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- Chapter 10 Assignments of Leases and Rents
CHAPTER 10.01. General
Jurisdiction | United States |
10.01. General
For most commercial property, the basis of the lender's loan underwriting is the property rents, whether from all tenants or from select high-credit tenants, as those rents constitute the value of the collateral as well as the means of paying the debt service to the lender. Because the rents to be derived from the leases on the mortgaged property are so critical to the lender, a lender will generally scrutinize the leases to ascertain whether those leases contain protections that make the generation of rent revenues more certain. For example, a lender might examine the lease for adequacy of rent, clarity of calculations of percentage rent, conditions under which rent may be reduced or abated by the tenant, tenant rights to terminate the lease, tenant rights to acquire the leased property (e.g., option to purchase), tenant exclusives that may impair leasing the entire project, and assignability and other provisions that could allow the exit of a tenant whose creditworthiness is important to the lender. Experienced lawyers who represent borrowers are well aware of these issues and can guide and educate their clients on the importance of lease terms to the financeability of the client's property.1
Generally, a lender does not have a common law right to rents from its real estate collateral. The right to rents and profits arises from possession.2 Thus, a mortgagee by its status as mortgage holder is entitled to rents only if it is entitled to possessory rights in the real property. This is true whether the lease antedates or postdates the mortgage.3 Consequently, a mortgagee is not entitled under common law to demand rents from the lessee, even under a lease that is subordinate to the mortgage, absent other considerations.4 In lien states such as Delaware, the right to rents from leases, which comes from possession, would therefore arise only once the mortgagee has acquired title by foreclosure or has had a receiver appointed.5 The right by virtue of title through foreclosure sale is simply the right to leases and rents that inures to any other purchaser from a foreclosure sale.6 Of course, if the mortgagee becomes a mortgagee-in-possession, it would also have a right to the rents.7
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Notes:
[1] See generally M. Madison, J. Dwyer & S. Bender, The Law of Real Estate Financing § 5:67 at 5-166 et seq. (2018).
[2] Osborne on Mortgages § 146 at 355 (1951).
[3] Id.
[4] Merchants' Union Trust Co. v. New Philadelphia Graphite Co., 83 A. 520 (Del...
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