A deed of trust is a written instrument granting a lien on real property. While slightly different from a mortgage, they are functionally nearly the same. Some states use deeds of trust instead of mortgages while others allow both. Either way, a deed of trust used to secure a commercial loan may also include an assignment of rents, which gives the lender the right to collect rental income from the property in the event of default.
What Is a Deed of Trust?
A deed of trust is a document that a borrower may execute in favor of a lender to give the lender a lien on a parcel of real estate. Like a mortgage, a deed of trust secures the loan by allowing the lender to foreclose on the real estate if the loan isn't paid (although in some states that use deeds of trust, a foreclosure isn't necessary).
Deed of Trust vs. Mortgage
A deed of trust is very similar to a mortgage in that it pledges property to secure a loan. A mortgage, however, is simpler; the property owner executes a mortgage document in favor of the lender, and the lender records the mortgage and has a lien, but the property owner still holds title to the property.
A deed of trust, on the other hand, grants an actual ownership interest in the property to a trustee, who holds the property in trust for the lender until the obligation is paid.
What Is an Assignment of Rents?
An assignment of rents is extra security granted to a lender that provides a commercial loan. Commercial loans are loans that are not made for family or household use but for business purposes.
When a borrower grants a mortgage or deed of trust on real estate and the real estate has tenants who pay rent, the lender can demand an assignment of rents in addition to the mortgage or deed of trust.
The assignment of rents means that if the borrower defaults on the loan, the lender can step in and collect the rents directly from the tenants.
Read More: What is an Assignment of Trust Deed?
Deed of Trust With Assignment of Rents
A deed of trust may contain an assignment of rents clause for that same property. In addition to a clause in the deed of trust, the lender may also require the borrower to execute a separate document called an "Assignment of Rents" that is recorded with the register of deeds.
Whether the assignment is written in the deed of trust only or is also contained in a separate document, it is binding on the borrower as long as its language is clear and sufficient to create an assignment under state law.
Exercising an Assignment of Rents
When a lender decides to collect the rents on the borrower's property, the lender is said to be exercising the assignment of rents. The lender cannot exercise the assignment unless the borrower has defaulted on the loan. Once that happens, the lender can send a written demand to the tenant or tenants, requiring that the rents be paid directly to the lender.
Absolute Assignments of Rents
An assignment of rents most likely will contain language that the assignment is an absolute assignment. In most states, an absolute assignment gives the lender an immediate interest in the rents. This means that the lender actually owns the rents and is simply allowing the borrower to collect them on license until an event of default. Once a default occurs, the lender can intercept the rents without taking any court action; a letter to the tenants is all that's needed.
Every state's laws are different; the law of the state where the property is located will dictate how a lender can exercise an assignment of rents.
Rebecca K. McDowell is a creditors' rights attorney with a special focus on bankruptcy and insolvency. She has a B.A. in English from Albion College and a J.D. from Wayne State University Law School. She has written legal articles for Nolo and the Bankruptcy Site.