Commercial mortgages can be subject to foreclosure when the borrower defaults on the mortgage, similar to residential properties. However, with commercial mortgages, the mortgage lender may include conditions in the loan agreement that may later be utilized to recoup the balance owed in the event of a default.
One such condition is an assignment of rents, or an agreement to deliver the rents of a commercial property from the borrower to the lender in the event of a default. In some cases, the commercial borrower can also agree to an assignment of profits, as well. An assignment of profits clause is applicable when the commercial mortgage is on a property wherein there exist residential or commercial tenants. Where an assignment of rents clause is in effect, money collected should be applied towards the amount the borrower owes, and the lender should provide the borrower with an accounting of how such funds are applied.
Where an assignment is agreed to, if the borrower defaults, the lender may issue a written demand for the rents. Once the demand is received, the borrower must deliver any rent on hand, and any future rent to be collected. The rent can also be kept by the registry of court if foreclosure proceedings have been initiated. If the money is kept by the court, the borrower may be allowed to first subtract any money needed to maintain or operate the mortgage property, pay the lender, or pay taxes and insurance costs related to the property.
A court may allow a lender to enforce an assignment of rents clause regardless of whether or not the value of the mortgaged property alone can cover the mortgage. Unless the assignment of rents clause provides otherwise, the lender does not need to initiate a foreclosure proceeding before seeking to collect the rents. If the lender seeks a hearing on an application to take advantage of an assignment of rents clause, courts are permitted to expedite the hearing.
If the mortgage is secured by a hotel property, the collection of rent provision is treated differently for any commercial tenants and for room receipts. Generally, hotel room receipts are not considered to be covered under an assignment of rents, unless otherwise agreed upon by the parties. However, if the hotel has commercial tenants, for example a coffee shop or boutique, the rents rendered by these tenants may be collectable as assigned.
An agreement to assign rent may sometimes be non-negotiable, depending on the bargaining power of the borrower, but if the commercial borrower has a choice, he should weigh the consequences of agreeing to such terms.
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If your business is facing foreclosure on a commercial mortgage, you need a strong defense to help you protect your business and keep operating if possible. Contact our business law attorneys with extensive knowledge of foreclosure defense at the North Miami Charlip Law Group, L.C. for a consultation.