court stops banning the lender from collecting rents from the landlord | Shutts & Bowen LLP
It is common for a business loan to include an “assignment of rent,” whereby the borrower assigns the rents they get from the property securing the loan to their lender. In Florida there is a law which governs the operation of an assignment of rents. Assignment of rents can be a powerful tool in a lender’s arsenal. The lender can even seize his lien on the rents without seizing the underlying mortgage.
In Green Emerald Homes, LLC v. Residential Credit Opportunities Trust, a court of appeal recently undermined the functioning of the collection of rents during certain foreclosures. The original mortgage in the case included a lease assignment clause. A junior lien holder seized his lien and Green Emerald purchased the property in the resulting foreclosure sale. At this point, Green Emerald owned the property, but was not the borrower under the mortgage, and the original borrower was still the borrower, but did not own the property. This fact has become critical to the outcome.
A few months later, the mortgage (which was still in place after the foreclosure sale) was assigned to Residential Credit. A month later, Residential Credit filed a foreclosure complaint. Residential Credit sent a request for rents to Green Emerald and the borrowers, but received nothing. As a result, Residential Credit asked the court to order Green Emerald to deposit all rents collected on the property into the Residential Credit attorneys trust account.
On appeal, the court’s decision was overturned. Green Emerald agreed that Residential Credit was entitled to obtain the rents, but not from Green Emerald. Why? Because it was not the borrower. The court of appeal accepted. Green Emerald bought the property matter mortgage, but Green Emerald does not have presume The mortgage.
The court also noted that by law, the lender’s lien on rents is enforceable against third parties once the mortgage is registered. But the court ruled that the law does not require a landlord who is not the borrower under the mortgage to assign to the lender the rents owed under an agreement that is not part of the foreclosure. The court was unsure whether this was the case with tenants here, but clarified that rents owed under leases issued by the original owner / borrower and which Green Emerald assumed should be allocated to residential credit. In other words, if Green Emerald received rent from a tenant under a lease signed by the original borrower, those rents would be paid to the home loan. But if Green Emerald collected rent from a tenant under a lease that Green Emerald signed after obtaining title to the property, those rents would not go to residential credit.
Finally, the court recognized that its decision would probably upset a common practice of parties who buy properties during a forced sale (renting a property and maintaining rents despite the existence of an overdue mortgage). The court suggested that allowing third-party buyers of foreclosed properties to collect rent while the mortgage (and perhaps taxes and other expenses) are not paid is not necessarily a good thing. But that’s what the law requires and the court seemed to suggest that lawmakers should change it.