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Properly Enforcing an Assignment of Rents

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

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

The Assignment of Rents Should be Recorded

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

How Can a Lender Enforce the Assignment of Rents?

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

(i) Actual Assignment of Rent to the Lender

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

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

(ii) Sequestration of Rent Into the Court Registry

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

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

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

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

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Office of the Revisor of Statutes

2023 minnesota statutes.

  • DECLARATORY, CORRECTIVE AND ADMINISTRATIVE REMEDIES

Chapter 559

Section 559.17.

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Recent History

  • 2016 Subd. 2 Amended 2016 c 135 art 3 s 1
  • 2012 Subd. 2 Amended 2012 c 143 art 3 s 27
  • 2005 Subd. 2 Amended 2005 c 4 s 133
  • 2005 Subd. 3 Amended 2005 c 4 s 134
  • 2003 Subd. 3 Amended 2003 c 5 art 2 s 3
  • 2000 Subd. 3 New 2000 c 450 s 6

559.17 MORTGAGE NOT A CONVEYANCE; MORTGAGEE CANNOT POSSESS.

Subdivision 1. enforcement of rent assignment..

A mortgage of real property is not to be deemed a conveyance, so as to enable the owner of the mortgage to recover possession of the real property without a foreclosure, except as permitted in subdivision 2. The enforcement of an assignment of rents of the type described in subdivision 2 shall not be deemed prohibited by this subdivision, nor because a foreclosure sale under the mortgage has extinguished all or part of the mortgage debt.

Subd. 2. Assignment; conditions.

A mortgagor may assign, as additional security for the debt secured by the mortgage, the rents and profits from the mortgaged real property, if the mortgage:

(1) was executed, modified or amended subsequent to August 1, 1977;

(2) secured an original principal amount of $100,000 or more or is a lien upon residential real estate containing more than four dwelling units; and

(3) is not a lien upon property which was:

(i) entirely homesteaded as agricultural property; or

(ii) residential real estate containing four or fewer dwelling units where at least one of the units is homesteaded. The assignment may be enforced, but only against the nonhomestead portion of the mortgaged property, as follows:

(a) if, by the terms of an assignment, a receiver is to be appointed upon the occurrence of some specified event, and a showing is made that the event has occurred, the court shall, without regard to waste, adequacy of the security, or solvency of the mortgagor, appoint a receiver who shall, with respect to the excess cash remaining after application as provided in section 576.25, subdivision 5 , apply it as prescribed by the assignment. If the assignment so provides, the receiver shall apply the excess cash in the manner set out herein from the date of appointment through the entire redemption period from any foreclosure sale. Subject to the terms of the assignment, the receiver shall have the powers and duties as set forth in section 576.25, subdivision 5 ; or

(b) if no provision is made for the appointment of a receiver in the assignment or if by the terms of the assignment a receiver may be appointed, the assignment shall be binding upon the assignor unless or until a receiver is appointed without regard to waste, adequacy of the security or solvency of the mortgagor, but only in the event of default in the terms and conditions of the mortgage, and only in the event the assignment requires the holder thereof to apply the rents and profits received as provided in section 576.25, subdivision 5 , or, as to an assignment executed prior to August 1, 2012, as provided in Minnesota Statutes 2010, section 576.01, subdivision 2 , in which case the same shall operate against and be binding upon the occupiers of the premises from the date of recording by the holder of the assignment in the office of the county recorder or the office of the registrar of titles for the county in which the property is located of a notice of default in the terms and conditions of the mortgage and service of a copy of the notice upon the occupiers of the premises. The holder of the assignment shall apply the rents and profits received in accordance with the terms of the assignment, and, if the assignment so provides, for the entire redemption period from any foreclosure sale. A holder of an assignment who enforces it in accordance with this clause shall not be deemed to be a mortgagee in possession with attendant liability.

Nothing contained herein shall prohibit the right to reinstate the mortgage debt granted pursuant to section 580.30 , nor the right to redeem granted pursuant to sections 580.23 and 581.10 , and any excess cash, as that term is used herein, collected by the receiver under clause (a), or any rents and profits taken by the holder of the assignment under clause (b), shall be credited to the amount required to be paid to effect a reinstatement or redemption.

Subd. 3. Expiration, satisfaction, release, and assignment.

(a) An assignment of rents and profits under this section, whether in the mortgage or in a separate instrument, shall expire:

(1) with respect to the rents and profits from all of the mortgaged property, when an action or proceeding to foreclose the mortgage is barred by section 541.03 , or upon recording in the office of the county recorder or in the office of the registrar of titles of the county where the mortgaged property is located, of a satisfaction of the mortgage or a certificate of release complying with section 507.401 in lieu of a satisfaction of the mortgage; or

(2) with respect to the rents and profits from a portion of the mortgaged property, upon recording in the office of the county recorder or the registrar of titles of the county where that portion of the mortgaged property is located, of a release of that portion of the mortgaged property from the lien of the mortgage, or a certificate of release complying with section 507.401 in lieu of a release of that portion of the mortgaged property.

No separate reassignment of the rents and profits or satisfaction or release of the assignment is required.

(b) An assignment of a mortgage, whether or not the mortgage mentions an assignment of rents and profits, is sufficient to assign both the mortgage and the assignment of rents and profits permitted by this subdivision which secures the debt secured by the mortgage, and no separate assignment of the assignment of rents and profits shall be required.

( 9572 ) RL s 4441 ; 1969 c 711 s 1 ; 1977 c 202 s 2 ; 1986 c 444 ; 1992 c 376 art 2 s 1 ; 1993 c 6 s 2 ; 2000 c 450 s 6 ; 2003 c 5 art 2 s 3 ; 2005 c 4 s 133 ,134; 2012 c 143 art 3 s 27 ; 2016 c 135 art 3 s 1

Official Publication of the State of Minnesota Revisor of Statutes

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

Best practices in drafting an assignment of rents and leases.

A live 90-minute premium CLE video webinar with interactive Q&A

Tuesday, February 20, 2024 (Tomorrow)

1:00pm-2:30pm EST, 10:00am-11:30am PST

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

Description

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

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

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

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

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

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

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

The panel will review these and other vital issues:

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

Lesser, Scott

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

Reperowitz, Deborah

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

Webb, A.J.

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

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how to enforce assignment of rents

Assignment Of Leases And Rents

Jump to section, what is an assignment of leases and rents.

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

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

Common Sections in Assignments Of Leases And Rents

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

Assignment Of Leases And Rents Sample

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

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

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I build legal solutions which create extraordinary value for my clients. I am a partner in Alliance Law Firm International PLLC in Washington. My specialties include tax, wealth management, estates, corporations/business, venture capital, private equity, and natural resources. Prior to practicing law, I had a decade-long career in international private equity and investment banking. I have worked on building and managing companies in technology, energy, materials, retail, and natural resources. I am licensed to practice in the District of Columbia and Pennsylvania. I have degrees from the Georgetown University Law Center (JD) and the Yale School of Management (MBA).

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Muhammad Yar L.

I am Muhammad, a legal counsel, technology law advisor, and corporate and commercial law expert, licensed to practice in New York State. I graduated from University of London and Georgetown Law Center and have about 5 years of experience in corporate and commercial law. As a As a technology law advisor, I possess deep insights into SaaS agreements, master service agreements, master subscription agreements, and SaaS Agreements, among others.

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Alexandra I.

I am a licensed attorney in California specializing in consumer contract law. My areas of expertise include contract law and employment law, including independent contractor compliance, work-for-hire compliance and general corporate law. I appreciate getting to know my clients and enjoy providing legal guidance, whether they are large corporations, young start-ups about to take off, or just one person in need of legal advice. Some of my recent work has included the drafting of corporate purchase and sale agreements, independent contractor agreements, nondisclosure agreements, and software as a service (SaaS) agreements. I am well-versed in intellectual property law and have successfully obtained trademarks for former clients. My passion for learning, reading and writing has proved advantageous in my practice. I complete continuing education courses to stay current on industry best practices. I take great satisfaction in offering precise and helpful legal advice free from fancy terminology. I look forward to discussing your particular needs and supporting you in achieving your objectives. Please get in touch to learn more about my approach and see whether we are a good fit.

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I am a Silicon Valley tech lawyer with over 13 years of in-house experience and additional years in BigLaw. I provide tech licensing, data privacy, employment, international expansion, go to market, and other corporate and commercial legal services to clients in software, SaaS, bio-tech, cryptocurrency, financing, and construction business. I currently run my own practice concentrating on transactional, commercial, corporate or employment matters. Prior to starting my own practice, I joined as the first in-house counsel to lead the global legal strategy to bring tech products to market, increase revenue, decrease exposure to risk, and raise venture funding for HashiCorp Inc., currently an unicorn technology company with evaluation over $5 billion and venture funding over $350 million; Sysdig Inc., a technology company with venture funding of $195 million; and Anaplan Inc., currently a publicly traded company on the US Stock Market. Furthermore, I acted as in-house counsel advising leading technology enterprise companies such as HP, VMware, and Genentech and currently act as member of strategic advisory boards to several technology companies located globally

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I'm a tenants rights attorney based (and licensed) in New York. My expertise includes filing complaints and responsive pleadings as well as reviewing leases and contracts and motion practice.

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Jennifer G.

I'm Jennifer Gunnell, a seasoned legal professional with a J.D. from the University of California, Los Angeles School of Law. I have extensive experience in litigation, family law, and public service work. My career began at Schonburn Seplow Harris & Hoffman in Los Angeles, focusing on civil litigation in environmental and civil rights issues. I then joined the American Civil Liberties Union of Washington as a Staff Attorney, where I authored policy documents, coordinated civil litigation, and engaged with stakeholders on civil rights issues. Subsequently, I managed legal representation for low-income survivors of domestic violence at Snohomish County Legal Services, addressing county and state issues related to domestic violence and sexual assault. As an Assistant Attorney General at the Attorney General's Office of Washington, I led multiple jury trials, directed trial teams, and reported on legal and legislative changes. My international experience includes a role at the United Nations Office of the High Commissioner for Human Rights in Geneva, where I provided support to the Special Rapporteur for the Independence of Judges and Lawyers. I'm a member of the State Bar of California (2016, now retired) and the State Bar of Washington (2018, active). Beyond my professional endeavors, I've volunteered as an Attorney General Legal Hotline Volunteer, Domestic Violence Clinic Volunteer, Northwest Immigrant Rights Project Volunteer, and Seattle Animal Shelter Volunteer and Dog Foster. With a comprehensive legal background and a tenacious attitude, I bring dedication and expertise to every role.

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The Castro Law Firm, located in Royal Palm Beach, Florida, provides a range of legal services to clients that focus on probate, estate plannnig and business matters. Our staff is fluent in Spanish. We offer free consultations and virtual appointments.

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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.

how to enforce assignment of rents

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

  • October 10, 2018
  • Demetri A. Braynin

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

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

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

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

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

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  • What is an assignment of rents?

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

how to enforce assignment of rents

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

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

Article by:

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

  • November 23, 2023

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

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

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

1. Definition and Purpose:

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

2. Legal Framework in California:

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

3. Activation of Assignment:

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

4. Enforcement and Collection:

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

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

5. Implications for Property Owners and Lenders:

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

6. Best Practices:

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

Conclusion:

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

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Assignments of Rents: Lenders Beware!

how to enforce assignment of rents

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

how to enforce assignment of rents

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

how to enforce assignment of rents

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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SwedelsonGottlieb

How to Perfect an Assignment of Rents Clause in CC&Rs

By Joan E. Lewis-Heard, Esq. Senior Associate; SwedelsonGottlieb For those community associations whose CC&Rs provide for assignment of rents from a tenant in the event an association owner who is renting their unit or home is delinquent in the payment of assessments, an association may collect the rent directly from the tenant to pay delinquent assessments.

If done properly, this can be done without a court order or the expense of a court appointed receiver. In order to do this, the following is required: 1) the CC&Rs must have an assignment of rents clause; 2) a lien for the delinquent assessments should be recorded to secure the debt; and 3) a statutory Demand to Pay Rent to a Party Other than Landlord, pursuant to Section 2938 of the Civil Code, is required to be delivered by mail or by hand to each tenant of the property and the landlord/owner. Follow this link for the required text of the demand to pay rent to party other than landlord. It is an important part of the process for the association to take all of the steps necessary to record a Notice of Delinquent Assessment (Lien). Once the Lien is recorded, this gives the Association “secured party” status and hence, the Association would be considered the “secured party” pursuant to the Lien and the “assignee” pursuant to the assignment of rents provision in the CC&Rs.

Throughout the process, it is most important that close attention is paid to: 1) statutory obligations; 2) the association’s CC&Rs assignment of rents provision; 3) securing the indebtedness, i.e., by recording a Lien should your association’s CC&Rs allow same; and 4) by making sure that both the tenant and landlord/owner are notified when the assessments are brought current such that the assignment of rents should no longer be in effect.

Further, pursuant to Civil Code Section 2938(g), if the association enforces the assignment by way of a Demand to Pay Rent (without the appointment of a receiver) and the tenant complies, the delinquent landlord/owner may make written demand upon the association to pay the reasonable costs of protecting and preserving the property, including payment of taxes and insurance and compliance with Building and Safety codes, if any. The association’s obligations under this provision cannot exceed the amount of rents received pursuant to the assignment. Therefore, the association’s obligation to protect the property by payment of taxes and insurance, etc. does not exceed the amount that it actually receives pursuant to the assignment of rents.

It is important for an association, prior to the time a landlord/owner becomes delinquent, to obtain a copy of the lease agreements landlord/owners have with their tenants. As an aside, it is important that the lease agreement generally incorporate the association’s governing documents and that the tenant agrees to abide by same. More importantly with respect to an assignment of rents, the association would have no real way of knowing how much rent to expect in the event of an assignment of rents if the association does not have a copy of the lease agreement. For instance, the tenant could say “I’m just paying $200 in rent,” when in actuality they are paying $2,000 in rent, still paying $1,800 to the landlord/owner and only paying $200 to the association pursuant to the assignment.

Bottom line, the procedure is properly completed, the assignment of rents provision, if contained in the CC&Rs, is a powerful tool to collect past-due assessments without the need for court intervention. However, if not done properly, it can raise threats of tort liability against the association by the landlord/owner such as interference with contract, etc. While threats of legal action and actual legal action may still be the result even if the assignment of rents is done properly, the association would have an appropriate defense to that action and the appropriate legal grounds upon which to have a court order the assignment of rents pursuant to Civil Code Section 2938.

If your CC&Rs do not have an assignment of rents provision, you may want to consider amending your CC&Rs.

For help with the assignment of rents procedure, contact Joan Lewis-Heard at SwedelsonGottlieb at 800-372-2207.

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Civil Code §2938. Enforcement of an Assignment of Rent

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  2. 50+ SAMPLE Assignment of Lease in PDF

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  3. Deed of trust and assignment of rents form in Word and Pdf formats

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  4. Mortgage, Assignment of Rents and Fixture Filing Form

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COMMENTS

  1. Assignment Of Rents

    An Assignment of Rents ("AOR") is used to grant the lender on a transaction a security interest in existing and future leases, rents, issues, or profits generated by the secured property, including cash proceeds, in the event a borrower defaults on their loan. The lender can use the AOR to step in and directly collect rental payments made ...

  2. How Lenders Can Enforce the Assignment of Rents

    In the event the borrower defaults on their loan, the lender will have two options to enforce the assignment of rents: the actual assignment of rent to the lender (Section 697.07 (3)), or the sequestration of rents into the court registry (Section 697.07 (4)). If the lender is seeking the actual assignment of rent, the lender must send a ...

  3. Enforceability of Assignment-of-Rents Provisions

    The UARA, which establishes a comprehensive statutory model for the creation, perfection and enforcement of security interests in rent, has been enacted in Nevada, New Mexico, North Dakota, Texas, and Utah (and was introduced in Massachusetts in 2015). The UARA includes provisions concerning: assignment of rents; appointment of a receiver ...

  4. II. Assignment of Rents and Profits

    Although it is a contractual provision, the assignment is regulated by statute (see How to Evaluate the Effect of Statutes Governing Assignment of Rents Provisions in the Related Documents section, below) and must be enforced in a court receivership action (i.e., for specific performance of the assignment of rents clause) or as a provisional ...

  5. Still Crazy After All These Years: The Absolute Assignment of Rents in

    enforce a collateral assignment of rents even if the parties have agreed that the lender is entitled to rents upon demand, and in some states, a collateral assignment may be treated as unperfected until it is enforced.'" As a result, lenders prefer another type of assignment of rents, called an absolute

  6. How to Enforce the Assignment of Rents During Foreclosure

    Under current Civil Code Section 2938, subdivision (c), a creditor is entitled to "enforce" the rent assignment on default by the debtor by taking any one of several alternative enforcement steps. After the necessary step has been taken, the creditor is entitled to collect all rents previously uncollected.

  7. Understanding Legal and Practical Considerations Related to Assignment

    Despite the abolishment of absolute assignment of rents, many lenders' forms of assignment still include the concept of a revocable license given to the assignor to collect rents. VI. Application of Rent. After properly taking an enforcement action, the assignee (lender) is entitled to receive: Accrued but uncollected rent; as well as

  8. Sec. 559.17 MN Statutes

    Subdivision 1. Enforcement of rent assignment. A mortgage of real property is not to be deemed a conveyance, so as to enable the owner of the mortgage to recover possession of the real property without a foreclosure, except as permitted in subdivision 2. The enforcement of an assignment of rents of the type described in subdivision 2 shall not ...

  9. Assignment of Rents Enforcement After a Default

    Tuesday, February 20, 2024 (in 8 days) 1:00pm-2:30pm EST, 10:00am-11:30am PST. Add to your calendar. This CLE webinar will focus upon the drafting and enforcement of assignments of rent in state and bankruptcy courts and how parties to assignments of rent in a commercial mortgage transaction can protect their rights.

  10. Assignment Of Leases And Rents: Definition & Sample

    The assignment of leases and rents is a legal document that gives a mortgage lender right to any future profits when a property owner defaults on their loan. ... by agent or by court-appointed receiver, to collect the Rents and enforce the Leases. (h) Power of Attorney. Borrower's irrevocable power of attorney, coupled with an interest, to ...

  11. Assignment of rents clause

    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 ...

  12. Best Practices: Enforcing Assignments of Leases and Rents in Bankruptcy

    Because SBA loan documents require an "event of default" to occur prior to any lender's ability to enforce the assignment of rents, SBA lenders' loan documents should always identify bankruptcy as an "event of default." In other words, the assignment of leases and rents may take effect conditioned upon an event of default and, if ...

  13. Modernizing Security in Rents: The New Uniform Assignment of Rents Act

    Assignment of Rents Act R. Wilson Freyermuth University of Missouri School of Law, [email protected] ... ing whether a mortgagee has properly created a security interest in rents and whether it can enforce that interest against third parties and the mortgagor. II Over the past two decades, this state of affairs has produced a substantial ...

  14. What Is Assignment of rents?

    The assignment of rents is a legal mechanism whereby a property owner (often a borrower) assigns the right to collect rent payments from a particular property to a third party, typically a lender. This is usually done as a form of security interest for a loan or mortgage. The primary purpose of the assignment of rents is to provide financial ...

  15. What is an assignment of rents?

    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 ...

  16. What is a "Plaintiff's Motion to Enforce the Assignment of Rents

    A motion to enforce the assignment of rents relates to language in a non-homestead mortgage. The Plaintiff is attempting to collect the rent money the owner of the property is receiving from you, the tenant. The general idea is that the Plaintiff doesn't want the owner to use the rent money on other obligations, including paying for a defense ...

  17. How to Evaluate the Effect of Statutes Governing Assignment of Rents

    Under Civil Code section 2938, an assignment of rents provision executed on or after January 1, 1997, is subject to analysis from the following perspectives: Creation of an interest in rents; Perfection of the interest in rents; Enforcement of the interest in rents; and. Scope of the assignment of rents.

  18. Securing Interests: Navigating The Intricacies Of Assignment Of Rents

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

  19. Assignments of Rents: Lenders Beware!

    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 ...

  20. PDF Assignments and Collateral Assignments Of Commercial Leases

    In the case of an assignment, the assignee assumes the lease as the new tenant and privity with the landlord is created. In some cases, but not all, the assignor may be released. The language dictating a ten-ant's assignment rights is typically drafted to require landlord's prior written consent to an assignment; a breach of such clause ...

  21. PDF Who owns the rents? Recent cases highlight uncertainty as to ...

    the effectiveness of an absolute rent assignment unless an event of default exists and the lender has taken certain affirmative enforcement steps. See, e.g., LT Propco LLC v. ... that, under New York law, the "right to enforce an assignment or collect rents does not confer title." Rather, the debtor . retained a "reversionary interest in ...

  22. How to Perfect an Assignment of Rents Clause in CC&Rs

    If done properly, this can be done without a court order or the expense of a court appointed receiver. In order to do this, the following is required: 1) the CC&Rs must have an assignment of rents clause; 2) a lien for the delinquent assessments should be recorded to secure the debt; and 3) a statutory Demand to Pay Rent to a Party Other than ...

  23. Civil Code §2938. Enforcement of an Assignment of Rent

    The assignment shall be enforced by one or more of the following: (1) The appointment of a receiver. (2) Obtaining possession of the rents, issues, or profits. (3) Delivery to any one or more of the tenants of a written demand for turnover of rents, issues, and profits in the form specified in subdivision (k), a copy of which demand shall also ...

  24. How To Rent an Apartment: The Complete Guide for First-Time Renters

    Rent prices in the U.S. vary by state and apartment type. As of December 2023 , the average rent prices in the 50 largest metros are as follows: $1,437 for a studio, $1,593 for a one-bedroom, and ...