Simon PLC Attorneys & Counselors – August 2022 Memorandum
Important Developments Under Michigan’s New Uniform Assignment of Rents Act
Troy, Michigan – When a lender makes a loan on income-producing real estate, the lender often requires the borrower to execute an “Assignment of Leases and Rents.” If it becomes necessary for the lender to institute a foreclosure proceeding, this assignment provides the lender with a security interest in rents that accrue prior to the completion of the foreclosure.
The assignment typically permits the lender to take steps following the borrower’s default to collect rents and apply them to reduce the debt. These steps may include the lender’s taking physical possession of the real estate, obtaining the appointment of a receiver, or notifying tenants to direct all future rents to the lender.
Michigan has recently passed a Uniform Assignment of Rents Act, and which is codified at MCL 554.1051 et. seq. (the “Act”). The Act seeks to bring consistency to commercial real estate transactions by establishing a comprehensive statutory model for the creation, perfection, and enforcement of a security interest in rents.
The Act repeals Michigan’s prior assignment of rents statute and addresses the following issues:
- Perfection of a Security Interest in Rents
- Once a lender has recorded an assignment of rents, no further action is necessary to protect the enforceability and priority of the lender’s security interest in rents against subsequent purchasers or creditors. This clarifies and overrules prior precedent case law that suggested that a security interest in rents was ineffective until a lender takes affirmative action after default to enforce its rights.
- No Absolute Assignments of Rents
- The Act establishes that an assignment of rents creates only a security interest in rents. Even if the assignment states it is an absolute transfer of the rents, it will only be deemed to have created a security interest.
- Appointment of a Receiver to Collect Rents
- The Act further expands the grounds for appointment of a receiver to collect rents, and provides that a lender is entitled to the appointment of a receiver if any of the following apply: (1) the assignor has agreed to the appointment in the loan documents; (2) It appears the lender is under-secured; (3) The borrower is not turning rents over to the lender; (4) a junior creditor has obtained the appointment of a receiver.
- The lender may also seek appointment of a receiver in connection with a foreclosure or waste being committed at the property.
- Because the appointment of a receiver has been subject to the discretion of the court, some courts have refused to appoint a receiver even when the mortgage provided for the appointment. The Act clarifies that a receivership clause is enforceable by the lender without regard to the condition of the property or adequacy of security.
- Characterization and Definition of Rents
- There was a split of case law precedent and authority regarding whether revenues paid by hotel guests, nursing home residents, marinas or garage spaces was rent. The Act expands the definition of rents to include any sums payable for the right to possess or occupy, or for the actual possession or occupation of, real property of another person. It also includes fees, charges, accounts, or other payments for the use or occupancy of rooms and other facilities in hotels, motels, or other lodging properties.
- Any other sums payable under an agreement relating to the real property of another person that constitute rents under law of this state other than this act.
- Enforcement by Demand to Assignor/Owner/Tenants
- The Act permits a lender to enforce its security interest in rents by giving a notification demanding that the borrower turn over any rents that it may collect following the notification. A borrower who fails to comply is liable for conversion of those rents.
- Form of Notification to Tenants
- The notification demanding that the tenant pay all rents to the lender must provide certain information to the tenant and a copy must be provided to the borrower. The Act provides a form notification that may be used and is complaint with the notification requirements.
The Act provides needed clarity, consistency and certainty for lenders and borrowers, given the conflicting precedents on treatment of security interests in rents. The Act takes effect September 22, 2022 and does not affect an action or proceeding commenced before the effective date. Our Financial Institutions, Receivership, Transaction, and Commercial Litigation attorneys are available to consult with you on the implications of the Act.
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