May 12, 2009 sees the effectiveness of the Utah Legislature’s adoption of its version of the Uniform Assignment of Rents Act, Utah Code Ann. § 57-26-101, et seq. This statute, recommended by the National Conference of Commissioners on Uniform State Laws, and already enacted by Nevada and under consideration in several other states, will be a useful addition to Utah banking law.
Before this enactment, Utah law provided no certain method of perfecting an assignment of rents except by filing suit against the debtor-landlord, obtaining the appointment of a receiver, and having the receiver collect rents from the tenants and disbursing them according to court order. This was all a very costly and complicated process. There was also considerable room for argument as to whether an assignee is entitled to a receiver to collect rents during the pendency of a non-judicial foreclosure.
The Utah Uniform Assignment of Rents Act answers these questions and provides a simple and efficient mechanism to collect rents that have been pledged as collateral. Sections 104(1) and 119(3) of the Act provide that an enforceable security instrument signed and delivered on or after May 12, 2009, creates an assignment of rents arising from real property described in the security instrument, unless the security instrument provides otherwise.
Having created an assignment of rents, the Act provides for three methods for a creditor to realize on an assignment of rent:
1. By the traditional method, through appointment of a receiver. A creditor is entitled to a receiver where the assignor is in default and (a) the assignor has agreed to the appointment of a receiver after default; (b) it appears that the property may not be sufficient to satisfy the secured obligation; or, (c) the assignor fails to turn over proceeds to which the assignee is entitled or a subordinate assignee of rents obtains the appointment of a receiver for the real property in question. If more than one assignee of rents qualifies for the appointment of receiver, then the assignee with priority can supplant a receiver obtained by a subordinate assignor.
2. By notification to the assignor to turn over rents to the assignee; and
3. By giving a written notice to the tenants who owe rent to the assignor. This method is similar to the collection of accounts receivable by notice to the account-debtors. The tenant is simply notified of the assignment and directed to pay the assignee instead of a landlord. Section 109 provides the content of the notice to the tenant, and the consequences of payment or non- payment. If, after receipt of such a notice, the tenant pays rent to the assignor, the tenant is not discharged from the obligation to pay rents to the assignee, unless the tenant occupies the premises as the tenant’s primary residence.
The assignor, in turn, has a duty to turn over to the assignee any rents received after the assignee takes an action to enforce the assignment. The Act also provides for the continuation of the assignee’s security interest in identifiable proceeds of the assignment (Section 114).
Section 111 makes it clear that by enforcement of an assignment of rents, a creditor does not (a) become a purchaser in possession of the real property; (b) make thereby an election of remedies precluding a later enforcement action; (c) bar a deficiency judgment; or, (d) violate the single action rule of Utah Code Ann. §78B-6-901.
Section 113 provides that, unless the tenant has otherwise agreed, the tenant may assert against the assignor any claim or defense against the assignor arising from the lease. Further, the Act does not limit the tenant’s right to request appointment of a receiver where, for instance, the assignee fails to use rents received to maintain the property as required under the assignor’s agreement with tenants.
Every lawyer with substantial experience in banking or finance law has watched a defaulting borrower use the pledged rents to litigate against the lender’s enforcement efforts. The Utah Uniform Assignment of Rents Act makes it less difficult for the lender to control the property’s income. This allows application of rents to pay down the loan which, of course, is the point of the secured loan. The Act makes it quicker and less expensive to enforce an assignment of rents and will, in the long run, make for a more efficient and cost-effective credit system.
This is an article that previously appeared in the Utah Banker's Newsletter.
This post was written by attorney Rick L. Knuth