Chapter 11 - § 11.6 • COLLATERAL PROVISIONS

• Jurisdiction: Colorado

§ 11.6 • COLLATERAL PROVISIONS

§ 11.6.1—Covenants by Mortgagor

A mortgage in substance in the form of C.R.S. § 38-30-117(1), when properly executed, is a mortgage to secure the payment of the money therein specified, with covenants as expressed in C.R.S. § 38-30-113(2), but if the words "and warrant(s) the title to the same" are omitted, no such covenants are implied.⁸⁰ The exclusion of certain interests from the warranty clause of a deed of trust does not exclude those interests from the grant of the deed of trust.⁸¹

§ 11.6.2—Right to and Assignment of Rents

An assignment of rents may be absolute, or it may create a security interest.⁸² If the assignment is absolute, then the assignee or beneficiary of the deed of trust is entitled without further action to collect all rents which become due after the date of default and apply them to the indebtedness;⁸³ if the assignment of rents is construed as granting a security interest, then the assignment does not become effective until the mortgagor defaults and the lender takes some effectual step subjecting the assigned rents toward the payment of the debt, for example by gaining rightful possession of the property or filing a foreclosure action, and until then the lender has only an inchoate property right to the rents. This is so even if the terms of the deed of trust grant the lender the right to receive rents in the event of a default.⁸⁴ The lender's rights to rents and profits are limited to those accruing after the filing of the suit to foreclose the mortgage.⁸⁵ Payments to landowners under the Conservation Reserve Program of the 1985 Food Security Act⁸⁶ are "rent" and not "proceeds."⁸⁷

§ 11.6.3—Right to Possession

At common law, a mortgagee had the right to possession of the mortgaged land and to the rents and profits without any specific provision in the mortgage.⁸⁸ In Colorado, however, the mortgagee cannot obtain possession without foreclosure and sale,⁸⁹ except with the consent of the owner.⁹⁰

Colorado has not adopted the doctrine of mortgagee in possession.⁹¹ Under the common-law doctrine of mortgagee in possession, a mortgagee may acquire possession of property securing indebtedness upon default of the mortgagor and retain possession until the mortgagor redeems the property or until the property is foreclosed. Colorado, however, has by statute adopted the lien theory of mortgages, which generally prohibits a mortgagee from acquiring possession of mortgaged property until a foreclosure sale has occurred.⁹² The statutory provision prevails over any provision in the mortgage or deed of trust.⁹³ A limited exception exists where an action or proceeding to foreclose the mortgage or deed of trust has been commenced and the owner (mortgagor) has abandoned the premises.⁹⁴

§ 11.6.4—Due-on-Sale or Encumbrance Clause

A lender has two primary reasons for including a due-on-sale clause in a mortgage. The first is to protect the lender's security interest by ensuring the creditworthiness of the new buyer. The lender's right to accelerate provides an opportunity to evaluate the credit of the buyer and accelerate if the buyer is not a good risk. Historically, this was the principal purpose of the clause. The second, and increasingly important, purpose of the clause is to enable the lender to keep its loan portfolio at more nearly current rates of interest and thereby protect its economic position in the money marketplace.⁹⁵

Due on sale clauses and acceleration clauses in instruments executed prior to July 1, 1975 have been upheld as per se reasonable restraints on alienation.⁹⁶ A due-on-sale clause may be either absolute or conditional on the failure to obtain the prior written consent of the lender.⁹⁷

Under a due-on-sale clause that expressly permits the granting of subordinate encumbrances, the lender should reasonably anticipate that the borrower could default on the subordinate encumbrance and that, accordingly, foreclosure would follow. Thus, if a conveyance is made pursuant to foreclosure, or is made involuntarily in lieu thereof, there can be no acceleration where the deed of trust allows the creation of a subordinate lien.⁹⁸

The Colorado statute declaring certain due-on-sale...