What Is a Deed of Trust With Assignment of Rents?

by Marie Murdock
Commercial property may be encumbered by a deed of trust with an assignment of rents and leases.

Commercial property may be encumbered by a deed of trust with an assignment of rents and leases.

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Some states refer to a voluntary lien against real property in exchange for money as a mortgage, while others refer to it as a deed of trust. Both mortgages and deeds of trust may incorporate an assignment of rents and leases that allows the lender to collect rent money held by,or due to, the property owner by tenants once the owner defaults or fails to make payments. An assignment of rents and leases may also be recorded as a separate document.

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Absolute Assignment

A lender may require a borrower to execute an absolute assignment of rents in conjunction with a deed of trust. This conveys the rents to the lender at the time of the assignment but, in actuality, allows the borrower, as a licensee, to continue to collect the rents so long as the deed of trust is not in default. 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.

Collateral Assignment

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. 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.

Rights After Default

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. This prevents the borrower’s disposing of rent money due the lender, pending foreclosure. Under a collateral interest, however, some bankruptcy courts have held that the rents belong to the borrower until title to the real estate merges with the right to collect rents. If this is the case, and the borrower continues to operate as a debtor-in-possession of the property under bankruptcy, the lender may not be entitled to receive any rent money unless or until the bankruptcy court allows foreclosure of the property.

Uniform Assignment of Rents Act

Due to the inconsistency in interpretation of state law pertaining to assignment of rents and leases, some states have adopted a Uniform Assignment of Rents Act that better clarifies how rent monies will be handled in the event of default under the deed of trust and loan documents. The uniform act generally strengthens the lender’s position by recognizing his interest in rent money pending foreclosure and bankruptcy proceedings.