ASSIGNMENTS OF LEASES, RENTS, NON DISTURBANCE AND ATTORNMENT: An Introduction

Leases and tenancies of a secured property are of great interest to a commercial lender for the following reasons:

1. The borrower could pay the debt from the rent obtained from the tenant;

2. For valuation of the property based upon a cap rate, the rent could be used as the basis;

3. The rent would determine whether or not the borrower could liquidate the property to repay the debt or get replacement financing to repay the debt, namely the voluntary exit strategy;

4. It would also indicate whether or not the lender could liquidate the property using mortgage remedies to repay the debt or could sell security to another lender, namely the involuntary exit strategy;

5. It would make up for a part of the shortfall while the lender is following other remedies;

6. It would permit a lender to keep a prior mortgage in suspension while the succeeding lender exercises its remedies; and

7. When the succeeding lender is without security because of falling values, getting the rents would allow a modest recovery, though such rent recovery would be short-lived.

ASSIGNMENT OF RENTS VS. ASSIGNMENT OF LEASES

The borrower could be asked by the lender to assign rents to it from the secured property or assign the leases themselves to the lender which could be an assignment of the rents or leases from a specific tenant or a general assignment of all existing or future leases or rents. If so, then what is the difference between the two?

First off, both enable the lender to get the rent. Such assignments are regarded as collateral security and not as absolute assignments. It is an important difference in respect to an assignment of leases where an absolute assignment of leases creates privity of contract between the mortgagee and the tenant. Thus, an absolute assignment of leases makes the mortgagee liable to the tenant for all of the landlord’s covenants. Such assignments are unacceptable to a lender, and hence assignments of leases are clear in stressing that the lender assumes no obligations under the lease. This is why the courts have held assignment of leases to be collateral security and not absolute assignments. That is also the reason to consider the matter in relation to Section 36 of the Personal Property Security Act (the “P.P.S.A.”).

The crucial difference between an assignment of rents and an assignment of leases is that the first  assigns only the rents, while the second assigns the entire contract (lease) to the lender. In other words, a chose in action or the landlord’s right to receive rent is assigned in the first, as opposed to the assignment to the lender all of the landlord’s rights or benefits in the lease contract, including the right to receive rents, is assigned in the second. In short, the right to receive rents is a personal property, but the lease itself is real property.

Nonetheless, an assignment of leases assigns all of the lease covenants but none of the landlord’s obligations under the lease. However, if it is absolute through sale or foreclosure, then the mortgagee becomes the landlord under the lease and is bound by all the landlord’s covenants.

The assignment of leases does more by assigning to the lender a real property interest. In fact, many documents entitled “Assignment of Rents” are by their terms assignments of leases as well, while in some instances, the document is entitled “Assignment of Leases and Rents”, which is actually a good thing because the P.P.S.A. should not be applicable to such a hybrid document. Summing up, an assignment of rents does not assign a property interest, an assignment of leases does.

Questions Arising from the above are as Follows:

Should an assignment of rents be registered under the P.P.S.A.;

Should an assignment of rents be registered on title to the secured property; and

Should an assignment of leases be registered just against title to the secured property or should it also be registered under the P.P.S.A.

To comprehend such issues, it should be remembered that an assignment of rents is not an interest in real property. It happens to be an interest in a lease, which is one of the covenants in the lease. It is the most important covenant, but it is not what is meant by real estate. Hence, without a special provision in the Land Titles Act, an assignment of rents theoretically cannot be registered. In fact, there is a special provision in the Land Titles Act for registration of an assignment of an interest in a lease (Section 111 of the Land Titles Act), which has been interpreted by Registrars to include an assignment of rents. The interest in the lease getting assigned is the rent, which registration for occurs under Section 71. It happens to be not a defensible position, but it has its uses.

Know your legal rights as a tenant or a landlord. For more information about renting in Toronto, and how you can use Ontario law to your advantage, contact the lawyers at Levy Zavet PC (Levy Zavet) in Toronto, Ontario.