Assignment of Rents Enforcement After a Default: Receivership, Foreclosure, and Bankruptcy Issues

State and federal courts (including bankruptcy courts) have struggled with actions that a mortgagee can take when holding a recorded assignment of rents to obtain title to the rents and directly collect them to the exclusion of the mortgagor. The issue is critical if a bankruptcy proceeding has been filed by or against the mortgagor.

Under the Bankruptcy Code, "perfection" of a mortgagee's interest in rental income occurs at the time of recordation of the mortgagee's assignment-of-rents document. But, an unresolved issue is what additional steps the mortgagee must take to "activate" or "enforce" its contractual right to the rents upon a default by the mortgagor.

Different rent assignments have developed in response to state and bankruptcy case law. A collateral assignment of rents allows the borrower to collect rents until the lender, upon default, takes some affirmative action, such as appointing a receiver or demanding rents from the borrower or tenants. Under an absolute assignment, the borrower may collect rents based on a license from the lender, but the lender's right to collect rents is triggered immediately upon the borrower's default. The distinction is critically important at the default and foreclosure stages and in bankruptcy.

Listen as our authoritative panel discusses the enforcement of the assignment of rents and leases after a commercial mortgage default.

I. General purpose of assignment of rents: security (or immediate) interest in rents

II. How the mortgagee generally exercises remedies

A. Taking possession of a property

B. Receivership

C. Notice to tenants

III. Differing state requirements for enforcement: Uniform Assignment of Rents Act

IV. Collection issues in bankruptcy

V. Significance of collateral vs. absolute assignment

VI. Key takeaways for drafting and assignment of leases and rents

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 often a separate document from the mortgage?
• How is an assignment of rents perfected, and what issues can arise in enforcement?
• What is collateral assignment as opposed to an absolute assignment, and why would a lender prefer the latter?
• How does the borrower's bankruptcy affect the lender's ability to enforce an assignment of rents?