the first method, the lender does not have to prove that there was a default or make a written demand, and an evidentiary hearing is not required.

Either the borrower or lender may make a motion to the court for sequestration of rent into the court registry. Upon such a motion, a court, pending final judgment of foreclosure, may require the borrower to deposit the collected rents into the court, or in such other depository as the court may designate. The court must hear the motion on an expedited basis, and the moving party will only be required to show that there is a pending foreclosure lawsuit, and that there is a provision in the loan documents for the assignment of rent. Wane , 128 So. 3d at 934.

Moreover, a borrower cannot avoid sequestration of rents by raising defenses or counterclaims. Id. ; Fla. Stat. § 697.07 (4). In addition, the borrower will be required to submit records of receipt of rent to the court and lender, typically on a monthly basis throughout the lawsuit. The rents will remain in the court registry until conclusion of the foreclosure action.

To properly enforce the assignment of rents, the first thing lenders should do is record the assignment of rents in the public records of the county in which the real property is located. In the event the borrower defaults on their loan, the lender will have two options to enforce the assignment of rents: the actual assignment of rent to the lender (Section 697.07 (3)), or the sequestration of rents into the court registry (Section 697.07 (4)). If the lender is seeking the actual assignment of rent, the lender must send a written demand to the borrower to turn over the rent payments and provide proof of default. On the other hand, the lender may seek sequestration without proof of default or written demand. Showing the existence of an assignment of rents provision in the loan documents is sufficient to obtain sequestration of rents into the court registry.

Austin B. Calhoun, Esq.
Melissa G. Murrin, JD Candidate

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Assignment of rent: an effective remedy against defaulting borrowers?

This article relates to:

The property market is still volatile despite rising property prices, and it remains a tricky time for lenders.

The property market is still volatile despite rising property prices, and it remains a tricky time for lenders. For those lenders struggling to keep debts serviced until property values rise again, the assignment of rental income by way of security can provide an effective remedy against defaulting borrowers.

Through such an assignment, lenders can demand that rent is paid to them directly from tenants which can then be used to discharge outstanding loan or interest payments as an alternative to repossession and sale.

For those properties in negative equity, where the current value is less than the amount secured on it, the assignment route enables lenders to keep loans serviced until property values increase again when the land can be sold to repay the lender in full.

Whilst lenders are commonly entitled under their standard mortgage terms to appoint Law of Property Act 1925 Receivers to collect rent directly from tenants, the main benefit of using the assignment by way of security route rather than relying on the receiver is that with the latter:

Receivers charge a fee or commission by the receiver for any rent collected;
Receivers have a discretion to exercise wider powers than simply rent collection, potentially increasing costs and depleting available funds from the property; and
Receivers may be unwilling to accept the appointment if they feel it is too minor, such as where only one low value property is involved.

Using the assignment method, there are no costs to the lender whose security entitles them to gain direct control over rental income without the need for a receiver appointment, as the lender is empowered to take all necessary steps themselves.

Under lenders’ standard legal mortgages, there is often a provision requiring landlords to hold any rent received upon trust for the lender. However this provision is ineffective against a defaulting or insolvent landlord since unlike assignments it does not confer rights of ‘appropriation’ of the money. An assignment gives powers for the lender to pursue the money directly.

To take advantage of this type of security, lenders should ask the borrower to sign a form of assignment containing a fixed charge over the rental account held by the landlord together with an assignment of the borrower’s right to receive rent from the tenant

Once this document is entered into, the borrower is prevented from using or releasing the money held in the rental account because it is charged to the lender, and is additionally unable to collect rent directly from tenants since this right is conferred on the lender as a direct assignment. Lenders are also entitled to sue tenants directly for non-payment of rent.

It would be prudent for lenders to require this type of security in every case where rental income from the property is to be the borrower’s main or only source of repayment of the mortgage loan. Otherwise, if prices have fallen and the borrower directs the tenant to pay its rent elsewhere, lenders will be left in the cold with no immediate remedy except the more expensive receiver route.

The status of the lender’s security over the rental account will depend on the level of control it exerts over that money. If the lender does not allow funds to be released without their express consent, it will usually be a fixed charge. However if lenders allow the borrower freedom to use and release money without reverting back to them in every case, it is more likely to be construed as a floating charge.

If the rental account is held by another lender, that other lender should be asked to confirm that it will not exercise any right of set-off or counterclaim against the money standing to the credit of the rental account.

To be binding on liquidators, the security assignment must be registered at Companies House. It is not registrable at the Land Registry.

Also, notice of the assignment must be given to all affected tenants in order to reserve priority over the rental money. The notice explains to tenants that they must make rent payments directly to the lender if they are asked to do so at any time in the future. It goes on to say that the tenant need not contact the landlord to enquire as to the justification of any request it receives from the lender, and will not be penalised by the landlord at a later dated for following the lender’s instructions.

The tenant signs a counter-notice confirming its understanding of those rights and verifies that it has not already received a similar request from another lender.

If no notice is served, the assignment will still confer the same rights over the rent but the lender could lose priority to another lender who took an equivalent assignment and served notice on the affected tenants. Priority over the rent between competing lenders is determined by the date notice is served and not by the date of the assignment.

The main advantage of the assignment is that it provides lenders with a more direct route to obtaining critical funds to service debts. This route is quicker and often cheaper than appointing a receiver, as the lender may carry out the work itself. The assignment gives lenders powers of appropriation not normally found in standard legal mortgages, and if the money has already been paid to the borrower’s rental account it is effectively frozen in favour of the lender.

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Assignment of Rents in Residential Real Estate Transactions

When discussing a mortgage product with your broker, you will be required to disclose certain information so that the mortgage may be crafted in accordance with your specific needs. As part of this task, you will be required to disclose whether the property will be your primary residence or an investment. Where borrowers own a property that is or may be leased in the future, most lenders will require that either a general assignment of rents or a specific assignment of rents be secured against the borrower’s property in addition to the secured mortgage.

In most cases, lenders will have borrowers execute the general or specific assignment of rents in a form of a separate document however, some lenders choose to incorporate an assignment of rents clause within the mortgage agreement itself. Even if the mortgage document is silent about assigning rents, the lender’s right to receive rental income will be inserted into the mortgage as incidents of ownership (the retainment of the right to collect rent). Both the general and specific assignment of rents provide a degree of financial protection for a lender as both entitle them to collect rental income from the borrower’s tenant(s) if the borrower defaults on the mortgage.

The specific assignment of rents applies where the lender is only interested in a specific lease(s). This arrangement may be appropriate in situations where a property has one tenant under a long-term lease or where multiple lenders are taking security in a particular property and wish to divide specific leases and income derived from each. Once such a lease(s) expires or terminates, the lender will no longer be entitled to any rental income from subsequent new leases.

On the opposite end of the spectrum is the general assignment of rents . Once implemented, not only does it give the lender the right to rental income from current or future tenants and leases but it also provides the lender with the ability to exercise all of the rights of a landlord under any prevailing or new leases, assignments, or subleases. This type of arrangement is a more popular choice with lenders as it provides synoptic security.

Like a mortgage, both general and specific assignment of rents are usually registered against title to a property as a notice under s. 78 of the Land Titles Act [1] .

I hope that this article has provided you with some helpful information. If you have any questions, please do not hesitate to contact me at [email protected] .

[1] R.S.O. 1990, c. L.5

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A banker asked us: General vs specific assignments of rents and leases in Ontario

Q: What is the difference between a general assignment of rents and leases and a specific assignment of rents and leases, and when should I include them in my term sheet for a commercial real estate financing of an Ontario property?

A: In situations where a borrower owns real property in Ontario that either is or will be leased to third party tenants, a lender should consider obtaining either a general assignment of rents and leases or a specific assignment of rents and leases in addition to a mortgage on the secured property. Like a mortgage, an assignment of rents and leases should be registered against title to the subject property, and in addition, should be registered under the applicable personal property security legislation as the rents and leases that are being secured by the assignment fall within the definition of personal property under that legislation. [1]

An assignment of rents and leases, be it a general assignment of rents and leases or a specific assignment of rents and leases, provides a lender with two principal benefits which may be realized by the lender after an event of default:

it permits the lender to receive the rent payments that the borrower/landlord would otherwise be entitled to, and this revenue stream from the tenants is a significant asset that should be secured; and,
it permits the lender to step into the shoes of the borrower/landlord and exercise all of the rights and remedies available to the landlord to ensure that the full benefit and value of the lease is realized by the lender, which includes for example, the right to demand payment in the event of non-payment of rent by a tenant and to assign the lease to a purchaser in the event of a power of sale proceeding.

The only difference between a general assignment of rents and leases and a specific assignment of rents and leases is the revenue streams and leases to which they apply. A general assignment of rents and leases applies to all present and future rental income and leases in respect of a particular property. Once in place, a general assignment of rents and leases gives the lender a right to the rental income and the ability to exercise all of the rights of the landlord under a lease in respect of all leases of the property, including but not limited to any new leases, subleases or assignments of lease entered into after the assignment is granted and registered. In contrast to this, a specific assignment of rents and leases only applies to leases which are specifically listed in the document. In the event that any of the specifically listed leases expire or are terminated, and/or a new lease or sublease is put in place, the specific assignment of leases will not apply to this new lease or sublease and the lender will have no right to the rental income or rights resulting from the new lease or sublease.

In most lending situations, the lender will prefer a general assignment of rents and leases as it provides the most comprehensive security. The lender will have security over all rental income, and be able to exercise the rights of the landlord, regardless of who the tenants are in the future, or what leases the borrower has in place at the time of default under the terms of the loan or credit facility. However, where there is a principal or anchor tenant that represents a preponderance of the rental income, and/or the borrower objects to a general assignment of rents and leases securing all rents and leases as too broad a security interest, the lender may only be interested in securing the rental income and landlord rights associated with a specific principal or anchor lease, or a particular group of leases. In such a situation, a specific assignment of rents and leases may be a reasonable compromise position for a lender to adopt. Alternatively, in situations where multiple lenders are taking security in a particular parcel of real property, specific assignments of rents and leases allow the various lenders to divide the rental income and leases among themselves, with each lender only obtaining security in a specifically agreed upon lease or group of leases.

The above is a general overview of general and specific assignments of rents and leases. The professionals in Gowling WLG (Canada) LLP’s financial services practice group would be pleased to discuss your lending and real property security needs in greater detail, and help you chose the security documents most appropriate for your lending needs.

[1] Some financial institutions have chosen to incorporate into their Standard Charge Terms for their mortgages various provisions that serve as a general assignment of rents, and they do not register a separate general assignment of rents as a result.

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Assignment of Rents: Substance Over Form and Meaning of `Property of the Estate’

By Adam L. Rosen and Sheryl P. Giugliano

At the beginning of a Chapter 11 single asset real estate case a debtor may encounter resistance from its secured lender over the debtor’s postpetition use of rents which are subject to an assignment of rents agreement. Secured lenders may argue that rents subject to an assignment of rents are not property of the estate, and therefore, are not cash collateral available for use by the debtor. Secured lenders have had some success in argument that upon a debtor’s default under the loan documents, title to the rents vests in the secured lender, eliminating any interest the debtor may have held in the rents. See, e.g., In re Soho Retail, LLC , Ch. 11 Case No. 10-15114, Adv. No. 11-1286, 2011 BL 85874 (Bankr. S.D.N.Y. Mar. 31, 2011); In re Loco Realty Corp. , No. 09-11785, 2009 BL 137139 (Bankr. S.D.N.Y. June 25, 2009). A recent decision by Judge Stong of the United States Bankruptcy Court for the Eastern District of New York suggests that single asset real estate debtors can successfully defeat these arguments if the bankruptcy court is either willing to look beyond the label of a document to the lender’s post-default actions, or recognize a debtor’s “equitable” interest in postpetition rents as sufficient to render the rents “property of the estate.” See In re S. Side House, LLC , 474 B.R. 391, 406 (Bankr. E.D.N.Y. 2012).

See In re S. Side House, LLC , 474 B.R. 391, 396 (Bankr. E.D.N.Y. 2012) (stating that in order to determine whether postpetition rental income is property of the estate and cash collateral, “the Court must start with New York law, which defines the property interests of borrowers and lenders under assignments of rent, and then consider whether the [d]ebtor’s prepetition property interests in the Rents meets the definition of property of the estate under Bankruptcy Code §541(a)”).

Clear Language of the Bankruptcy Code.

“Accordingly, all post-petition rents are property of the bankruptcy estate. Whiting Pools mandates this result: Until title has transferred, property controlled by a secured creditor, unless subject to an exception, must be turned over to the estate.” In re Amaravathi Ltd. P’ship , 416 B.R. 618, 633 (Bankr. S.D. Tex. 2009).

Debtor’s Interest in Rents.

Despite the express language of Bankruptcy Code §541(a)(6), and perhaps recognizing the distinction made by Kenneth N. Klee, courts often focus on determining whether, as of the commencement of the case, a debtor had any legal or equitable interest in the rents under applicable state law. See, e.g., Sovereign Bank v. Schwab , 414 F.3d 450 , 452 (3d Cir. 2005) (“[D]etermining whether the rents here are property of the bankruptcy estate requires an inquiry into whether the debtor had any legal or equitable interests in those rents as of the date of the bankruptcy petition.”); In re Jason Realty, L.P. , 59 F.3d 423 , 426 (3d Cir. 1995) (“Property of the estate consists of all property in which the debtor holds an interest upon the commencement of bankruptcy.” (citing 11 U.S.C. §541(a)(6) )). See also, In re S. Side House, LLC , 474 B.R. 391, 402 (Bankr. E.D.N.Y. 2012) (citing Taub v. Taub (In re Taub) , 427 B.R. 208, 219 (Bankr. E.D.N.Y. 2010) (stating “[w]hether or not a debtor has an interest in property sufficient to bring it within the ambit of ’property of the estate’ is determined by state law or other applicable nonbankruptcy law”).

The determination under state law of what relative rights a secured lender and debtor held prior to the commencement of the bankruptcy case, with respect to rents subject to an assignment of rents, depends (at first glance at least) on whether the assignment of rents “was intended to be for ‘collateral’ or whether it was intended to be an absolute assignment.” David R. Kuney & Alex R. Rovira, The Single Asset Real Estate Case: Basic Principles and Strategies, 60 ( Joel M. Aresty, Am. Bankr. Instit. 2012). Cf. In re S. Side House , 474 B.R. 391, 403 (Bankr. E.D.N.Y. 2012) (“New York courts interpret rent assignment clauses to be additional security even when they contain terms such as ‘absolute’ and ‘unconditional.’ This is because courts look beyond the language used in rent assignment clauses … .”).

Understanding `Collateral’ Versus `Absolute’ Assignments.

Although case law suggests that the label of an assignment of rents is not determinative, and therefore it is a difference without a distinction in the end, debtors and secured lenders should still understand how “absolute” assignments of rents differ from “collateral” assignments of rents. See, e.g., Fin. Ctr. Assocs. of E. Meadow, L.P. v. TNE Funding Corp. (In re Fin. Ctr. Assocs. of E. Meadow, L.P.) , 140 B.R. 829, 832 (Bankr. E.D.N.Y. 1992). “[A]n absolute assignment of rents operates to transfer the right to [rents to the lender] automatically upon the happening of a specified condition, such as default.” In re Amaravathi Ltd. P’ship , 416 B.R. 618, 630 (Bankr. S.D. Tex. 2009) (quoting Taylor v. Brennan , 621 S.W.2d 592 , 293 (Tex. 1981)). Alternatively, a collateral assignment of rents “occurs when the debtor pledges the property’s rents to the mortgage lender as additional security for a loan,” and then, after an event of default occurs, “the lender may assert rights not only to the property subject to the mortgage but also to the rents generated by the mortgage property.” Id. See also, In re S. Side House, LLC , 474 B.R. at 403 (“When an assignment is for additional security, the lender has a lien on the rents, but title to the rents remains with the borrower. But when an assignment is absolute, title to the rents vests in the lender upon execution of the agreement, and the borrower is granted a revocable license to collect the rents that may terminate immediately and permanently upon default.”).

The View of Assignments in New York.

Other states apply the same method of looking beyond the label of an assignment of rents agreement to determine whether it is “absolute” or “given as additional security.” See, e.g., In re Senior Hous. Alt., Inc. , 444 B.R. 386, 392-93 (Bankr. E.D. Tenn. 2011) (holding under Tennessee state law that “an assignment of rents absolute on its face will nevertheless be viewed as a security interest if given in connection with a mortgage loan and not in exchange for a present consideration … .”) (citations omitted); In re Hrapchak , No. 07-1668, 2008 BL 79636 , at *5 (Bankr. N.D. W. Va. Apr. 16, 2008) (holding under West Virginia law that although assignment of rents agreement was labeled “absolute,” after examining the facts and circumstances, “the right to collect rents is given as security and the rents themselves constitute property of the bankruptcy estate”).

Although under New York state law, assignments of rents are generally given as additional security for the loan, and are not “absolute,” two recent decisions out of the United States Bankruptcy Court for the Southern District of New York in the Second Circuit held that postpetition rents are not property of the estate available as cash collateral because, even though the assignment of rents was “collateral,” the lender’s efforts were sufficient to cut off the debtor’s property interest in the rents prior to the commencement of the case, or because the language of the agreement made it clear that the assignment of rents was “absolute.” See, e.g., In re Soho 25 Retail, LLC , Ch. 11 Case No. 10-15114, Adv. No. 11-1286, 2011 BL 85874 , at *7 (Bankr. S.D.N.Y. March 31, 2011) (finding no need to determine whether an “absolute” assignment of rents is permissible under New York law, because regardless, the lender had taken “sufficient affirmative steps” to make the assignment of rents effective). See also, In re Loco Realty Corp. , No. 09-11785, 2009 BL 137139 , at *5-6 (Bankr. S.D.N.Y. June 25, 2009) (recognizing most courts in New York find assignments of rents to be collateral, finding assignment of rents agreement was “absolute” in light of clear language labeling it as such, but recognizing that “an absolute assignment of rents prepetition does not necessarily mean that the estate has no interest in the rents for the purposes of §541 analysis”).

Courts Look Beyond Labels.

See Travelers Indem. Co. v. Grant Assocs. (In re Grant Assocs.) , No. M – 47 (S.D.N.Y. Feb. 5, 1991) (holding “the finding that the assignment was absolute does not necessarily compel the conclusion … that the [lender] thereby holds more than a security interest in the rents or that [the d]ebtor retains no interest in the rents … .”); In re Charles D. Stapp of Nev., Inc. , 641 F.2d 737 , 740 (S.D.N.Y. 1981) (concluding that notwithstanding an absolute assignment under Georgia law, the debtor retained a residual interest in the rents which were assigned); In re Princeton Overlook Joint Venture , 143 B.R. 625, 633 (Bankr. D.N.J. 1992) (concluding that the mortgagor retained a “collection interest” in the rents, and thus, the rents were part of the bankruptcy estate pursuant to Bankruptcy Code §541). See In re Loco Realty Corp. , No. 09-11785, 2009 BL 137139 , at *6 (Bankr. S.D.N.Y. June 25, 2009) (finding absolute assignment of rents to be “absolute” in New York, but recognizing “an absolute assignment of rents prepetition does not necessarily mean that the estate has no interest in the rents for purposes of a §541 analysis”) (citations omitted); Amaravathi Ltd. P’ship , 416 B.R. 618, 637 (Bankr. S.D. Tex. 2009) (concluding postpetition rents are property of the estate regardless of whether the assignment of rents was absolute or collateral because “[t]he only difference between such assignments is the fact that the lender must take affirmative steps to ‘activate the ‘collateral’ assignment… . [once the lender takes those affirmative steps], however, the lender’s rights with respect to the debtor and the rents are identical under either type of assignment.”). In re Constable Plaza Assocs., L.P. , 125 B.R. 98, 102-03, 106 (Bankr. S.D.N.Y. 1991) (holding appointment of receiver prior to commencement of the case “did not cut off all of the debtor’s property interests in the future rents” because “the debtor continues to possess a residual interest in the rents which results in characterizing such rents as property of the estate within the meaning of 11 U.S.C. §541 ”). Some courts will not find that a debtor’s residual interest in property is sufficient to render the rents property of the estate because, according to those courts, if under state law the debtor would not have the right to collect the rents, then in bankruptcy the debtor does not have any greater rights. In re S. Pointe Assocs. , 161 B.R. 224, 227 (Bankr. E.D. Mo. 1993) (rejecting debtor’s argument rents are property of the estate because of debtor’s “residual interest,” where lender acted to activate its rights to collect the rents, and therefore, as of the commencement of the case, under Missouri state law, “the [d]ebtor has no right to the immediate collection of the apartment rents”). It is obvious, but worth highlighting, that if a court finds an assignment of rents agreement is “absolute” and the debtor does not maintain a residual interest in the postpetition rents, then, absent some alternative financing, the debtor’s Chapter 11 single asset real estate case cannot continue.

In sum, depending on the facts, an assignment of rents agreement may not be an impediment to a successful single-asset real estate case, or to using a lender’s cash collateral. The debtor’s chances for success seem to rest on the court’s willingness either to look beyond the label of a document, or to recognize the breadth of “property of the estate,” including a debtor’s “residual” interest in postpetition rents.

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Assignment of Rents

What you need to know about Assignment of Rents and Leases

Legal Compliance and Risk Management

Lawyers ensure legal compliance and proactively manage risks associated with the assignment. They stay updated on legal changes, identify potential pitfalls, and guide clients in making informed decisions to avoid legal complications.

Customization of Agreements

Recognizing the uniqueness of each assignment, lawyers tailor their services to the specific needs, property characteristics, and preferences of the parties involved. This customization ensures that the assignment of rent agreement aligns with the context of the transaction.

Land Titles and Regulatory Compliance

Lawyers also ensure that the assignment of rents complies with Alberta’s Land Titles Act , overseeing proper registration of the land titles. This step is crucial for transparency, legal clarity, and enforceability of the agreement.

Recording Interests and Due Diligence

Lawyers navigate the process of recording interests, ensuring that assignments of rents are properly registered in the land titles. This not only serves as public notice but also aids in due diligence for buyers and mortgagors, allowing them to make informed decisions in their real estate transactions.

Navigating the real estate landscape can be tricky. Making the right decisions can have a significant financial impact when purchasing or selling a property. If you would like help with your assignment of rents matter, or if you are unsure whether assignment of rents is in your best interest, contact DLegal today.

Our experienced real estate lawyers know the ins and outs of Alberta real estate law . They will provide legal advice and guidance on any assignment of rents matters or other real estate matters.

The DLegal team is here to support. We will do our best to assist or connect you with those who can help.

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Assignment Of Leases And Rents

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What is an assignment of leases and rents.

The assignment of leases and rents, also known as the assignment of leases rents and profits, is a legal document that gives a mortgage lender right to any future profits that may come from leases and rents when a property owner defaults on their loan. This document is usually attached to a mortgage loan agreement.

Assignment of leases and rents allows lenders to a degree of financial protection in case a loan default occurs. This document is an agreement made between a borrower and a lender of mortgage loans. It often details an exact amount the lender will be entitled to if a default happens.

Common Sections in Assignments Of Leases And Rents

Below is a list of common sections included in Assignments Of Leases And Rents. These sections are linked to the below sample agreement for you to explore.

Assignment Of Leases And Rents Sample

Reference : Security Exchange Commission - Edgar Database, EX-10.9 10 d368735dex109.htm ASSIGNMENT OF LEASES AND RENTS , Viewed October 4, 2021, View Source on SEC .

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Shelia A. Huggins is a 20-year North Carolina licensed attorney, focusing primarily on business, contracts, arts and entertainment, social media, and internet law. She previously served on the Board of Visitors for the North Carolina Central University School of Business and the Board of Advisors for the Alamance Community College Small Business Center. Ms. Huggins has taught Business and Entertainment Law at North Carolina Central University’s law school and lectured on topics such as business formation, partnerships, independent contractor agreements, social media law, and employment law at workshops across the state. You can learn more about me here: www.sheliahugginslaw.com www.instagram.com/mslegalista www.youtube.com/mslegalista www.facebook.com/sheliahuugginslaw

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John has extensive leadership experience in various industries, including hospitality and event-based businesses, then co-founded a successful event bar company in 2016. As co-founder, John routinely negotiated agreements with venues, suppliers, and other external partners, swiftly reaching agreement while protecting the brand and strategic objectives of the company. He leverages his business experience to provide clients with strategic legal counsel and negotiates attractive terms.

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Assignment of Rents and Bankruptcy

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February 25, 2020

Category: Banking & Finance , Bankruptcy, Restructuring & Creditor-Debtor Rights

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If you are a lender whose collateral includes rents from an apartment building, shopping mall, or other income-producing property, you might want to check your loan documents to be sure that you have taken an absolute assignment of those rents. It could save you time, resources, and frustration if the borrower files a Chapter 11 bankruptcy.

Arkansas law makes a distinction between the two main categories of rent assignments. The first type of assignment of rents is one for security only. Many assignment of rents clauses will specify that the lender is taking an assignment of rents, and that assignment is for security only. The second type of assignment of rents is an absolute assignment of rents. The language in an absolute assignment of rents must be specific that the assignment is absolute and not for security only. The distinction is important if the lender wants to avoid getting sucked into a long and slow-moving Chapter 11 bankruptcy.

Under Arkansas law, an assignment of rents for security only is just like any other security interest a lender may take to secure repayment of the debt. This security interest is perfected by filing the mortgage or separate assignment of rents document in the real estate records in the county where the property is located. However, those rents remain property of the borrower until and unless a receiver is appointed. At that point, Arkansas law holds that the rents are conveyed to the lender—meaning the borrower no longer has an ownership interest. With an absolute assignment of rents, the rents are conveyed to the lender upon the filing of the mortgage or assignment in the real estate records. Even if the borrower collects the rents after the filing in the real estate records and uses them for operations, Arkansas law provides that the borrower is simply holding those rents in trust for the lender and never has a legal or equitable interest in them.

This distinction as to when the borrower conveys its interest in the rents to the lender is critical if the borrower files for bankruptcy. Upon the filing of a bankruptcy petition, any property in which the borrower has a legal or equitable interest becomes property of the bankruptcy estate. If a lender has an assignment of rents for security only, and the borrower files bankruptcy before a receiver can be appointed, then the rents are property of the bankruptcy estate and can be used to fund the bankruptcy. Usually a borrower is going to file bankruptcy before that receiver gets appointed in state court. If a lender has an absolute assignment of rents, then the borrower has already conveyed its legal and equitable interest when the assignment was filed in the real estate records. If the borrower files bankruptcy, the lender will have the ability to move for dismissal of the case early on the basis that the rents are not property of the estate, meaning the borrower will not have income to fund a plan (assuming of course that the rents are the main source of the borrower’s income). Bankruptcy courts in Arkansas have consistently held that when a lender has a valid, absolute assignment of rents, the rents do not come into the bankruptcy estate and cannot be used to fund a plan. The courts will dismiss the case absent a separate agreement between the lender and borrower.

Whether you are making a new loan or reviewing your current ones and your collateral consists of income-producing rental property, be sure you have the appropriate language in your loan documents regarding the assignment of rents. You will be glad you did if your borrower files a Chapter 11 bankruptcy.

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Assignment of rents clause

Posted by ft Editorial Staff | Aug 8, 2004 | Property Management , Real Estate | 2

This article discusses the uniform rules for enforcement of assignment of rent clauses.

The lender’s rent collection scheme

An assignment of rents clause is commonly placed in all trust deeds. The clause includes rents as additional security to the real estate described in the trust deed.

The rents clause in a trust deed transfers to the beneficiary (lender) the right to collect rental income from the income-producing real estate described in the trust deed following a default on the note, trust deed or other secured obligation held by the lender. The rents clause is legally referred to as an assignment of rents, issues and profits claus e.

Two types of assignment of rents provisions exist:

An absolute assignmen t.
A conditional assignmen t.

However, the distinction between the two types of assignment of rents clauses is not of concern to the holder of a trust deed recorded on or after January 1, 1997.

A trust deed executed and delivered after 1996, containing either type of assignment of rents clause, creates a present security interes t in existing and future leases, rents, issues or profits on the secured real estate, and is generally referred to as a lien. [Calif. Civil Code §2938(a)]

The 1997 statutory scheme provides for uniform enforcemen t of all assignment clauses, no longer leaving the details to the trust deed contract.

For assignment of rents clauses recorded before 1997, the rules regarding the distinctions between the two types of rent clauses still govern their perfection and enforcement.

Editor’s note — Unlike liens on real estate or personal property, enforcement of a security interest in rents had not been controlled by the state prior to 1997 .

L ike statutory schemes that control a trustee’s foreclosure sale when enforcing a power-of-sale provision in a trust deed, and the sale of personal property when used as collateral for a loan, the statutory scheme for the enforcement of assignment of rents clauses entered into after January 1, 1997, controls the procedures for perfecting the lien and enforcing the collection of rents .

Absolute assignment – pre-1997 rules

An absolute assignmen t of rents clause is a present transfe r of all the owner’s right, title and interest in the rents generated by the real estate.

To be enforceable, the present transfer must first be perfecte d. The transfer of title to the rents is perfected on recording the trust deed that contains an absolute assignment clause. [CC §2938(b)]

However, the absolute assignment of rents provision reserve s to the owner the right to collect and use the rents until the owner defaults on the note or trust deed, or other debt the trust deed secures.

On default, the lender can enforce its right to collect the rents. [CC §2938(c)]

Under an absolute assignment of rents, the lender is entitled to collect the rents directly from the tenants without first taking possession of the real estate or using a court-appointed receiver.

Thus, the lender can directly enforce the absolute assignment of rents clause by making a written demand on the owner or tenant for the rent.

Conditional assignment of rents – pre-1997

A conditional assignmen t of rents clause in a trust deed creates a lie n on all rents in favor of the lender. The rents become additional security to the real estate which is liened by the trust deed.

As a lien, the conditional assignment of rents is not a present transfer of any rights to the rents. The lender merely holds a lien on the rents and has the right to enforce collection of the rents by taking possession of the real estate on a default in the trust deed. Possession can be by the lender or by a court-appointed receiver.

For conditional assignments entered into before January 1, 1997, judicial confusion as to the distinction between the terms perfectio n and enforcemen t existed.

However, for all conditional assignment of rents clauses entered into between January 1, 1993 and January 1, 1997, the lender perfecte d his lien right in the rents by recording the document (trust deed) that contained the conditional assignment provision. [CC §2938(b)]

Editor’s note — The two different types of assignment clauses led to chaos in perfection and enforcement.

1997 assignment of rents scheme

A trust deed executed and delivered after 1996 which contains any type of assignment of rents clause establishes a present security interes t – a lien – on existing and future rents, issues or profits of the properties, regardless of whether the assignment is called absolute, absolute conditioned on default, additional security, a lien, etc. [CC §2938(a)]

The rent assignment clause may be in a separate lien agreement, but is usually placed in the trust deed recorded against the real estate involved. [See Figure 1]

Once the assignment is recorded, the assignment:

gives constructive notic e of the lender’s security interest in the rents; and
is fully perfecte d even though the provision states the assignment is unenforceable until a default occurs on the note or trust deed. [CC §2938(b)]

Perfection establishes the lender’s security interest in the rents with priorit y over security interests in the rents subsequently acquired by other creditors or owners of the real estate.

Default by the owner

On a default under a trust deed, the assignment of rents clause is triggered, allowing the lender to collect the rents by taking one or more enforcement steps:

delivering a written demand on the owner for the rents, with a copy to all persons holding a recorded interest in the rents [See Form 456 accompanying this chapter];
delivering a written demand to the tenants with a copy to the owner and all persons holding a recorded interest in the rents, such as junior and senior trust deed holders [See Form 457 accompanying this chapter];
having a receiver appointed judicially; or
obtaining possession of the rents nonjudicially. [CC §2938(c)]

When the lender seeks the appointment of a receiver, takes possession of the rents or delivers a demand for rents notice, the lender has enforce d his right to the rents. From the moment the lender commences enforcement of his right to collect the rents by taking one of these actions, the lender is entitled to collect and receive future rents as well as all rents accrued and unpaid from the time of enforcement. [CC §2938(c)]

The written demand served on a tenant for collection of the rent must be made on a statutorily prescribed form, signed under penalty of perjury by the lender or the lender’s agent. [See Form 457]

Editor’s note — On an owner’s default, a lender with a pre-1997 absolute assignment (present transfer) clause may use any of the 1997 statutory enforcement procedures to properly enforce its rights to the rents.

However, for enforcement of a pre-1997 conditional assignment (lien provision) , the lender must take possession of the property by:

self-help; or
a court-appointed receiver.

Until the lender takes physical possession or a receiver is appointed, the owner of the secured real estate remains entitled to collect and keep the rents under a pre-1997 conditional assignment provision. [Childs Real Estate Company Inc. v. Shelburne Realty Co. (1943) 23 C2d 263]

Thus, a trust deed lender with a pre-1997 conditional assignment on income-producing property should consider amending the clause in a separate, recorded document as part of any future negotiations. The post-1996 amendment, recorded after January 1, 1997, is then enforceable under the new statutory scheme.

Regardless of the method of enforcement used, be it judicial or nonjudicial, the lender’s enforcement of its collection rights under an assignment of rents clause does not constitute an action for purposes of the one-action rul e. Thus, enforcement does not bar a lender from later foreclosing on the real estate or seeking a deficiency judgment. [CC §2938(e)]

Written demand on tenant

Once the lender makes a written demand on a tenant for rent, all unpaid rents due or becoming due in the future must be paid to the lender unless:

the tenant previously received a demand for the rents from a different lender;
the tenant has in good faith previously paid, or within 10 days following receipt of demand pays, the rent to the owner;
a court order directs the tenant to pay rent differently; or
the lender cancels his demand for the rents. [CC §2938(d); see Form 458 accompanying this article]

Payment of rent to the lender under the demand satisfies the tenant’s obligation to pay rent to the landlord under his lease or rental agreement.

The lender who makes a demand on a residential tenant to pay rents should at the same time make a demand on the owner to forward to the lender any rents collected after receiving the notice from the lender.

When the lender serves a demand for rents on both the residential tenant and the owner, the owner becomes personally liable for the rents if the tenant pays the rent to the owner within 10 days of receiving the demand notice.

However, nonresidential tenants remain liable to the lender for rent if they disregard the lender’s notice and continue to pay rents to the owner. [CC §2938(d)]

By noticing the owner, the lender further protects itself against the tenant’s failure to comply with the demand.

Payment of costs

Now consider a lender who enforces the assignment of rents clause by making only a written demand on the property owner to collect and hand over the rents. [See Form 456]

The lender does not seek the appointment of a receiver, does not take possession of the property or make a demand for rent on the tenants.

After receiving the lender’s demand to hand over the rents, the owner does so voluntarily. In turn, the owner may then make a written demand on the lender to pay the taxes and insurance premiums as well as operating costs on the property for repair, maintenance and security incurred by the owner.

Does the lender need to pay the ownership costs as demanded by the owner?

Yes! If rent collection by an assignment of rents clause is other than by the appointment of a receiver, the owner may make a demand on the lender to pay reasonable costs to preserve the propert y – including the payment of taxes and insurance premiums – which the lender is then obligated to pay from the rents collected. [CC §2938(g)(1)]

No penalties exist for the lender’s failure to pay costs on the owner’s written demand. However, the lender is liable to the owner for the costs.

Also, if the lender has a future advances claus e, costs such as the payment of insurance premiums or property taxes are added to the principal owed the lender, unless they are impounded by agreement.

A future advances clause in a trust deed obligates the owner to reimburse the lender on demand for amounts advanced by the lender under provisions in the trust deed. [See first tuesday Form 450 §A5]

Any impound (escrow) account for insurance or taxes will be paid as agreed in the trust deed. [See first tuesday Forms 450 §10 and 455]

Costs which are considered reasonable to preserve and protect the property include:

pool maintenance;
common area maintenance (CAM), whether paid through the rents or paid by the landlord;
repair costs, such as plumbing and roofing; and
security patrols, if already provided by the owner before the default.

However, payment of reasonable costs under a demand from the owner does not make the lender a mortgagee-in-possession, or obligate the lender to operate or manage the property.

Unless a receiver is appointed or the lender takes actual possession of the property, the owner still has a primary duty to operate and manage the property, even though the lender is receiving the rents and paying some of the operating and ownership expenses incurred by the owner. [CC §2938(g)(2)]

Further, the lender’s obligation on written demand from the owner to pay reasonable property operating expenses remains until:

a receiver is appointed, in which case the receiver pays all further costs incurred to operate the property; or
the lender ceases to enforce its assignment of rents clause. [CC §2938(g)(3)]

However, the lender is under no obligation to have a receiver appointed in order to enforce its assignment of rents clause. [CC §2938(g)(4)]

Editor’s note — When a receiver is appointed, the receiver is basically a new owner-operator of the property, managing and caring for the property for the duration of the receivership.

Most lenders secured by a rents clause on smaller rental properties have neither the administrative expertise (staff) nor the will to enforce the clause or receive a voluntary tender of the rents from the owner.

The risk of disruption

Serving the tenants with a statutory notice to now pay the rents to the lender seems to be a simple process for the secured lender.

Although initially simple, the notice to the tenant can lead to more involvement than would have occurred had the lender only made a demand on the owner or sought the appointment of a receiver.

Initially, lenders will view the statutory notice for demanding rents from the tenant as a fast and easy way to force the owner into curing the default or just protect their secured position in the rents.

Before the demand can be delivered to the tenants, the lender must, as a practical matter:

obtain a list of tenants’ names and addresses; or
hand deliver the demand to each tenant to get the tenant’s name, and on delivery, insert the tenant’s name on the form.

The lender must also conduct a title search for the names and addresses of the owners of record and lenders with a recorded interest in the rents. Title insurance companies will oblige for a fee.

Once made, the lender’s rent demand on the tenants will adversely affect the income flow from the property, making a cure of the default more difficult.

For example, consider an owner who defaults on a note additionally secured by an assignment of rents provision in a trust deed. The owner’s default is on a monthly payment and is the result of a simple oversight.

The lender informs the owner of the delinquency. However, before the owner cures the default, the lender, in a “knee-jerk reaction,” serves the statutory notice on the tenants.

When the tenants receive the demand for rent, the relationship between the owner and the tenants, which is often delicate, is adversely disrupted. A tenant’s confidence in the landlord is definitely diminished by the demand for rent notice.

Some tenants will consider relocating to other property, and some will do so, since the demand for rent raises concerns about the owner’s solvency and his ability to maintain the property or provide security. In essence, the tenant may believe a change of ownership is underway, a destabilizing event under the best of circumstances.

When tenants leave, the lender will experience a decrease in the flow of income from the property since replacement tenants will not be on notice to pay rent to the lender. The lender will then have to make a demand on the replacement residents and risk disrupting the landlord/tenant relationship with the replacement tenant – unless disruption is the lender’s intent.

Instead of immediately serving the demand on the tenants, the lender should first determine whether the default was merely an infrequent delinquency or a serious default which warrants the Draconian step into the collection of rents and foreclosure on the real estate.

To discover the nature of the default, the lender must contact the owner. The lender’s collection effort requires staff and analysis, not a knee-jerk, automatic foreclosure/collection reaction.

If the default is more serious than an oversight, the lender should seek to work out the default or establish a period of time for the owner to straighten out his financial affairs. Over a short period of time, the secured lender has little to lose but patience.

Property maintenance problems

Sending the notice to the tenants also weakens the lender’s relationship with the owner by taking a hostile turn.

To compound the hostilities, the owner may, in turn, correctly burden the lender with bills to be paid, whether the lender gives the demand notices for rent to the tenants or to the owner.

Further, if tenants have maintenance or security problems, the owner might refuse to correct them for lack of rental income to pay the bills, and simply refer the tenants to the lender – another example of how the tenant/landlord relationship is affected.

The lender may then feel obligated to respond as would a property manager, even though the lender is not in possession of the property, and the owner is still responsible for its operation. [CC §2938(g)(2)]

If the lender finds collecting the rents is necessary on a default, the best course of action is to seek the appointment of a receiver, usually an experienced, licensed real estate broker.

When the decision is made to collect rents through a receiver, the lender should immediately serve notice on the owner demanding the rents. The demand establishes the date of enforcement and entitlement to unpaid rents.

By making a demand on the owner, the lender promptly enforces his claims on the rents after a default occurs.

The lender can then file a specific performance actio n seeking a receiver. A receiver is appointed without the lender having to initiate a judicial foreclosure action or trustee’s foreclosure on the real estate involved. [Calif. Code of Civil Procedure §564(b)(11), (12)]

The lender is not liable for mismanagement of the property by a court-appointed receiver. The receiver is not considered an agent of the lender. [Tourny v. Bryan (1924) 66 CA 426]

Although having a receiver appointed is not as easy nor as inexpensive as making a demand on the tenants or owner for rents, the lender will not be burdened with accounting for rent collections or disbursement, or property management situations, all of which take time and expertise to administer.

Accounting for rents received

All rents received by the lender must first be applied to the debt and credited for purposes of curing the default and reinstating the debt, except to the extent the lender complies with the owner’s demand to cover reasonable costs. [CC §2938(c)]

However, failure of the lender to apply rents to the debt will not:

result in a loss of the lender’s security interest;
render the debt unenforceable; or
constitute an action which would bar a foreclosure under the one-action rule. [CC §2938(c)]

Editor’s note — No statutory sanctions exist to penalize a lender who does not follow the accounting rules.

An owner could face a situation where he must contest a judicial foreclosure action or litigate a nonjudicial foreclosure to compel a foreclosing lender to account for the rents received and not properly applied to the debt.

Priority between competing lenders

Now consider property encumbered by both a first and second trust deed. Both trust deeds contain assignment of rents clauses.

On the owner’s default in payment, the junior lender promptly enforces its assignment of rents clause by making a demand for the rents on both the tenants and the owner.

Later, the senior lender enforces its assignment of rents clause by making a demand for the rents on both the tenants and the owner.

The senior lender then claims the junior lienholder must pay to him all the rents he collected after the owner defaulted on the first trust deed, even though the senior lender did not enforce his right to the rents until later.

The junior lender claims the senior lender may only collect the rents from the time the senior lender first served rents demands on the tenants or the owner.

Is the senior lender entitled to all the rents from the time of the default?

No! A junior lender with an assignment of rents is entitled to collect the rents until the senior lender enforces its right to collect the rents.

All rents collected by the junior lender prior to the time the senior lender enforces its clause are uncollectible by the senior lender as a source of funds to cure the default on its loan. [CC §2938(h)]

Should the junior lender who has enforced his assignment of rents receive notice of the senior’s enforcement, the junior lender must:

cease collecting the rents; and
sends notice to the tenants cancelling his demand for rents. [CC §2938(h); see Form 458]

The junior lender’s failure to send the cancellation notice will not result in any penalties.

However, the junior lender will be liable to the senior lender for any rents collected after the senior lender enforces its clause.

Receiving rents after notice

If the owner or a junior lender receives rents after a notice of demand for rents from a senior lender has been served on the owner or tenant, the senior lender is entitled to the rents collected.

To recover rents improperly received and withheld by the owner or a junior lender, the senior lender has the right to bring an action against the owner or the junior lender.

The senior lender’s action to recover the rents collected by the owner or junior lender after the senior lender’s demand is not a violation of the one-action rule.

Thus, the dispute over rents is unrelated to the foreclosure of the trust deed lien on the real estate, except for the amount of the debt remaining unpaid (which will require an underbid at a foreclosure sale).

Further, if a dispute arises between the senior lender and another person claiming an interest in the cash proceeds – such as in bankruptcy – the senior lender has a continuously perfected security interest in the cash proceeds from the rents which remain identifiable.

To remain identifiable, the cash proceeds must be in a segregated account or traceable if commingled with the owner’s or junior lender’s other accounts.

Owner files bankruptcy

If the owner files bankruptcy before the lender enforces the assignment of rents clause, the lender still has a security interest in post-petition rents since they are considered cash collatera l. [11 United States Code §363(a)]

Cash collateral can be used by the owner in bankruptcy only in limited circumstances, and then only with the consent of the lender holding the security interest. [11 USC §363(c)(2)]

Before the statutory scheme for assignment of rents clauses was enacted, conflicting bankruptcy decisions turned on whether the lender who enforced the assignment of rents clause post-petition was entitled to control pre-petition rents collected by the owner.

A court held the lender who enforced the assignment clause after the bankruptcy petition was filed was entitled to the rents paid pre-petition as cash collateral, even though the lender did not enforce the assignment clause until after the filing. [In re Scottsdale Medical Pavilion (9th Cir. BAP 1993) 159 BR 295]

Another court held the lender only had a security interest in unpaid rents when enforcement occurred post-petition. Thus, the lender could not collect rents paid after the default but collect the rents before the lender enforced the assignment of rents clause. [In re Goco Realty Fund I (1993) 151 BR 241]

The new California statute should clear up the confusion created by conflicting cases.

The Goco Realty Fund I case is the codified rule for post-1997 assignment of rents clause enforcement.

Under the statutory assignment of rents scheme, the lender is now only entitled to rents which are paid after the lender enforces the assignment of rents clause, regardless of whether the rents accrued or became unpaid before enforcement.

Thus, if the owner files a bankruptcy petition, cash collateral also includes those rents which were due pre-petition if:

the rents were paid post-petition; and
after the assignment clause is enforced.

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REAL ESTATE LAW

What is a deed of trust with assignment of rents.

By Rebecca K. McDowell, J.D.

February 24, 2020

Reviewed by Michelle Seidel, B.Sc., LL.B., MBA

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What Is a Corporate Assignment of Deed of Trust?

A deed of trust is a written instrument granting a lien on real property. While slightly different from a mortgage, they are functionally nearly the same. Some states use deeds of trust instead of mortgages while others allow both. Either way, a deed of trust used to secure a commercial loan may also include an assignment of rents , which gives the lender the right to collect rental income from the property in the event of default.

What Is a Deed of Trust?

A deed of trust is a document that a borrower may execute in favor of a lender to give the lender a lien on a parcel of real estate. Like a mortgage, a deed of trust secures the loan by allowing the lender to foreclose on the real estate if the loan isn't paid (although in some states that use deeds of trust, a foreclosure isn't necessary).

Read More: How to Research a Deed of Trust

Deed of Trust vs. Mortgage

A deed of trust is very similar to a mortgage in that it pledges property to secure a loan. A mortgage, however, is simpler; the property owner executes a mortgage document in favor of the lender, and the lender records the mortgage and has a lien , but the property owner still holds title to the property.

A deed of trust, on the other hand, grants an actual ownership interest in the property to a trustee, who holds the property in trust for the lender until the obligation is paid.

What Is an Assignment of Rents?

An assignment of rents is extra security granted to a lender that provides a commercial loan. Commercial loans are loans that are not made for family or household use but for business purposes.

When a borrower grants a mortgage or deed of trust on real estate and the real estate has tenants who pay rent, the lender can demand an assignment of rents in addition to the mortgage or deed of trust.

The assignment of rents means that if the borrower defaults on the loan, the lender can step in and collect the rents directly from the tenants.

Deed of Trust With Assignment of Rents

A deed of trust may contain an assignment of rents clause for that same property. In addition to a clause in the deed of trust, the lender may also require the borrower to execute a separate document called an "Assignment of Rents" that is recorded with the register of deeds.

Whether the assignment is written in the deed of trust only or is also contained in a separate document, it is binding on the borrower as long as its language is clear and sufficient to create an assignment under state law.

Exercising an Assignment of Rents

When a lender decides to collect the rents on the borrower's property, the lender is said to be exercising the assignment of rents. The lender cannot exercise the assignment unless the borrower has defaulted on the loan. Once that happens, the lender can send a written demand to the tenant or tenants, requiring that the rents be paid directly to the lender.

Absolute Assignments of Rents

An assignment of rents most likely will contain language that the assignment is an absolute assignment . In most states, an absolute assignment gives the lender an immediate interest in the rents. This means that the lender actually owns the rents and is simply allowing the borrower to collect them on license until an event of default. Once a default occurs, the lender can intercept the rents without taking any court action; a letter to the tenants is all that's needed.

Every state's laws are different; the law of the state where the property is located will dictate how a lender can exercise an assignment of rents.

Read More: What Is the Difference Between a Deed and a Deed of Trust?

Companies Incorporated: Mortgage States and Deed of Trust States
American Bar Association: Commercial Real Estate FAQs
Schulte Roth & Zabel: Sixth Circuit Upholds Assignment of Rents to Secured Lender
Findlaw: California Civil Code - CIV § 2938
Legal Beagle: What Is the Difference Between a Deed and a Deed of Trust?
Legal Beagle: How to Research a Deed of Trust
Legal Beagle: Documents Needed to Refinance a Mortgage
Legal Beagle: How to File a Property Lien

Rebecca K. McDowell is a creditors' rights attorney with a special focus on bankruptcy and insolvency. She has a B.A. in English from Albion College and a J.D. from Wayne State University Law School. She has written legal articles for Nolo and the Bankruptcy Site.

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Can an assignment of rental income to a lender under a legal charge protect the lender's rights to collect despite the administration moratorium? Will the assignment be outside the issues discussed in Spectrum Plus?

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Administration

IMAGES

Rent Deed For A Residential Unit
Assignment Of Rents By Lessor
Rental Income Statement Spreadsheet Landlords Template for
Rental Income Property Analysis Excel Spreadsheet
Deed of trust and assignment of rents form in Word and Pdf formats
About Rent to Income Ratio

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COMMENTS

Assignment Of Rents
An Assignment of Rents ("AOR") is used to grant the lender on a transaction a security interest in existing and future leases, rents, issues, or profits generated by the secured property, including cash proceeds, in the event a borrower defaults on their loan. The lender can use the AOR to step in and directly collect rental payments made ...
How Lenders Can Enforce the Assignment of Rents
In the event the borrower defaults on their loan, the lender will have two options to enforce the assignment of rents: the actual assignment of rent to the lender (Section 697.07 (3)), or the sequestration of rents into the court registry (Section 697.07 (4)). If the lender is seeking the actual assignment of rent, the lender must send a ...
Assignment of rent: a remedy against defaulters?
An assignment gives powers for the lender to pursue the money directly. To take advantage of this type of security, lenders should ask the borrower to sign a form of assignment containing a fixed charge over the rental account held by the landlord together with an assignment of the borrower's right to receive rent from the tenant. Once this ...
Assignment of Leases and Rents
In 2005, the Uniform Assignment of Rents Act was passed to clarify how a lender could get access to the rental income they are owed and what the tenants' rights of notice are. The UARA specified that the lender can request direct payment of rental income from the tenant but lays out specifics on how said lender must provide notice.
Assignment of Rents in Residential Real Estate Transactions
The specific assignment of rents applies where the lender is only interested in a specific lease (s). This arrangement may be appropriate in situations where a property has one tenant under a long-term lease or where multiple lenders are taking security in a particular property and wish to divide specific leases and income derived from each.
A banker asked us: General vs specific assignments
In most lending situations, the lender will prefer a general assignment of rents and leases as it provides the most comprehensive security. The lender will have security over all rental income, and be able to exercise the rights of the landlord, regardless of who the tenants are in the future, or what leases the borrower has in place at the ...
Understanding Legal and Practical Considerations Related to Assignment
Most lenders' form assignments, including the form in this chapter, give the lender broad discretion in applying the rent collected. The lender can apply the rents as allowed in the controlling assignment agreement, unless the borrower or any other assignee demands that rents be applied first to reasonable property maintenance costs (i.e ...
Enforceability of Assignment-of-Rents Provisions
The UARA, which establishes a comprehensive statutory model for the creation, perfection and enforcement of security interests in rent, has been enacted in Nevada, New Mexico, North Dakota, Texas, and Utah (and was introduced in Massachusetts in 2015). The UARA includes provisions concerning: assignment of rents; appointment of a receiver ...
Assignment of Rents: Substance Over Form and Meaning of `Property of
E.D.N.Y. 2012). Whether postpetition rental income subject to an assignment of rents is "property of the estate," and therefore cash collateral, depends on whether, (1) under relevant state law the rental income would be considered property of the debtor's estate, and (2) the extent of the debtor's interest in postpetition rents meets ...
Assignment of Rent definition and explanation
In some cases the Assignment of Rent is a full document while in other cases it is just a clause of the mortgage contract. It becomes null and void when the full amount of debt is paid to the lender or when the lease period is over. The Assignment of Rent is more common in the case of commercial properties than residential properties.
Assignment of Rents
An "assignment of rents" is a legal document or provision in a mortgage or loan agreement that transfers the right to collect rental income from a property to the lender. This arrangement is common in real estate financing, especially in the context of commercial mortgage financing involving income-generating properties.
Assignment Of Leases And Rents: Definition & Sample
The assignment of leases and rents, also known as the assignment of leases rents and profits, is a legal document that gives a mortgage lender right to any future profits that may come from leases and rents when a property owner defaults on their loan. This document is usually attached to a mortgage loan agreement.
Mitchell Williams
If a lender has an absolute assignment of rents, then the borrower has already conveyed its legal and equitable interest when the assignment was filed in the real estate records. ... Whether you are making a new loan or reviewing your current ones and your collateral consists of income-producing rental property, be sure you have the appropriate ...
Rental income assigned to lender were not part of bankruptcy estate
The property in Paterson, New Jersey, was valued at $171,000 and rental income gross receipts in 2011 totaled $26,400. In 2007, the debtors signed an "assignment of rents" provision with the lender. At the time of the bankruptcy, the debtors were collecting the rents on the property, rather than the lender.
Rental Income
When current lease agreements or market rents reported on Form 1007 or Form 1025 are used, the lender must calculate the rental income by multiplying the gross monthly rent(s) by 75%. (This is referred to as "Monthly Market Rent" on the Form 1007.) The remaining 25% of the gross rent will be absorbed by vacancy losses and ongoing maintenance ...
Assignment of rents clause
The lender's rent collection scheme. An assignment of rents clause is commonly placed in all trust deeds. The clause includes rents as additional security to the real estate described in the trust deed. The rents clause in a trust deed transfers to the beneficiary (lender) the right to collect rental income from the income-producing real ...
5 The Assignment of Rents
5 The Assignment of Rents II. LEGAL AND PRACTICAL CONSIDERATIONS §5.8 F. Lender Approval of Leases. In most loan transactions involving commercial property, the lender relies on the stream of rental income to enable the borrower to make loan payments. As a result, lenders are legitimately concerned about maintaining control and approval rights ...
What Is a Deed of Trust With Assignment of Rents?
An assignment of rents most likely will contain language that the assignment is an absolute assignment . In most states, an absolute assignment gives the lender an immediate interest in the rents. This means that the lender actually owns the rents and is simply allowing the borrower to collect them on license until an event of default.
Assignment of Leases and Rents definition
Sometimes called Assignment of Leases, Rents and Profits or simply Assignment of Rents, this is a document attached to a mortgage loan agreement which entitles the lender to any income (from leases, rents, etc.) derived from the property once the owner defaults on the loan. Find more information under Assignment of Rent .
Can an assignment of rental income to a lender under a legal charge
A number of those properties are charged by way of legal charge to a lender. The legal charges contain fixed charges over 'Property', which is defined as including rental income in respect of the properties. The legal charges also expressly provide that any rental income is assigned to the lender and held on trust for it by the Company.
Assignment of Rental Income Definition
Related to Assignment of Rental Income. Assignment of Rents means an instrument that transfers the beneficial interest under a deed of trust from one lender/entity to another.. Assignment of Rents and Leases means, with respect to the Mortgaged Property, an Assignment of Rents and Leases (and, if there are more than one, each and every one of them), dated as of the Closing Date, granted by the ...