Navigating the complexities of commercial mortgages and their potential foreclosure can be daunting for any business owner. When it comes to assignments of rents, the legal landscape becomes even more intricate. In this article, we explore the ins and outs of assignments of rents and commercial mortgages, shedding light on the various clauses and regulations involved. Understanding these details is crucial for businesses to make informed decisions when entering into loan agreements and to protect their interests in the event of a default.
Don’t let the intricacies of commercial mortgage foreclosure catch you off guard. If you’re facing financial impact due to foreclosure of your business, the experienced Miami foreclosure attorneys at Charlip Law Group are here to help. Our team may be able to help protect your business and keep it operating if possible. Contact us today at (305) 354-9313 for a consultation and let us guide you through this challenging process.
Commercial mortgages can be subject to foreclosure when the borrower defaults on the mortgage, similar to residential properties. However, with commercial mortgages, the mortgage lender may include conditions in the loan agreement that may later be utilized to recoup the balance owed in the event of a default.
One such condition is an assignment of rents, or an agreement to deliver the rents of a commercial property from the borrower to the lender in the event of a default. In some cases, the commercial borrower can also agree to an assignment of profits, as well. An assignment of profits clause is applicable when the commercial mortgage is on a property wherein there exist residential or commercial tenants. Where an assignment of rents clause is in effect, money collected should be applied towards the amount the borrower owes, and the lender should provide the borrower with an accounting of how such funds are applied.
Where an assignment is agreed to, if the borrower defaults, the lender may issue a written demand for the rents. Once the demand is received, the borrower must deliver any rent on hand, and any future rent to be collected. The rent can also be kept by the registry of court if foreclosure proceedings have been initiated. If the money is kept by the court, the borrower may be allowed to first subtract any money needed to maintain or operate the mortgage property, pay the lender, or pay taxes and insurance costs related to the property.
A court may allow a lender to enforce an assignment of rents clause regardless of whether or not the value of the mortgaged property alone can cover the mortgage. Unless the assignment of rents clause provides otherwise, the lender does not need to initiate a foreclosure proceeding before seeking to collect the rents. If the lender seeks a hearing on an application to take advantage of an assignment of rents clause, courts are permitted to expedite the hearing.
If the mortgage is secured by a hotel property, the collection of rent provisions is treated differently for any commercial tenants and for room receipts. Generally, hotel room receipts are not considered to be covered under an assignment of rents, unless otherwise agreed upon by the parties. However, if the hotel has commercial tenants, for example, a coffee shop or boutique, the rents rendered by these tenants may be collectible as assigned.
An agreement to assign rent may sometimes be non-negotiable, depending on the bargaining power of the borrower, but if the commercial borrower has a choice, he should weigh the consequences of agreeing to such terms.
What is an Assignment of Rents
In Florida, the “Rents Statute,” or Fla. Stat. § 697.07, dictates the rules for assigning rents in mortgages or separate documents. This statute establishes that the assignment of rents serves as “security for repayment,” and the mortgagee holds a lien on the rents. However, enforcing the assignment does not transfer title to any rents that the mortgagee has not received, even if the assignment claims to be “absolute and not merely as additional security.”
Mortgagees can use the Rents Statute as a framework for seeking interim relief in foreclosure actions. To do so, they must submit a written demand for the mortgagor to hand over all rents they possess or control, as well as any rents collected afterward, minus authorized expenses. Failing to make a proper written demand may result in the mortgagee losing the right to enforce their lien on rents. During a foreclosure action, a state court typically requires the payment of rents, minus expenses related to property protection and preservation, to the lender or into the court registry. Mortgagees must use the received funds in accordance with the loan documents, and the remedies provided by the Rents Statute supplement other rights or remedies.
The Rents Statute raises interesting questions about when title to rents passes and whether rents count as a debtor’s cash collateral in bankruptcy cases. While the statute only creates a lien on rents that can be enforced, some courts have allowed the transfer of title to rents before a foreclosure sale. As a result, many bankruptcy practitioners file petitions before an order confirms that a mortgagee is entitled to possession of rents to err on the side of caution.
| Topic | Description |
|---|---|
| Assignment of Rents | Agreement to deliver rents of a commercial property from the borrower to the lender in case of default |
| Assignment of Profits | Agreement to deliver profits generated from a property with residential or commercial tenants |
| Demand for Rents | Written demand by the lender to the borrower for the payment of rents in case of default |
| Rent Collection | Process of collecting and applying the rents towards the amount owed by the borrower |
| Hotel Room Receipts | Receipts from hotel room rentals, which may not be covered under an assignment of rents |
| Collection of Rents | Collection of rents rendered by commercial tenants in a hotel property |
| Negotiability | The possibility of negotiating the terms of the assignment of rents clause |
Contact Us For Legal Assistance
If your business is facing foreclosure on a commercial mortgage, you need a strong defense to help you protect your business and keep operating if possible. Contact our business law attorneys with extensive knowledge of foreclosure defense at the North Miami Charlip Law Group, L.C. for a consultation.
source https://charliplawgroup.com/assignment-of-rents-and-commercial-mortgages/
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