meaning of assignment of rents

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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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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• What is an assignment of rents?

by Brian D. Moreno, Esq., CCAL | General Real Estate Law , Homeowners Association

With the collection of assessments, community associations are always looking for creative ways to increase the chance of recovery.  One underutilized remedy that may provide associations good results is an assignment of rents.  If an owner-landlord fails to pay HOA assessments but continues to collect rent payments from his or her tenant, the association should consider rent assignment.  There are prejudgment and post-judgment rent assignment remedies that can be pursued with regard to the delinquency.  A post-judgment rent assignment can be pursued by way of a request to the court after a Judgment is entered against the owner-landlord.

A prejudgment rent assignment can be pursued even before filing a lawsuit if executed properly.  In California, Civil Code Section 2938 regulates the formation and enforcement of the assignment of rents and profits generated by a lease agreement relating to real property.  It provides that “[a] written assignment of an interest in leases, rents, issues, or profits of real property made in connection with an obligation secured by real property. . .shall, upon execution and delivery by the assignor, be effective to create a present security interest in existing and future leases, rents, issues, or profits of that real property. . . .”   Once a written assignment of rents is properly authorized and formed, the law creates a security interest (i.e., lien) against the rents and profits paid by a tenant. 

The question then is whether the association’s CC&Rs, by itself, creates an assignment of the right to a tenant’s rent payment in favor of the association.  Indeed, section 2938(b) provides that the assignment of an interest in leases or rent of real property may be recorded in the same manner as any other conveyance of an interest in real property, whether the assignment is in a separate document or part of a mortgage or deed of trust.  Since a homeowners association’s CC&Rs is a recorded document and contains covenants, equitable servitudes, easements, and other property interests against the development, it follows that the assignment of rents relief provided in Section 2938(b) can be extended to community associations provided the CC&Rs contains an appropriate assignment of rents provision.

Section 2938, however, does not clarify whether the CC&Rs document on its own creates a lien and enforceable assignment right.  Moreover, a deed of trust is much different than a set of CC&Rs, in that the deed of trust creates a lien against the trustor’s property upon recordation, while a homeowners association would not have a lien until an owner becomes delinquent with his or her assessments and the association records an assessment lien against the property.  Therefore, depending on the scope of the assignment of rents provision in the CC&Rs, a homeowners association would likely need to record an assessment lien first before pursuing rents from a tenant.  Moreover, even after a lien is recorded, homeowners associations should consider adding a provision in the assessment lien giving notice to the delinquent owner that an assignment right is in effect upon recordation of the assessment lien.  Nevertheless, association Boards should consult with legal counsel to ensure proper compliance with the law.

Once the assignment right becomes enforceable, the next issue is how the Association can and should proceed.  Section 2938(c)(3) allows the association to serve a pre-lawsuit demand (a sample of which is included in the statute) on the tenant(s), demanding that the tenant(s) turn over all rent payments to the association.  This can be a powerful tool for homeowners associations.  Moreover, if the tenant complies, the association will receive substantial monthly payments that can be applied towards the assessment debt, and collecting the funds does not appear to preclude the association from pursuing judicial or non-judicial foreclosure proceedings at a later time.

While homeowner associations have the option of pursuing a lawsuit against the delinquent owner and seeking to collect the rent payments after a judgment has been obtained, there are obvious advantages to enforcing the assignment of rents provision prior to pursuing litigation.  A pre-lawsuit assignment of rents demand may prove to be more effective and cheaper.  Additionally, the tenant affected by the assignment of rents demand may place additional pressures on the delinquent owner/landlord having received such a demand.  Given this, the options available pursuant to Section 2938, including the pre-lawsuit demand for rents, should at least be considered and analyzed before action is taken.

Truly, the initial pre-lawsuit demand for rents may persuade the landlord-owner to resolve the delinquency with the association in the face of the potential disturbance of the landlord-tenant relationship.  Even if the tenant fails to comply with the demand and/or the owner fails to bring the account current, the association could nonetheless pursue foreclosure remedies and/or seek to have a receiver appointed to specifically enforce the assignment of rents provision.

In sum, if a delinquent homeowner is leasing the property to a tenant, the homeowners association should consider making a pre-lawsuit demand for rent payments.  If the association’s CC&Rs does not contain an assignment of rents provision, the board of directors should consider amending the CC&Rs to include an appropriate provision.  Without question, the pre-lawsuit demand for rents could provide an excellent opportunity for recovery of unpaid assessments during these difficult economic times.

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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.

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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
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• Attorney for Real Estate Contract Review
• Estate Planning
• Real Estate and Investing

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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 .

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.

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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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What’s an Assignment of Rents?

A lender may ask you to sign an assignment of rents agreement, but what is this? Should you agree to this?

In this piece, we give you a quick overview into what an assignment of rents is whether you should agree to this.

What is an Assignment of Rents?

An assignment of rents reserves the lender the right to collect rent payments (if being rented out) when a borrower defaults on their loan payments. The lender using certain clauses can also take over the lease and dealing with the tenant. However, both the borrower and lender must agree to this.

The assignment of rents is registered on the property alongside the mortgage/loan. This means that once the mortgage is discharged from the property, so is the assignment of rents.

General vs Specific Assignment of Rents

There are two main types of assignments of rents, general and specific. A general assignment of rents allows for the creditor to collect rent but not under a specific lease. This assignment therefore applies to all present and future rental income/leases.

On the other hand, a specific assignment of rents applies to leases that are specifically listed in the document. If any of the specific/listed leases expire or are terminated, the specific assignment of leases will not apply to any new lease/sublease.

In most situations, the lender will prefer a general assignment of rents as it is a more comprehensive additional security.

Signing an assignment of rents is standard practice for rental properties and protects the lender if you default. If you’re interested in what an assignment of rents agreement looks like, click here to see an example of an Assignment of Rents from the Land Registry of Ontario.

If you have any questions on the assignment of rents, feel free to contact our office at 905 787 2296 or [email protected] .

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Assignment of Rents

What you need to know about Assignment of Rents and Leases

Parties Involved in Lease Assignment

There are three parties involved in a lease assignment – the landlord or owner of the property, the assignor and the assignee. The original lease agreement is between the landlord and the tenant, or the assignor. The lease agreement outlines the duties and responsibilities of both parties when it comes to renting the property. Now, when the tenant decides to assign the lease to a third-party, the third-party is known as the assignee. The assignee takes on the responsibilities laid under the original lease agreement between the assignor and the landlord. The landlord must consent to the assignment of the lease prior to the assignment.

For example, Jake is renting a commercial property for his business from Paul for two years beginning January 2013 up until January 2015. In January 2014, Jake suffers a financial crisis and has to close down his business to move to a different city. Jake doesn’t want to continue paying rent on the property as he will not be using it for a year left of the lease. Jake’s friend, John would soon be turning his digital business into a brick-and-mortar store. John has been looking for a space to kick start his venture. Jake can assign his space for the rest of the lease term to John through an assignment of lease. Jake will need to seek the approval of his landlord and then begin the assignment process. Here, Jake will be the assignor who transfers all his lease related duties and responsibilities to John, who will be the assignee.

You can read more on lease agreements here .

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Assignment of Lease From Seller to Buyer

In case of a residential property, a landlord can assign his leases to the new buyer of the building. The landlord will assign the right to collect rent to the buyer. This will allow the buyer to collect any and all rent from existing tenants in that property. This assignment can also include the assignment of security deposits, if the parties agree to it. This type of assignment provides protection to the buyer so they can collect rent on the property.

The assignment of a lease from the seller to a buyer also requires that all tenants are made aware of the sale of the property. The buyer-seller should give proper notice to the tenants along with a notice of assignment of lease signed by both the buyer and the seller. Tenants should also be informed about the contact information of the new landlord and the payment methods to be used to pay rent to the new landlord.

You can read more on buyer-seller lease assignments here .

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General practitioner since 2005, general practice; civil disputes, torts.... logo Call us: (410) 878-7006 Menu Services Maryland Mobile Last Will & Testament Services All Maryland Legal Services Susan C. Trimble Attorney at Law WHAT WE ARE ABOUT Susan C. Trimble, is an established attorney in the Maryland area. Her work is infused with commitment to her community and family. is tailored to your wants and needs. Here you will find an approachable, personable and conscientious advocate. EDUCATION: Juris Doctorate (JD). University of Baltimore School of Law, Baltimore, Maryland, USA. 2006. Bachelor of Science (BS), English Literature. Towson University, 1989. Associate in Claims, (AIC) certification. Fraud Claims Law Associate, (FCLS) certification.

I have been practicing law since 2018. I used to be a litigator at a nationwide practice before going in-house at a fintech company. I have experience drafting NDAs, SaaS contracts, service agreements, and stock purchase agreements.

Lawyer Vets APC is a digital legal practice founded on the idea that legal services should be available to all– Not just a privileged few. In support of this mission, we leverage technology to reduce overhead, increase productivity, and put more money in our client's pockets.

Sayema Hameed is an experienced California attorney offering exceptional legal services in the field of employment law. With over two decades of legal experience, Sayema provides her clients with thoughtful and strategic advice and counsel, attention to detail, and high quality work to satisfy client goals and achieve successful outcomes. Helping clients maintain legal compliance, reduce liability exposure, and resolve conflicts efficiently are top priorities of Hameed Law Group. Sayema's practice includes preparation and update of employee handbooks, policies, and contracts, as well providing advice and counsel in all areas of employment in California. Sayema makes it a priority to stay up to date on the latest developments in California employment law. Sayema has been recognized as a Southern California Super Lawyer (2019-2024) and previously as a Rising Star (2009-2017) by Super Lawyers, a rating service of outstanding lawyers who have attained a high-degree of peer recognition and professional achievement.

Ann R. Dougherty, Esquire practices in both Pennsylvania and New Jersey with over 25 years of experience and has taught legal writing at the Delaware Law School of Widener University. Ann’s experience includes general liability, commercial property and bad faith insurance coverage litigation. Ann has successfully represented corporations in declaratory judgment matters concerning environmental and asbestos exposure, handled excess recoveries, comprehensive claim reviews and negotiated cost sharing agreements. She has also represented religious organizations including risk management strategies. In addition to practicing law, Ann also teaches introductory Philosophy and Ethics courses. Ann is a member of the Philanthropic Educational Organization for Women and the Daughters of the American Revolution. She has served on the Boards of the American Lung Association of the Mid-Atlantic for Delaware and the Wilmington Ballet Academy.

Lissette E.

Litigation and Immigration Attorney with over 12 years of experience.

Education: Georgetown Law (83), Yale (75- BA in Economics), Hotchkiss School (1970). Practice areas have included commercial litigation, individual litigation, and securities litigation and arbitration.

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Contract to lease land from a church.

I’m planning on leasing land from a church. Putting a gym on the property. And leasing it back to the school.

Ok; first step is that you will need a leasing contract with the church. Ask them to prepare one for you so you would just need an attorney to review the agreement and that should cost less than if you had to be the party to pay a lawyer to draft it from scratch. You need to ensure that the purpose of the lease is clearly stated - that you plan to put a gym on the land so that there are no issues if the church leadership changes. Step 2 - you will need a lease agreement with the school that your leasing it do (hopefully one that is similar to the original one your received from the church). Again, please ensure that all the terms that you discuss and agree to are in the document; including length of time, price and how to resolve disputes if you have one. I hope this is helpful. If you would like me to assist you further, you can contact me on Contracts Counsel and we can discuss a fee for my services. Regards, Donya Ramsay (Gordon)

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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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Assignments of Rents: Lenders Beware!

Contributed by    R. Kymn Harp   author of   Intent to Prosper  and attorney at  RSP Law , Chicago, Illinois.

Assignments of Rents. Here’s a topic that doesn’t pop up in light conversation very often.

Assignments of Rents. Virtually every commercial real estate financing includes an assignment of rents – either as a separate instrument, or in the mortgage, or both. We think we know what it means, and what protection it provides. But do we?

Assignments of Rents. What could assignments of rents possibly have to do with Pink Floyd?

It has been suggested on occasion, only half-jokingly, that I don’t like lenders. That is really not true. Lenders are valuable participants in the commercial real estate market. Without lenders, few of my clients could buy, develop or own commercial real estate projects. Commercial lenders provide valuable liquidity to the market (usually) and allow commercial real estate developers and investors to leverage available resources.

For years, I have described commercial lenders and their borrows as “friendly adversaries”. Friendly, because they need each other. Adversarial, because their interests are not always completely aligned. They are each necessary complements to the other.

In good times, all typically works well, with lenders and borrowers sharing a common goal -financing a viable commercial project that makes each of them an attractive return.

In troubled times, like we have seen over the past several years, lenders and borrowers can find themselves at odds. The current economic downturn has been particularly brutal because the commercial real estate market has seen an unprecedented collapse in property values and tenant rental revenue. Lenders often blame the borrower, because the loan has ended up in default. Realistically, for most commercial real estate borrowers, there is little if anything they could have done to prevent a default, save not acquiring and financing the project in the first place – which, in hindsight, most borrows wish, as much as most lenders wish, had been the case. But neither borrowers nor lenders foresaw the dramatic financial debacle we have been experiencing since 2008.

Still, we are where we are. Commercial real estate borrowers are holding projects with substantially lower values than existed five or six years ago, and may be in default of their mortgage loans. Not unreasonably, commercial real estate lenders want their money back.

Assuming the lender has properly documented and administered its commercial real estate loan, the lender should be in the driver’s seat. All else being equal, with a properly documented and administered commercial loan, a lender has a powerful arsenal of enforcement tools at its disposal.

That said, lenders must still comply with the law. Assuming they can pass the test of having a properly documented loan that has been properly administered in a manner that does not violate the rights and interests of the borrower, the mere fact that a lender is owed millions of dollars and has a secured interest in the borrowers project (including, yes, an assignment of rents) does not mean a lender can do whatever it wishes to collect its loan without regard to applicable law.

Do I dislike lenders? No. What I abhor are lenders and their attorneys who ignore the law – which already wildly favors lenders – and take steps in direct contravention of the law to collect their loans. With the legal enforcement deck already stacked in their favor, there is no excuse for lenders to overreach and violate the law in their enforcement efforts. When they do, they should fully expect that I will object on behalf of my borrower clients and seek to hold them accountable. We will pursue compensatory and punitive damages, when appropriate, petition to have their unlawful actions reversed, and will press to have their equitable remedies, including their equitable remedy of foreclosure, curtailed or barred.

Follow the law, and a lender should expect to get what the law provides. Violate the law, and a lender should expect to suffer the consequences.

Enforcement of an Assignment of Rents is a case in point. The law in Illinois, and in most other states, is crystal clear. It is an extension of common law doctrine that has developed over centuries. If a lender is going to require an Assignment of Rents, and plans to enforce the Assignment of Rents, it is incumbent upon the lender to know the law governing Assignments of Rents.

The leading case in Illinois on the effect and enforceability of an Assignment of Rents provision, whether in the mortgage or in a separate document, is Comerica Bank-Illinois vs. Harris Bank Hinsdale, et al, 284 Ill.App.3d 1030, 220 Ill.Dec. 468, 673 N.E.2d 380 (1st. Dist. 1996).

The Comerica case involved a dispute between a property owner/mortgagor and a first and second mortgagee as to who was entitled to collect the rents from shopping center tenants after the mortgagor’s default in payment of the a first mortgage and second mortgage.

The assignment of rents provision in the mortgage provided that, after a default, Comerica could collect rents from the property without taking possession of the property, and without exercising other options under the mortgage.

Comerica, the first mortgagee, sent a notice to tenants that the mortgagor was in default under its mortgage and that under the assignment of rents provision in its mortgage Comerica was entitled to collect the rents. Thereupon Comerica began collecting rents.

The property owner/mortgagor and the second mortgagee objected.

In summary, the Comerica court held as follows:

1. At common law, it was strictly held that the mortgagee must take actual possession before being entitled to rents.

2. A clause in a real estate mortgage pledging rents and profits creates an equitable lien upon such rents and profits of the land, which may be enforced by the mortgagee upon default by taking possession of the mortgaged property.

3. The possession requirement reflects the public policy in Illinois which seeks to prevent mortgagees from stripping the rents from the property and leaving the mortgagor and the tenants without resources for maintenance and repair.

4. Courts will not enforce private agreements that are contrary to public policy.

5. “To obtain the benefits of possession in the form of rents, the mortgagee must also accept the burdens associated with possession – the responsibilities and potential liability that follow whenever a mortgage goes into default. The mortgagee’s right to rents, then, is not automatic but arises only when the mortgagee has affirmatively sought possession with its attendant benefits and burdens”.

6. A mortgagee may be entitled to rents once a receiver is appointed as an incidence of being in “constructive possession”, since having a receiver appointed constitutes affirmative action by the mortgagee, under court authorization.

7. In a foreclosure action, the mortgagee is not entitled to rents until judgment has actually been entered unless the mortgage agreement permits the mortgagee to obtain prejudgment possession.

8. A mere filing of a foreclosure action or request for appointment of a receiver is not sufficient to trigger a mortgagee’s right to collect rents. The receiver must actually be appointed. “The mortgagee is not entitled to the rents until the mortgagee or a receiver appointed on the mortgagee’s behalf has taken actual possession of the real estate after default.”

9. Where a mortgagee does not obtain prejudgment possession of the property (through a court appointed receiver or as a mortgagee in possession), and where rents are collected during a time while the mortgagor remained in possession of the property, the rents so collected belong to the mortgagor.

In making its ruling, the Comerica court relied on Illinois case law, but, noting that the U.S. Supreme Court has required bankruptcy courts to apply State law in determining a mortgagee’s entitlement to rents [Butner v United States, 440 U.S. 48, 99 S. Ct. 914 (1979)], the Comerica court also found relevant bankruptcy decisions and Federal case law to be thorough and persuasive. Among other cases, the Comerica court found persuasive the bankruptcy court opinion in In re. J.D. Monarch Development Co. 153 B.R.829 (Bankr. S.D.Ill 1993).

In the case of In re. J.D. Monarch Development Co. 153 B.R.829 (Bankr. S.D.Ill 1993), the bankruptcy court, applying Illinois law, held as follows:

1. Illinois law recognizes the validity of an assignment of rents included in a mortgage of real estate.

2. Such an assignment creates a security interest in rents that is perfected as to third parties upon recording the mortgage in the real estate records.

3. As between the mortgagee and the mortgagor, however, the mortgagee is not entitled to the rents until the mortgagee or a receiver appointed on the mortgagee’s behalf has taken actual possession of the real estate after default.

4. This is so even though the mortgage instrument contains a specific pledge of the rents.

5. The mortgage does not create a lien upon rents to the same extent that it creates a lien upon the land. Rather, the inclusion of rents in a mortgage merely gives the mortgagee the right to collect rents as an incident of possession of the mortgaged property, and the mortgagee, after default, must take affirmative action to be placed in possession of the property to receive such income.

6. The requirement that a mortgagee enforce its lien on rents by possession of the real estate renders an assignment of rents different from security interests in other property.

7. Typically, a perfected lien gives the creditor an interest in a specific piece of property, whereas an assignment of rents allows the mortgagee to collect rents that come due after the mortgagee takes control of the property. To obtain the benefits of possession in the form of rents, the mortgagee must also accept the burdens associated with possession.

Notwithstanding the clarity of the law on this topic, there are lenders, and lenders’ counsel, and occasionally receivers, who ignore the law or choose to intentionally violate the law by seeking to take the benefits of rental projects by control of rents without accepting the burdens that come with possession. They want the good, but not the bad. The dessert, but not the main course. The pudding, but not the meat.

[Hence my opening reference to Pink Floyd: “How can you have any pudding, if you don’t eat your meat?” Even Pink Floyd understood the public policy applicable to assignments of rents!]

So what is the property owning borrower’s remedy for a lender violating the law by exercising dominion or control over rents payable to the borrower without first obtaining possession of the project?

How about conversion/civil theft? Let’s check-off the elements:

A proper complaint for conversion must allege the four elements of a cause of action for conversion:

(1) an unauthorized and wrongful assumption of control, dominion, or ownership by a lender over a borrower’s personalty (identifiable “rents” count); [ √ check]

(2) borrower’s right to the rents; [ √ check]

(3) borrower’s right to immediate possession of the rents; [ √ check]

(4) borrowers’ demand for possession of the rents. [easy to do: √ check]

“Punitive damages” are available where a defendant willfully or wantonly converts the property of another. Is there any legitimate doubt – especially in Illinois – especially since the court’s clear and unequivocal Comerica decision in 1996 – that a lender who unilaterally converts the rents of a borrower to its own use without taking lawful possession of the rental project does so “willfully or wantonly” in disregard of the project owners’ rights to those rents?

If a lender is intentionally violating the law as it relates to the security for its loan, particularly as it relates to an assignment of rents executed within or in conjunction with a mortgage debt, might the lender also be guilty of “unclean hands” relative to the mortgage security, with the result that a lender might be equitably barred from foreclosing its mortgage in a court of equity? Stay tuned…

The point is not that I wish to prevent a lender from enforcing its legal rights under its loan documents. The point is, a lender must enforce its legal rights within the bounds of the law, just like everyone else.

I didn’t make the rules, but I will enforce them. If a lender insists on violating the law vis-à-vis one of my borrower clients, it should expect to suffer the consequences.

This is not a threat – it is a promise.

Thanks for listening. Kymn

R. Kymn Harp is a seasoned attorney and trusted advisor to commercial real estate investors, lenders, and developers. He is a partner in the Chicago, Illinois law firm of Robbins, Salomon & Patt, Ltd. and may be reached at (312) 456-0378 or  [email protected] . For more information, visit his website  http://www.rsplaw.com

Article Source:  http://EzineArticles.com/?expert=R._Kymn_Harp

R. Kymn Harp

R. Kymn Harp is a recognized thought leader and resourceful advocate for commercial real estate investment and development in Illinois, Indiana and throughout the USA. Kymn is a solutions-oriented attorney who takes a practical approach to all real estate and business transactions. He is a frequent speaker at CE seminars, and is a widely published author on commercial real estate legal topics.

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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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