Court stops foreclosing lender from getting rents collected by property owner

Court stops foreclosing lender from getting rents collected by property ownerIt’s common for a commercial loan to include an “assignment of rents,” by which the borrower assigns to its lender the rents it gets from the property securing the loan.  In Florida, there’s a statute that governs how an assignment of rents works.  The assignment of rents can be a powerful tool in the lender’s arsenal.  The lender can even foreclose on its lien on the rents without foreclosing on the underlying mortgage.

In Green Emerald Homes, LLC v. Residential Credit Opportunities Trust, an appellate court recently threw a wrench into how the collecting of rents works during some foreclosures.  The original mortgage in the case had an assignment of rents provision.  A junior lienholder foreclosed on its lien and Green Emerald bought the property at the resulting foreclosure sale.  At that 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.  That fact became critical to the outcome.

A couple of months later, the mortgage (which was still in place after the foreclosure sale) was assigned to Residential Credit.  One month after that, Residential Credit filed a foreclosure lawsuit.  Residential Credit sent a demand for rents to Green Emerald and the borrowers, but received nothing.  As a result, Residential Credit asked the court to order that Green Emerald deposit any rents it collects from the property into the trust account of Residential Credit’s attorneys.

On appeal, the court’s ruling was reversed.  Green Emerald agreed that Residential Credit had the right to get the rents, but just not from Green Emerald.  Why?  Because it was not the borrower.  The appellate court agreed.  Green Emerald bought the property subject to the mortgage, but Green Emerald did not assume the mortgage.

The court also noted that under the statute, the lender’s lien on rents is effective against third parties once the mortgage is recorded.  But the court ruled that the statute does not require a property owner who is not the borrower under the mortgage to assign rents to the lender that are due under some agreement that is not part of the foreclosure.  The court did not know whether that was the case with the tenants here, but made clear that rents due under leases originated by the original owner/borrower and which Green Emerald assumed would have to be assigned to Residential Credit.  In other words, if Green Emerald collected rent from a tenant under a lease that the original borrower signed, those rents would go to Residential Credit.  But if Green Emerald collected rent from a tenant under a lease that Green Emerald signed after it got title to the property, those rents would not go to Residential Credit.

Finally, the court acknowledged that its decision would probably upend a common practice of parties that buy properties at foreclosure sales (leasing up a property and keeping the rents despite the existence of a defaulted mortgage).  The court suggested that allowing third-party purchasers of foreclosed properties to collect rents while the mortgage (and maybe taxes and other expenses) goes unpaid isn’t necessarily a good thing.  But it’s what the statute requires and the court seemed to hint that the legislature should change it.

  • Matthew R. Chait

    Matt Chait is the Managing Partner of the West Palm Beach office of Shutts & Bowen LLP, where he is a member of the Business Litigation Practice Group. His statewide practice focuses on commercial real estate and land use litigation ...

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