Title to Rents In Borrower Notwithstanding Assignment of Rents

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The owner of a rental property in Loudonville, New York defaulted on his mortgage. Hermann, the mortgagee, advised that tenants that he was entitled to rents at the property under the assignment of rents provision in the mortgage. The tenants engaged counsel and placed their rents in an escrow account. Hermann commenced a small claims action for the non-payment of rent and the case was transferred to the regular civil part of the Cohoes City Court, in Albany County.

According to the City Court, the law in New York is split between the application of a “lien theory” for rents and a “title theory”. “Generally speaking, an assignment clause may be a source of additional security for a mortgage loan, or, alternatively, it may create an absolute and unconditional assignment. When an assignment is for additional security, the lender has a lien on the rents, but title to the rents remains with the borrower. When an assignment is absolute, title to the rents vests as a property right with the mortgagee on default of the mortgagor”. Absent a case on point from the Appellate Division, Third Department, the Court applied the lien theory, which it termed the majority view.

“This means that [an] assignment of rents becomes effective only upon the foreclosure or upon the appointment of a receiver of the rents of the mortgaged property….Since Hermann neither sought a receiver nor foreclosed...[the property owner] is entitled to the rents collected by her prior to foreclosure…Hermann has no claim for rent because his right to receive rent is not ripe.

Therefore, the tenants owe Hermann nothing”. Herrmann v. Coletti, 2017 NY Slip Op 27220, decided June 29, 2017, is posted at http://www.nycourts.gov/reporter/3dseries/2017/2017_27220.htm.

 

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Mike Berey
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