Lease Assignment

Definition of Lease Assignment

In the context of a commercial mortgage, a Lease Assignment (formally known as an Assignment of Leases and Rents) is a legal contract and security instrument where a borrower (the landlord) transfers their rights, title, and interest in existing and future leases to a lender. This document serves as additional collateral for the mortgage loan, ensuring that the lender has a direct claim to the property's income stream if the borrower fails to meet their financial obligations.

Detailed Description

A Lease Assignment is a standard requirement in commercial real estate financing because the value of a commercial property is intrinsically linked to the cash flow generated by its tenants. While the Mortgage or Deed of Trust provides a lien against the physical land and buildings, the Lease Assignment provides a lien against the contractual income those assets produce.

The following points provide a detailed breakdown of how this instrument functions within a commercial mortgage structure:

• The Security Interest: The primary purpose is to grant the lender a security interest in the rents, issues, and profits of the property. If the borrower defaults on the loan, the assignment allows the lender to "step into the shoes" of the landlord to collect rent directly from tenants to service the debt.
• Absolute vs. Conditional Assignment: Most Lease Assignments are drafted as absolute assignments, meaning the legal title to the rent is technically transferred to the lender immediately. However, the lender grants the borrower a revocable license to collect and use that rent as long as no default has occurred. If a default occurs, the lender can revoke this license.
• Tenant Notification: While the agreement is signed at the closing of the mortgage, tenants are typically not notified to redirect their payments unless a formal default is declared. At that point, the lender sends a formal notice to the tenants instructing them to pay the lender directly.
• Lender Protections: These agreements often include "negative covenants," which prevent the landlord from modifying, terminating, or accepting prepaid rent (usually more than one or two months in advance) from tenants without the lender's prior written consent. This prevents the borrower from devaluing the collateral or "bleeding" the property of cash before a foreclosure.
• Integration with SNDA: A Lease Assignment often works in tandem with a Subordination, Non-Disturbance, and Attornment Agreement (SNDA). The SNDA establishes the direct relationship between the lender and the tenant, ensuring the tenant recognizes the lender as the new landlord in the event of a foreclosure.

In summary, the Lease Assignment is a vital "protective wrap" for the lender. It ensures that the primary source of loan repayment—the rental income—cannot be redirected, encumbered, or diminished by the borrower without the lender’s oversight, thereby significantly reducing the credit risk associated with the commercial loan.