Assignment Of Rents And Leases

Assignment Of Rents And Leases-8
Dec.11.2012 In exchange for a loan secured by commercial property, a lender often receives an absolute assignment of the property's leases and rents.But who owns those rents once the borrower files for bankruptcy protection?involved a note secured by a mortgage on commercial property as well as an Assignment of Leases and Rents that provided the lender with an absolute and unconditional assignment of the borrower's rights to the rents.

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Although the lender commenced a foreclosure action, had a receiver appointed, and obtained summary judgment of foreclosure prior to the debtor's bankruptcy petition, the court ruled that these measures were insufficient to obtain control of the property's rental revenues.

The court acknowledged other decisions that reached different results.

Under the "title theory" of mortgages, a mortgage is considered a conveyance of the borrower's interest in property to the lender, which is restored upon satisfaction of the debt.

As real property law evolved, the majority of states, including New York, abandoned this notion in favor of "lien theory," which treats mortgage transactions as secured debtor-creditor relationships.

The answer depends not on bankruptcy law, but on the law of the governing jurisdiction – and then potentially on the measures that the lender undertakes following a default.

Two cases out of New York illustrate the importance of a lender's diligence in enforcing its rights under a mortgage and assignment of rents.One concern for the lender in this instance is that, in a judgement, other creditors will take priority, causing the lender to lose its security interest in the rent.Under an absolute assignment, if a borrower defaults on the deed of trust, the lender may request appointment of a receiver to collect the rents until foreclosure of the deed of trust or a determination of ownership of rents by a court of law.Payments under an absolute assignment will ordinarily be paid to the borrower or owner of the property as long as the loan secured by the deed of trust is not in default.In a collateral assignment, the borrower is generally considered to retain ownership of the rents until the lender takes action to enforce the assignment or gains possession of the property through foreclosure.However, the court observed that because New York operates under a "lien theory" of mortgages, an assignment of rents could not be "absolute" and a secured lender would acquire "title" to the property's rents only after foreclosing its lien at a sale.The court ruled that the lender's efforts to exercise control over the rents gave the lender only an enforceable interest in the rents – but not title – and permitted the debtor to utilize the rents, in the first instance, as cash collateral.The uniform act generally strengthens the lender’s position by recognizing his interest in rent money pending foreclosure and bankruptcy proceedings.Under some circumstances, a bankruptcy court may not only delay or stop a foreclosure process, but actually declare a mortgage to be void, relieving the debtor of the obligation to continue making any mortgage payments.Debtors argue that the rents are property of the bankruptcy estate and constitute cash collateral available for their use during the case.Lenders, on the other hand, assert that the assignments convey ownership of the rents, and as such, the rents may be used only with their consent.

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