The Legislative Rewrite of the Assignment of Rents that is Sitting in Your Filing Cabinet

Cox Smith E-Alert

The Legislative Rewrite of the Assignment of Rents that is Sitting in Your Filing Cabinet

Lenders should be aware that their loan documents have just been modified by the Texas Legislature. On June 17, the Governor signed into law effective immediately legislation which codified "assignment of rents" into a new Chapter 64 of the Texas Property Code. The codification applies retroactively to enforcement and priority of security interests in rents with limited exemptions for home equity loans, reverse mortgages, and homesteads of a one to four family dwelling. The law effectively forces tenants to comply with demands made by lenders who seek to collect rents upon default by a borrower. The law allows a lender, upon giving notice to the borrower or tenant, to demand all uncollected rents and prepaid rents that accrue after the notice. Failure of the borrower to turn over the rents provides for a civil action with liability to the borrower for the lender's attorney's fees.

Previously there was uncertainty in the law as to whether an "absolute" assignment of rents inadvertently worked to reduce the borrower's debt. The new law does away with the entire absolute assignment scheme and replaces it with the provisions of Chapter 64. Modifications are permitted along the margins, such as how notice is provided to the borrower and tenant, and whether the tenant must pay the lender all prepaid rents. A perfected rent assignment itself, while still exempt from UCC Article 9, now enjoys the prioritization common to typical security interests.

The change may also affect a lender who permits second liens or subordinated lending. Without an agreement otherwise, a subordinated lender could make similar demands for rent, which neither the subordinated lien holder nor the tenant has to replenish to a superior lien holder.

What does this mean to you as a lender?

The "absolute assignment" in Texas real estate loans is dead and the new law supersedes the terms of your loan documents.

Some KEY FEATURES of the new Texas law, which applies to all existing real estate loan transactions are:

• all assignments of rents executed in connection with real estate loans are security agreements, even if they are in the form of an absolute assignment;
• the assignment of rents is perfected when the deed of trust is recorded;
• upon default, the lender is entitled to collect all uncollected rents and all pre-paid rents from the borrower by giving the borrower proper notice; the borrower is entitled to keep rents already collected, except for pre-paid rents that accrue on or after the date the lender gives notice;
• upon default, the lender is entitled to collect all unpaid rents from commercial tenants and the tenants will remain liable for the rent if they pay the borrower/landlord instead of the lender after receiving proper notice; and
• using the proper method and address for giving notice is critical under the statute, but parties can specify the method and address for notice and agree to the use of electronic notice.

You can review the full text of the bill at http://www.capitol.state.tx.us/BillLookup/Text.aspx?LegSess=82R&Bill=SB889.