Security Interests in Rents

Security Interests in Rents

Security Interests in Rents

Mortgage lenders frequently view real property as providing two separate and distinct sources of security for the mortgage obligation. They rely not only on the real property itself, but also on the rents it produces. However, in lien theory states, it is important to realize that simply taking a garden –variety mortgage on the debtor’s fee simple absolute will not adequately protect the lender with respect rents and profits. As one federal judge aptly observed, such instances, the logic is that the borrower has retained all the incidents of possession, including the right to rents, profits and crops, and these he may do with as he pleases. It is only when the lender takes possession or does so constructively, as by having a receiver appointed, that he is entitled to the ordinary incidents of possession, like rents, profits and crops. First Federal Savings of Arkansas, F.A. v. City National Bank of Fort smith, Arkansas.real property as providing two separate and distinct sources of security for the mortgage obligation. They rely not only on the real property itself, but also on the rents it produces. However, in lien theory states, it is important to realize that simply taking a garden –variety mortgage on the debtor’s fee simple absolute will not adequately protect the lender with respect rents and profits. As one federal judge aptly observed, such instances, the logic is that the borrower has retained all the incidents of possession, including the right to rents, profits and crops, and these he may do with as he pleases. It is only when the lender takes possession or does so constructively, as by having a receiver appointed, that he is entitled to the ordinary incidents of possession, like rents, profits and crops. First Federal Savings of Arkansas, F.A. v. City National Bank of Fort smith, Arkansas.

Consequently, mortgages commonly require mortgage language or collateral agreements by which the mortgagor” assigns” or mortgages” the rents as additional security for the mortgage loan. In relatively rare situations, such agreements give the mortgagee immediate access to the rents. In these situations, the mortgagees may, from the inception of the loan, actually collect the rents from mortgagor’s tenants and apply them to the mortgage indebtedness. More commonly, however, the mortgagee’s   right of access to the rents is triggered by mortgagor default. See generally, Haroldson, Perfecting a Security Interest in Future Rents from Mortgaged Real Property, 40 Drake L. Rev. 287 (1991).

Today an assignment of rents agreement is enforceable in every jurisdiction, irrespective of whether it follows the lien or title theory or mortgage law. This unanimity ends, however, as soon as courts confront the question of when such assignments become effective and at what point the mortgage acquires the actual right to commence collection of the rents. As to those latter questions, mortgage law theory can sometimes play a significant role, as the following material illustrates.

What recording or filing requirement must be followed with respect to an assignment of rents? Perhaps out of an excess of caution, mortgagees frequently not only record in the real estate records, but attempt to perfect a Uniform Commercial Code security interest in rents as well. This “belt and suspenders” approach stems from a concern that rents may be characterized as “personality” and that recordation of an assignment in the real estate records will not provide the mortgagee with sufficient protection. In theory, this concern is misplaced. Under Article 9of the UCC, the Code is inapplicable “ to the creation or transfer of an interest in or lien on real estate, including a lease or rents thereunder.”

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