General Assignment Of Rental And Lease Definitions

Q: What is the difference between a general assignment of rents and leases and a specific assignment of rents and leases, and when should I include them in my term sheet for a commercial real estate financing of an Ontario property?

A: In situations where a borrower owns real property in Ontario that either is or will be leased to third party tenants, a lender should consider obtaining either a general assignment of rents and leases or a specific assignment of rents and leases in addition to a mortgage on the secured property. Like a mortgage, an assignment of rents and leases should be registered against title to the subject property, and in addition, should be registered under the applicable personal property security legislation as the rents and leases that are being secured by the assignment fall within the definition of personal property under that legislation. [1]

An assignment of rents and leases, be it a general assignment of rents and leases or a specific assignment of rents and leases, provides a lender with two principal benefits which may be realized by the lender after an event of default:

  1. it permits the lender to receive the rent payments that the borrower/landlord would otherwise be entitled to, and this revenue stream from the tenants is a significant asset that should be secured; and,
  2. it permits the lender to step into the shoes of the borrower/landlord and exercise all of the rights and remedies available to the landlord to ensure that the full benefit and value of the lease is realized by the lender, which includes for example, the right to demand payment in the event of non-payment of rent by a tenant and to assign the lease to a purchaser in the event of a power of sale proceeding.

The only difference between a general assignment of rents and leases and a specific assignment of rents and leases is the revenue streams and leases to which they apply. A general assignment of rents and leases applies to all present and future rental income and leases in respect of a particular property. Once in place, a general assignment of rents and leases gives the lender a right to the rental income and the ability to exercise all of the rights of the landlord under a lease in respect of all leases of the property, including but not limited to any new leases, subleases or assignments of lease entered into after the assignment is granted and registered. In contrast to this, a specific assignment of rents and leases only applies to leases which are specifically listed in the document. In the event that any of the specifically listed leases expire or are terminated, and/or a new lease or sublease is put in place, the specific assignment of leases will not apply to this new lease or sublease and the lender will have no right to the rental income or rights resulting from the new lease or sublease.

In most lending situations, the lender will prefer a general assignment of rents and leases as it provides the most comprehensive security. The lender will have security over all rental income, and be able to exercise the rights of the landlord, regardless of who the tenants are in the future, or what leases the borrower has in place at the time of default under the terms of the loan or credit facility. However, where there is a principal or anchor tenant that represents a preponderance of the rental income, and/or the borrower objects to a general assignment of rents and leases securing all rents and leases as too broad a security interest, the lender may only be interested in securing the rental income and landlord rights associated with a specific principal or anchor lease, or a particular group of leases. In such a situation, a specific assignment of rents and leases may be a reasonable compromise position for a lender to adopt. Alternatively, in situations where multiple lenders are taking security in a particular parcel of real property, specific assignments of rents and leases allow the various lenders to divide the rental income and leases among themselves, with each lender only obtaining security in a specifically agreed upon lease or group of leases.

The above is a general overview of general and specific assignments of rents and leases.

You are free to agree on what you want. California law on transfers is fairly straightforward. The general rule is that unless illegal or unconscionable, whatever the parties agree on in the lease regarding transfers will be enforceable. A lease may prohibit transfers altogether or permit transfers subject to specified conditions, the most common condition being that a landlord consent to transfer before it is made.

If you are silent, rules will be implied. The only time standards are implied into a lease is when the lease is silent, in which case: (1) if the lease is silent on transfers altogether and neither prohibits nor permits them, then a tenant may freely transfer the lease; and (2) if the lease requires the landlord's consent, but does not specify the standard that applies to such consent, then the landlord's consent must be reasonable.

If you are unclear, what you say will be interpreted as narrowly as possible. If any restriction is particularly important to a landlord, the landlord needs to make that restriction crystal clear because courts are required to interpret any ambiguity in favor of transferability. In other words, if a lease does not expressly impose a condition on a transfer, a court will not read it in, and if a restriction is unclear, it will be interpreted as narrowly as possible.  

All of these rules and the others noted below are found in Sections 1995.010-1995.340 of the California Civil Code. (Note that there is one exception to the general rules above, which is that if your lease was entered into on or before September 23, 1983, unlikely unless you have a ground lease or other long-term lease, and the lease requires the landlord's consent but is silent on the standard that applies, the landlords consent need not be reasonable. )

If you want a "transfer" to include a transfer of interest or control in the tenant, you have to say so in the lease.

A "transfer" as used in the Civil Code includes an "assignment, sublease, or other voluntary or involuntary transfer or encumbrance of all or part of a tenant's interest in the lease." Some commentators reason that this is such a broad definition, it covers a transfer in the tenant as well.  But that's not the case.  The key part part of the definition is the last part: "a tenant's interest in the lease."  As we discussed above, a transfer of an interest in a tenant is not a transfer of a lease, and when you recall the rule about any ambiguities being interpreted in favor of transferability, it should be clear that if a landlord wants to prevent a tenant from making this type of transfer, then the landlord needs to specifically say so in the lease.

After a transfer, the original tenant remains liable under the lease.

If a tenant subleases, the tenant of course remains liable under the lease -- the tenant is still in possession, still paying rent, still the only party directly obligated to the landlord. (Remember, with a sublease there is no direct link between a subtenant and the landlord -- everything, including including liability flows through the tenant).

But even if the tenant makes a complete assignment of the lease, the default rule is that the tenant remains liable under the lease -- and not only for the initial term, but for any extension options that were granted before the assignment. If you are a tenant (or guarantor) this is something to carefully consider.  Even though you are out of the picture and the new tenant has taken over the lease and is directly liable to the landlord, if the new tenant stops paying rent or otherwise defaults under the lease, the landlord can come come after you to collect.  

There are two caveats: First, this is just a default rule. The parties are free to negotiate and generally do. For example, a lease might provide that if the new tenant/assignee meets certain conditions (e.g., same amount of money as the original tenant, same use, and operational experience) and performs for a period of time after the assignment, the original tenant and any guarantors will be released. Second, this rule only applies to the original lease as assigned. If the landlord and new tenant extend the term of the lease (beyond any extension options granted before the assignment) or materially change the terms of the lease, the original tenant is no longer on the hook.

A landlord may require that the tenant pay over bonus rent, but the requirement must apply only to rent and must be in the lease before the proposed transfer.

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