What is an Assignment of Rents?
An assignment of rents and leases is an agreement between the owner of a particular property and a designated second party. The terms and conditions allow that second party to collect any rental payments paid by tenants and to manage that property for a period of time. This type of arrangement is most commonly utilized to settle a loan or some sort of credit extended by the second party to the property owner, and remains in effect until the debt is settled in full.
For the duration of the assignment of rents, the property owner remains the owner of record for the property. There is no transfer of title, although the lender is usually given the privilege of managing the property as he or she sees fit. This means that for the duration of the agreement, the lender can use part of the collected proceeds to maintain the property, while applying the remainder of the collected rent payments toward the outstanding balance of the loan amount.
Choosing to create an assignment of rents usually takes place because the property owner is in need of a quick infusion of resources for some reason. Rather than going with a loan and simply using the property as collateral , the assignment of rents effectively allows the property owner to borrow against future income, which is realized as tenants make regular rental payments. As with any type of loan situation, there is a rate of interest applied to the outstanding balance, with a portion of each month’s proceeds going to retire a part of the principle as well as some of the interest due.
The benefit to the property owner is that loans with this stipulation often carry very competitive rates of interest. This means that over the life of the loan, the owner is likely to pay much less interest on the loan installments. Since an assignment of rents can easily be structured between two individuals, there is also the advantage of not having to go through a bank or mortgage company at all. If the property owner can find an angel lender who is willing to advance money now and receive payments back from the rental proceeds each month, the paperwork is kept to a minimum, and the owner can receive the advance of funds almost immediately.
It is not unusual for an assignment of rents to also contain clauses that protect the interests of both the property owner and the lender. These provisions give the lender protection in the event that the collected rentals slip below a certain point due to vacancies. At the same time, the owner is protected from the lender attempting to gain ownership of the property as long as the monthly payments amount to a minimum figure.
After many years in the teleconferencing industry, Michael decided to embrace his passion for trivia, research, and writing by becoming a full-time freelance writer. Since then, he has contributed articles to a variety of print and online publications, including SmartCapitalMind, and his work has also appeared in poetry collections, devotional anthologies, and several newspapers. Malcolm’s other interests include collecting vinyl records, minor league baseball, and cycling.
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- By: dbvirago An assignment of rents is an agreement between the owner of a property and a designated second party that may allow that second party to manage the property for a period of time.
ASSIGNMENTS OF RENTS, LEASES AND PROFITS
Assignment of rents, leases, and profits lawyers in orlando, florida .
If you are lending money to an investor looking to rent, lease, or profit from a real estate property, you may want to ensure that your mortgage contract contains a clause for assignment of rents, leases, and profits. Furthermore, if you are considering lending money to a small business or start-up, you might want to consider how you’ll protect your rights and lower your risk with collateral. One way that lenders to small businesses protect their rights is by requiring businesses to use their rental properties as collateral. With an assignment of rents, leases, and profits clause in your loan agreement, you as a lender may have more rights should a borrower default on a loan. Legal Counsel, PA employs an assignment of rents, leases, and profits lawyer in Orlando, Florida who can assist you with your mortgage contract needs and work to include all the clauses you might need in your contract to protect your rights. Our firm works with private lenders in Orlando, Florida to help them meet their business and lending needs.
When you lend money to an investor, business, or individual so that they can purchase a rental property, one of the rights you might want to protect is your right to collect rents, leases, and profits related to the property directly should the borrower default on the loan. By protecting your right to collect rent, leases, and profits on the property directly, you increase your protections against loss and can lower the risk of the loan you are making. If the borrower defaults, you, as the lender, might be entitled to collect rent money or collect profits related to the property directly from tenants. If you are a private lender considering loaning money to another party for rental property, having the right clauses in your mortgage contract is important. The assignment of rents, leases, and profits lawyer in Orlando, Florida may be able to help you. Have questions? We have answers. Contact Legal Counsel, PA at 407.982.4321.
Collecting Rents, Leases, and Profits in Orlando, Florida When a Borrower Defaults
If a borrower defaults on his or her mortgage, you may be entitled to collect rents directly from the borrower’s tenants. How can you do this? If a borrower has defaulted on his or her obligations, you can get a notice of default. This notice must be filed with the court so that you can take legal action. The borrower may have the right to go to court to dispute the default, but if the borrower fails to prove that they have not defaulted, or if they do not appear on their court date, the lender can then present the notice of default along with the assignment of rents, leases, and profits to tenants, and collect this money directly from them. If you need to make a claim for rents, leases, and profits in Orlando, Florida, it is important to protect your rights. Legal Counsel, PA employs an assignment of rents, leases, and profits lawyer in Orlando, Florida who can assist you with your claims and protect your rights in court should a borrower default on a loan.
However, in order to collect rents, leases, and profits on a rental property when a mortgage borrower or business borrower defaults, it is important to have the right loan contract in place. In order to be able to assert this right, you must have included the proper language into your loan contract, and have executed and recorded these documents. Legal Counsel, PA employs an assignment of rents, leases, and profits lawyer in Orlando, Florida who can help you with drafting an assignment, rents and leases agreement. Have questions? We have answers. Contact Legal Counsel, PA at 407.982.4321.
What is Required in an Assignment of Rents Leases, and Profits Agreement?
In order for a borrower to be able to assert his or her rights with an assignment of rents, leases, and profits agreement in Orlando, Florida, the agreement must be properly written, properly executed, and recorded. This means that the assignment of rents, leases, and profits agreement should make reference to the specific promissory note it will protect, and that it includes a clear legal description of the rental property that will serve as collateral under the assignment. The document must be signed and notarized and recorded in the public records of the Clerk of the Circuit Court in which the property is located. Other issues can arise with an assignment of rents, leases, and profits agreements. For example, the title must be clear for the assignment to be valid (there must be no other mortgage or claim on the property). So, you may want to perform a title search before letting a lender use rental property as collateral. Legal Counsel, PA employs a rents, leases, and profits lawyer in Orlando, Florida who can assist you with your loan contracts and help you address any questions that might arise when businesses or property buyers use rental property as collateral. Have questions? We have answers. Contact Legal Counsel, PA at 407.982.4321.
Assignment of Rents, Leases, and Profits for Business Loans
Private lenders who loan money to small businesses or start-ups may ask for collateral on loans. Because new businesses may not always have equity or capital, business owners may put up their own property as collateral. One type of property that may serve as collateral are rental properties. One way that a lender can protect their rights is by having an assignment of rents, leases, and profits agreement that allows the lender to collect rent money directly from the borrower’s tenants if the borrower defaults on the loan. Having an assignment of rents, leases, and profits agreement on your property can secure the loan and lower the lender’s risk. When it comes to small business loans, it is important to understand your risk and protect your rights. If you have questions about how an assignment of rents, leases, and profits agreement can impact your small business, impact your rental property, or protect your rights as a private lender, contact Legal Counsel, PA, a law firm that employs an assignment of rents, leases, and profits clause lawyer in Orlando, Florida today. Have questions? We have answers. Contact Legal Counsel, PA at 407.982.4321.
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Creation, Assignment And Registration Of Leases Notes
Law Notes > Land Law Notes
A more recent version of these Creation, Assignment And Registration Of Leases notes – written by Oxford students – is available here .
The following is a more accessble plain text extract of the PDF sample above, taken from our Land Law Notes . Due to the challenges of extracting text from PDFs, it will have odd formatting:
Creation, assignment and registration of leases Creation
This is regulated by our old friend the LPA 1925 o Number of things required: ? S.53(1)(a): All interests must be created by writing signed by the person creating the interest ? S.52(1): Must be created by deed ? S.54(1): All other interests created by parol but not writing have the effect as interests at will only, notwithstanding any consideration given. o Two principal exceptions: ? Assent by personal representative only requires writing ? Short leases need not be entered into with great formality
* Indeed. s.54(2): If lease of period not exceeding three years o Then oral lease is acceptable ? So long as stipulates
* best rent which could be reasonably obtained without taking a fine
* And possession is taken immediately (so lease can't be postponed)
* LRA 2002 Sch 1 para 1: Legal leases of less than seven years are overriding interests so long as not discontinuous nor future leases o Equally s.33(2)(b): three year leases can't be registered. o Smith: However, leads to fine distinctions re: "immediate possession"= agreement for lease for a year granted in six months will be fine ? As it is an agreement for immediate possession after grant ? Whereas agreement for immediate lease to take effect in a few days will fall out of the statute. Registration
* Legal lease exceeding seven years may be registered in same way as fee simple o Means could be number of legal titles on same plot of land o Smith: point of doing this is protect long leases where freehold land is not actually registered. ? And also to prevent the register of interests on a freehold covenant becoming unduly cumbersome. o Compulsory Registration ? LRA 2002 S.4(2) Whether Landlord title registered or not, every grant of lease for more than seven years must be registered
* Otherwise you get no legal estate. o Exceptions to 7 year rule ? Future lease under which possession will be taken in the future must be registered
* Because they represent a trap to purchasers. o Therefore not an overriding interest (no occupation) and must be registered to have effect. Under LRA 2002 ? LRA 2002 s.3(4) For similar reasons discontinuous leases must be registered.
Buy the full version of these notes or essay plans and more in our Land Law Notes .
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Assignment Of Rents In Alberta
When people buy a home, or even after they owned their home for some time, they sometimes see an assignment of rents registered on the title to their property. While this raises concerns for many people, a registers assignment of rents remains a normal part of many real estate transactions. Keep reading to learn, the details of these registrations. In the event that you have further questions, please reach out to us. With offices in both Calgary and Edmonton, Kahane Law Office offers full support for all your real estate law needs.
What Is An Assignment Of Rents
An assignment of rents is a document registerable at the Alberta Land Titles Office. Its purpose is to allow a bank or mortgage lender to collect rents in the event a landlord / property owner fails to make their mortgage payments. Essentially, the lender serves notice on the tenants. The notice tells them that the borrower failed to make their mortgage payments. The tenant must then pay their regular rent payment to the lender directly. A tenant only has the requirement to pay, if the assignment is registered on title and they receive notice. Failure to make the payments to the lender then cause legal and financial consequences for the tenant.
When Lenders Use Assignment Of Rents Used
Several situations arise for when lenders require assignment of rents. For example, in almost every situation where a lender lends money for a mortgage on a rental property , the lender requires one. Next, private lenders lending money on a principal residence frequently require one, in the event that the owner decides to rent out the property. A private lender is an individual or smaller company that lends funds privately. These often make up loans to individuals not able to qualify with a regular mortgage lender. Lastly, many lenders lending on commercial transactions require an assignment of rents. If you want to know if your lender requires one, then simply ask. Your banker or mortgage broker has the ability to find out if your situation requires one.
The Cost Of An Assignment Of Rents
The costs associated with an assignment of rents include two components. Firstly, the lawyer drafting the assignment of rents for the lender charges a fee for this service. With almost all lenders, the costs of the lender’s lawyer fees are paid by the borrower. Often the cost for the preparation of this document is about $200 to $400. Next, the second part of the cost involves the land title fee for the document registration. While land title fees change, the cost is currently under $50. Remember, if your property is made up of more than one title, such as a condominium unit with a separate title parking stall, a registration fee applies to all titles with the mortgage.
Discharging The Registered Document
When a person sells a house, or payout out a mortgage, a discharge of the assignments is required. The process for discharging the assignment of rents is usually simple. In most cases, it “falls off” when the mortgage that it is for is discharged. In the event that land titles leaves it on title, the discharge process remains simple. Often a letter or request to discharge works to remove it. Again, this simple removal process only exists if the associated mortgage no longer appears on title. If the mortgage remains on title, then the discharge requires the consent of the lender to ensure they remain protected.
Risks To Buyers
The risk to a buyer of a property with an assignment of rents on title is nominal. In essence, the registration should be removed then the seller’s lawyer discharge their mortgage. Your lawyer ask the lawyer for an undertaking (a lawyer promise binding on the lawyer) to discharge it. If the lawyers forget about it and land title accidentally leaves it on, then the buyer needs to see to its removal. As above, the process for removing it is easy and very low cost in most situations. This is not a registration on title that raises any red flags for a buyer.
How Alberta Lawyers Help With Assignment Of Rents
Understanding real estate law is an important aspect of home ownership. The real estate lawyers at Kahane Law Office help with assignment of rents in many ways. For example, we assist clients with:
- Drafting assignment of rents;
- Reviewing registrations (including these ones) on title with clients;
- Helping lenders (mainstream and private) with mortgages requiring these registrations;
- Discharging the registration from the land title to a property; and lastly
- Serving notice and collecting on the assignment when a borrower fails to make payment.
Help With Assignment Of Rents
Our team of real estate lawyers and real estate litigation lawyers help clients with all aspects of assignment of rents. If you are a borrower or lender, call and we provide you with the assistance you need. Kahane Law Office prides itself in it exceptional level of client service and explains all aspects to you so you understand your specific situation. If you are in the Calgary and surrounding area, please call 403-225-8810 . Alternatively, if you live in the Edmonton or surrounding area, please reach us at 780-571-8463 . Lastly, while we enjoy phone calls with clients, email often makes the initial contact easier. It allows us to provide you with more information quicker. Please use this email to connect today.
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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.
About The Author
ft Editorial Staff
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Deed of Trust With Assignment of Rents (Long Form)
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