An “assignment of rents” is a legal document or provision in a mortgage or loan agreement that transfers the right to collect rental income from a property to the lender. This arrangement is common in real estate financing, especially in the context of commercial mortgage financing involving income-generating properties.

Both interested buyers and sellers should seek legal advice to understand the legal implications of Assignments of Rents in real estate transactions. A lawyer can review the terms, assess potential risks, and provide guidance on how to proceed.

Assignment of Rents

An assignment of rents refers to a legal agreement where a property owner (usually the landlord or the owner of a property) assigns or transfers their right to receive rental income from tenants to another party, often a mortgage lender or a financial institution. This assignment typically occurs as collateral for a loan or mortgage.

It is a strategic move that serves as a risk mitigation mechanism primarily for lenders. It offers a layer of financial protection against potential borrower defaults. If the borrower defaults on the loan, the lender can step in and collect the rental income directly to help satisfy the debt.

It’s important to note that the specifics of assignment of rents can vary based on the terms negotiated between the lender and borrower. Some agreements may allow the borrower to continue collecting rents until a default occurs, while others may require the automatic transfer of rental income to the lender.

Types of Assignment of Rents

The assignment of rents encompasses two primary types: absolute assignment and collateral assignment. These distinctions significantly impact the level of control a mortgages lender has over rental income and the conditions under which they can assert that control.

It’s important to note that both absolute and collateral assignments can be integrated into either a general assignment of rents, where the lender is granted a security interest in all rental income from the property, allowing them to collect rent from all tenants in the event of default, or a specific assignment that assigns the right to collect rental income from a particular property or tenant to the lender.

Absolute Assignment of Rents

In an absolute assignment of rents, property owners willingly and unequivocally transfer complete control over the collection of rental income to the lender. This strategic move empowers the lender with the authority to directly manage and allocate rental funds without any conditions or restrictions.

The decision to opt for absolute assignment is often driven by lenders seeking maximum control and assurance, particularly in scenarios with an elevated risk of borrower default. From the initiation of the agreement, lenders gain a robust mechanism to secure a consistent revenue stream, providing maximal security to cover mortgage payments.

This choice, however, has profound implications for property owners. The impact on autonomy is substantial, as property owners relinquish control over rental income from the outset. This may raise concerns about the ability to manage the property’s financial aspects and make decisions aligned with the owner’s preferences. 

Collateral Assignment of Rents

The collateral assignment of rents, on the other hand, grants the lender a more delimited authority. In this arrangement, the property owner conveys control over rental income to the lender, but the lender’s authority is conditional. It comes into effect only when the borrower fails to meet their obligations, typically by defaulting on the loan. Collateral assignment strikes a balance between risk and control, offering lenders a measure of security without exercising complete dominance over the property’s income.

The decision to opt for collateral assignment reflects a nuanced approach for lenders. While they seek a level of control, it is conditional and comes into play only when specific circumstances, such as borrower default, are met. For property owners, collateral assignment provides a more balanced approach, allowing them to maintain a degree of autonomy unless triggered by specific conditions. This can be appealing to property owners who wish to preserve control over rental income while providing lenders with a security mechanism.

The Cost of Assignment of Rents

A primary consideration in the cost of assignment of rents is legal fees. Engaging legal professionals in the drafting and execution of necessary documents is essential, as the legal documents define the terms and conditions of the assignment, ensuring clarity and enforceability. Additionally, there will be costs associated with registering the document according to the Land Titles Act.

Negotiating the allocation of costs is a critical aspect of the assignment of rents process. Lenders and borrowers may discuss and agree upon how certain costs will be distributed between the parties. Clearly defining these terms in the agreement can prevent misunderstandings and disputes in the future. 

Releasing Assignment of Rents

Releasing assignments of rents is a collaborative process requiring mutual agreement between the property owner and the party holding the assignment rights. However, in most cases it will only be released when the mortgage has been paid.

To initiate the release, a formal agreement or termination document is drafted, clearly outlining the terms, conditions, and effective date of the release. Negotiations may be required to get to a place where you can be released if possible. Once the release agreement is prepared, both parties execute it, with signatures often witnessed or notarized in accordance with local laws. 

If tenants were previously informed of the assignment, they should be given written notice to inform them of the release, with clear instructions regarding future rent payments. Filing the release agreement or necessary notices with the Alberta Land Title Office ensures the update of property records. 

How a Lawyer Can Help With Assignment of Rents

Getting assistance from a real estate lawyer is essential for both lenders and borrowers involved in the assignment of rents in Alberta. Lawyers bring essential expertise in real estate law to the process, adeptly navigating the intricacies of the law and the legal landscape.

Legal Expertise and Document Drafting

Lawyers play a pivotal role in drafting comprehensive and legally sound assignment agreements. Their deep understanding of Alberta’s real estate law and legal frameworks ensures that the terms are clear, enforceable, and comply with relevant regulations. 

Dispute Resolution and Advocacy

In cases of disputes, lawyers serve as advocates, representing the interests of their clients. They employ negotiation skills to facilitate resolutions and, when necessary, escalate matters to litigation to seek a fair outcome.

Legal Compliance and Risk Management

Lawyers ensure legal compliance and proactively manage risks associated with the assignment. They stay updated on legal changes, identify potential pitfalls, and guide clients in making informed decisions to avoid legal complications.

Customization of Agreements

Recognizing the uniqueness of each assignment, lawyers tailor their services to the specific needs, property characteristics, and preferences of the parties involved. This customization ensures that the assignment of rent agreement aligns with the context of the transaction.

Land Titles and Regulatory Compliance

Lawyers also ensure that the assignment of rents complies with Alberta’s Land Titles Act, overseeing proper registration of the land titles. This step is crucial for transparency, legal clarity, and enforceability of the agreement.

Recording Interests and Due Diligence

Lawyers navigate the process of recording interests, ensuring that assignments of rents are properly registered in the land titles. This not only serves as public notice but also aids in due diligence for buyers and mortgagors, allowing them to make informed decisions in their real estate transactions.

Navigating the real estate landscape can be tricky. Making the right decisions can have a significant financial impact when purchasing or selling a property. If you would like help with your assignment of rents matter, or if you are unsure whether assignment of rents is in your best interest, contact DLegal today.

Our experienced real estate lawyers know the ins and outs of Alberta real estate law. They will provide legal advice and guidance on any assignment of rents matters or other real estate matters.