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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 .

Who Helps With Assignments Of Leases And Rents?

Lawyers with backgrounds working on assignments of leases and rents work with clients to help. Do you need help with an assignment of leases and rents?

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Meet some of our Assignment Of Leases And Rents Lawyers

Matt practices law in the areas of commercial finance, contract law, business & corporate law, and residential and commercial real estate (with a particular emphasis on retail shopping centers and office buildings). He has extensive experience in negotiating and structuring complex commercial loan, asset acquisition, asset disposition, leasing and real estate transactions. Matt additionally works on various general matters for clients such as forming LLCs and corporations, preparing various LLC and corporation documents and drafting and reviewing various types of contracts and agreements for clients and providing advice regarding same. Matt provides clients with extensive and timely communication on their matters and ensures that his clients are well represented and highly satisfied with their legal representation and the work product provided. Matt offers all potential clients a free initial consultation to discuss their legal matters prior to engaging his firm to represent them. Prior to opening his law firm Matt worked for many years in the New York City office of a large international law firm where he counseled large multi-national businesses, financial institutions, investment groups and individuals on highly sophisticated business, financial and real estate transactions. Matt provides his clients with diligent legal representation on their matters with a very personal approach.

With over 15 years of legal experience, I was admitted to the bar in 2008 and have since cultivated a diverse legal background. My expertise spans family law, estate planning, healthcare regulatory matters, and business law. I have a particular knack for crafting meticulous contracts. My approach is client-centric, ensuring that every individual receives personalized, knowledgeable guidance tailored to their unique situation. Partner with me, and let's navigate the complexities of the law together. www.downslawla.com

Attorney admitted to the New York State Bar. Hispanic. Eager to meet client's needs and provide legal assistance.

D. Cassie B.

Cassie has spent more than a decade handling all aspects of litigation, focusing on divorce, family law, Personal Injury Protection (PIP) claims, contracts, fraudulent insurance claims, and bodily injury claims. She has worked at small boutique law firms, in house for major insurance carriers, and most recently as a partner at a large nationwide practice. She has served as lead counsel on thousands of cases statewide. Cassie now contributes this knowledge and experience for the benefit of her clients. She is zealous about obtaining the best financial outcome for her clients and supporting them while they navigate the difficult terrain of family law, contracts, insurance claims, and personal injuries.

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I am a business organization, IP and data privacy attorney with over 19 years of experience, as well as a Certified Information Privacy Professional. I have successfully worked in both the public and private sectors, contribute to academia in all of my areas of expertise, and hold leadership positions with key organizations in the legal industry. Some sample agreements/documents with which I have drafting and negotiating expertise include: Business Formation Agreements Privacy Policies Information Security Policies and Documentation Master Services Agreements Joint Venture Agreements Non-Disclosure & Confidentiality Agreements Software Licensing Agreements Employment Contracts Distribution Agreements Equipment Lease Agreements All forms of Entertainment Legal Agreements M&A Due Diligence Checklists EDiscovery Protocols Legal Hold Documentation Outsourcing Agreements Real Estate Purchase & Sale Agreements Subcontracting Agreements Software Development Agreements for Mobile Apps IP Licensing and Royality Agreements Loan Agreements & Documentation Insurance Policy Reviews Employee Handbooks & Policies E-Commerce Terms & Conditions Sponsorship Agreements All forms of Digital Creator Agreements Subscription Agreements & Policies Agency Agreements Supply Chain & Logistics Agreements And more...

Copyright, trademark, and intellectual property contracts and licenses. General Business contracts. Practical and comprehensive advice and contract drafting in an efficient, no-nonsense manner. She routinely represents clients needing copyright, trademark, and intellectual property contracts and licenses in the book publishing industry, music publishing, and all aspects of art and entertainment. She has represented both sides of the table - creators and authors and corporations and businesses. After 40 years of experience she has seen most business models and structures and has worked with many general contracts in different industries.

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Properly Enforcing an Assignment of Rents

Reading Time: 5 minutes

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 .

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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Securing Interests: Navigating the Intricacies of Assignment of Rents in California Real Estate

Article by:

Steven e. ernest, esq., share this post:.

• November 23, 2023

Your borrower has an income generating property (generally tenants who are paying monthly rent) and is (presumably) collecting it. He isn’t paying you, though. Where is the money going? You ask, and he tells you ghost stories about Wimpy paying for a cheeseburger on Tuesday, but Tuesday never comes. What can you do? As with all things litigation, folks respond to one thing – pressure. You need to gain leverage on him and make it easier for the borrower to do what you want him to do (pay) than it is for him to do what he wants to do (not pay). Gaining that leverage typically requires a lawsuit.

So, sue him! Get a receiver appointed and have the rent paid to you. Suppose that will get the attention of your borrower? I do as well.

I write today to provide a detailed overview of the concept of Assignment of Rents as it pertains to real estate holdings in California. This is a significant aspect for both lenders and property owners, and understanding its implications is crucial for informed decision-making.

1. Definition and Purpose:

Assignment of Rents is a legal mechanism used in real estate where a property owner assigns their right to collect rents from the property to a lender as security for a loan. This arrangement is particularly common in commercial real estate transactions. The primary purpose is to provide additional security to the lender; in the event of a default, the lender has the right to collect rents directly from tenants.

2. Legal Framework in California:

In California, the Assignment of Rents is governed by the California Civil Code § 2938. The statute outlines the conditions and procedures under which rents may be assigned and the rights of both the lender and borrower in such scenarios. It is essential to understand this law balances the interests of lenders, borrowers, and tenants.

3. Activation of Assignment:

Typically, the assignment becomes active (or “absolute”) upon a default by the property owner. Prior to default, the owner usually retains the right to collect and use the rents, often referred to as a “conditional” assignment.

4. Enforcement and Collection:

Upon default (generally, your borrower missing an installment payment), the lender gains the ability to enforce the assignment of rents. This may involve notifying tenants to pay rents directly to the lender or taking legal action to collect the rents (sue your borrower!). The lender’s right to collect rents is subject to existing tenancy agreements and state laws regarding tenant rights.

Your lawsuit will be filed seeking appointment of a receiver (the guy who will collect the rent, deposit them with the Court, which will account them to you). The lawsuit may also include any other causes of action which lie against your borrower (i.e. conversion, judicial foreclosure, breach of contract, breach of guaranty, child support, … whatever).  The motion to appoint a receiver will come about one month after filing, and you can expect to begin seeing the rent deposited during the following rent cycle.

5. Implications for Property Owners and Lenders:

For property owners, it’s crucial to understand assigning rents can impact their cash flow and control over the property in case of a default. This is a high leverage proposition. Without their revenue, it is extraordinarily difficult for them to operate. You’ll have their full attention (perhaps for the first time since default). For lenders, while it provides an additional security layer, it also imposes the responsibility of managing rent collection and possibly dealing with tenants directly.

6. Best Practices:

• For Property Owners: Carefully review the terms of any loan agreement that includes an assignment of rents. Consider the implications of default and seek legal advice if necessary.
• For Lenders: Ensure compliance with California law when drafting assignment of rents clauses and enforcing them. Clear communication with borrowers and tenants is key to smooth enforcement. Use counsel who is experienced in these matters. This isn’t an area to experiment with.

Conclusion:

The Assignment of Rents is a critical tool in real estate financing in California, offering additional security to lenders while imposing certain obligations and risks. Both lenders and property owners should approach this arrangement with a clear understanding of their rights and responsibilities under California law. Contact the team at Geraci with any questions you may have about Assignment of Rents.

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Best Practices: Enforcing Assignments of Leases and Rents in Bankruptcy Proceedings

• October 10, 2018
• Demetri A. Braynin

As part of most institutions’ prudent lending practices, due diligence processes, and SBA program requirements, lenders obtain executed assignments of leases and rents from their borrowers. These agreements entitle lenders to any income derived from the CRE (from leases, rents, etc.) if the borrower defaults on the loan. However, what most lenders don’t know is what happens to the assigned rent if the borrower files for bankruptcy. A common misconception is that the assigned rent always becomes part of the bankruptcy estate to be distributed by the Trustee among the creditors. However, it is useful to know that the law typically favors those lenders who hold executed assignments of leases and rents.

The law is well settled that an assignment of leases and rents is enforceable in bankruptcy proceedings. If, prior to loan disbursement, the lender has obtained an executed assignment of leases and rents, the lender may request that the bankruptcy court issue an order to enforce the assignment and have the bankruptcy Trustee (or another custodian) turn this money over to the lender. On many SBA 7(a) loans, the proceeds from a sale following foreclosure leaves the lender with a deficiency. As such, the rule followed by most courts is that the rents collected between adjudication and the sale under foreclosure proceedings belong to the lender – under a claim of deficiency – when the proceeds of the sale are insufficient to pay the mortgage indebtedness.

Another argument presented to the court in enforcing the assignment of rents is under a theory of conversion. Upon default, an assignment of rents and leases extinguishes a borrower’s right to collect the rent, in whole or in part, meaning that the lender acquires the right to collect lease payments from its borrowers’ tenants. Because SBA loan documents require an “event of default” to occur prior to any lender’s ability to enforce the assignment of rents, SBA lenders’ loan documents should always identify bankruptcy as an “event of default.” In other words, the assignment of leases and rents may take effect conditioned upon an event of default and, if default occurs, the rents are then assigned to the lender and – arguably – do not become part of the bankruptcy estate. Unfortunately, many lenders fail to explore this option and choose to do nothing until the borrower emerges from bankruptcy or receives a formal discharge.

It is important to keep in mind that these bankruptcy enforcement options may not apply to all situations because disputes and litigation are always fact-specific. Accordingly, it is important for any institution’s special assets group to confer with bankruptcy counsel to evaluate the circumstances and determine if enforcement of the assignment of leases and rents may be appropriate and warranted to prevent conversion of funds collected by the borrower or the bankruptcy Trustee.

For more information pertaining to creditors’ rights or the enforcement of assignments of leases and rents, contact Demetri A. Braynin at [email protected] or at 267.470.1210.

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Drafting and Enforcing Assignments of Rent: Collateral vs. Absolute Assignments, Receiverships, Bankruptcy Issues

Best practices in drafting an assignment of rents and leases.

Recording of a 90-minute premium CLE video webinar with Q&A

Conducted on Tuesday, February 20, 2024

Recorded event now available

This CLE webinar will focus upon the drafting and enforcement of assignments of rent in state and bankruptcy courts and how parties to assignments of rent in a commercial mortgage transaction can protect their rights.

Description

State and federal courts, including bankruptcy courts, have struggled with issues involving the creation of an enforceable assignment of rents and the exercise by a mortgagee, or lender, of its rights to collect and retain rents thereunder. The issues are critical when the mortgagor, or borrower, is the subject of a bankruptcy case.

Over time, two types of assignments of rent have developed. Under a collateral assignment, a security interest in favor of the lender is created and the borrower retains title to the rents and collects rents until a triggering event or action occurs.

Under an absolute assignment, title to the rents or leases passes to the lender at the time the assignment is made and the lender allows the borrower to collect rents, usually pursuant to a license, until a triggering event or action occurs.

Whether the lender or the borrower owns the rents is critical, particularly in the event of a borrower’s bankruptcy, since ownership will control whether the rents are property of a debtor’s estate constituting cash collateral that can be used by the debtor.

The creation and enforcement of assignments of rent is governed by state law (with the overlay of bankruptcy laws such as the automatic stay), and different states have adopted different laws. While the Uniform Assignment of Rents Act was adopted nearly 20 years ago, very few states have adopted it.

Listen as our authoritative panel discusses the enforcement of assignments of rents, including an introduction into various laws, practices and recent caselaw.

• A distinction without a difference?
• Chapter 11 versus Chapter 7
• Property of the Estate and Automatic Stay Issues
• Cash Collateral and Cash Management Concerns
• Debtor vs. Lender Approaches
• Importance of State Law
• Recent Decisions (including In re Town Center Flats (6th. Cir. 2017))
• Conflicts of Law
• State Adoption
• Enforcement Mechanisms
• Receiverships and Assignments for the Benefit of Creditors
• Drafting Recommendations & Panel Tips

The panel will review these and other vital issues:

• What is the significance of an assignment of rents in a commercial mortgage transaction, and why is it sometimes a separate document from the mortgage?
• How and when is an assignment of rents perfected, and what are the implications for enforcement?
• What is collateral assignment as opposed to an absolute assignment, and why might a lender prefer one over the other?
• How does the asset class impact the efficacy of an assignment of rents and the practical viability of enforcement mechanisms?
• How do pre-petition enforcement efforts affect the borrower's access to property revenues during the pendency of a bankruptcy?

As a leader on the firm’s highly experienced Commercial Real Estate Workout Team, Mr. Lesser uses his knowledge and expertise to avoid and resolve his clients' concerns before they develop into true issues. He prides himself on guiding his clients and fellow practitioners alike to practical solutions to distressed real estate and finance situations. In pursuing this end, he co-authors the Michigan Chapter on Receiverships for Strategies For and Against Distressed Businesses, co-authors the "Foreclosure of Mortgages and Land Contracts: Receiverships" chapter in the LexisNexis Practice Guide to Michigan Real Estate Litigation, and is a frequent speaker on distressed asset topics. In addition to representing special servicers, financial institutions, private investors and other creditors, Mr. Lesser also leverages his real estate litigation experience to help title insurance companies, receivers, property owners, real estate investors involved in ownership disputes, real estate developers and others work through difficult circumstances.

Ms. Reperowitz is a nationally recognized bankruptcy and commercial litigation attorney and mediator. Debbie has been a partner at “Biglaw” firms and served as senior vice president, chief litigation counsel at CIT Group and general counsel to a financial advisor with an excess of $20 billion under management. Ms. Reperowitz’ bankruptcy and litigation experience is extensive. She has represented virtually all constituents in bankruptcy cases, including pre-petition, DIP and exit lenders, unsecured creditors, investors and asset acquirers. Her practice has been focused upon complex, often high stakes, cases, involving confirmation disputes, fraudulent transfer issues, lien avoidance/priority claims, business torts, breach of contract, fraud, misrepresentation, conversion and class and mass actions. Ms. Reperowitz also has a robust ADR practice, serving as a mediator and arbitrator in business disputes.

Mr. Webb counsels companies facing varying degrees of financial uncertainty and distress, working to proactively identify and assess insolvency issues. He represents parties (secured/unsecured creditors, debtors, committees, purchasers, and borrowers) in all phases of bankruptcy and insolvency proceedings, with an emphasis on selling or acquiring distressed assets and assisting parties in restructurings or out-of-court workouts. Additionally, Mr. Webb counsels clients on general corporate and commercial matters and has also prosecuted or defended numerous avoidance actions. He has represented clients throughout the country in debtor, committee, senior secured lender, distressed acquisition, and retail/landlord engagements.

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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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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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Assignment of Rents & Leases

Assignment of rents and leases in business and real estate transactions.

An “Assignment of Rents and Leases” is a crucial legal instrument that significantly impacts commercial and residential real estate, and mergers and acquisitions of real estate. Having a properly drafted and executed assignment means the rights and assets that are transferred give the new party (the assignee) the right to receive payments.

What is an assignment of rents and leases?

An assignment of rents and leases is a legal agreement in which the individual or company entitled to receive payments transfers that right to another party. Most often, this occurs (1) when a property owner hires a property manager, or (2) in acquisitions, such as a property management company selling their accounts to another property management company or a commercial landlord selling their portfolio to a buyer.

How is an assignment of rents and leases used?

This arrangement is often utilized in business sales, account sales, financing, and investment transactions as a means of securing debt or protecting the interests of the lender or property owner.

In the financing context, an assignment often grants the lender or assignee the authority to collect and apply the rents from the property should the borrower default on their loan; this is important when the borrower collateralizes real estate in order to receive the loan. In a property management context, an assignment often serves to effectively transfer management rights to the new company.

An assignment of rents and leases is probably most commonly used in a commercial real estate context when there is a sale of a commercial property, or in the residential real estate context when there is a change in property managers.

What terms should be included in an assignment of rents and leases?

Certain components should be included in a proper assignment. Here are a few of the foundational terms for an assignment of rents and leases:

• Parties. All parties should be clearly identified and defined. This can include the borrower, lender, assignee, assignor, successor, etc.
• Property description. The real estate parcel(s) involved in the assignment should be described by legal description, street address, and more.
• Lease terms, rents, and disclosures. The actual lease agreements that are being transferred to the new landlord, property manager, lender, etc. should be provided to the assignor/successor, along with an easy-to-read schedule of rents and other crucial details per parcel or premises.
• Rights and obligations. Each party should have their rules, permissions, and contractual rights and obligations outlined in the assignment language. The rights and obligations of each stakeholder will be widely varied based on the needs and financial position of each party, the existing leases being assigned, and the specifics of the subject properties.

Best Commercial Real Estate Attorneys in Oklahoma

It is crucial to engage an attorney with experience in properly negotiating, drafting, and executing assignments of rents and leases. They can guide you through the process, ensuring that the assignment is tailored to your specific needs and complies with all relevant legal requirements. The attorneys of Avenue Legal Group have the experience you need and want in your transaction. Contact our firm to discuss your transaction, assignment of rents and leases, or other real estate documentation.

Looking for local counsel in Oklahoma for your commercial real estate transaction? Our firm frequently works with attorneys, investors, and lenders from outside the state. Contact us by call, text, email, or website submission to discuss your matter.

Other helpful information:

• Commercial Real Estate Transactions in Oklahoma
• Due Diligence in Oklahoma Real Estate Transactions
• Essential Terms for Every Commercial Lease
• Attorney for Real Estate Contract Review
• Estate Planning
• Real Estate and Investing

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