In the period immediately following a default by a borrower, a
mortgage lender is often faced with a number of strategic issues to
consider. The lender must quickly determine, among other things,
the underlying cause(s) of the default, whether the borrower is in
a position and prepared to deal with the problem, the rights and
remedies available to the lender, and how quickly and aggressively
the lender should proceed with the exercise of one or more of its
In addition to the other remedies which a mortgage lender has in
its arsenal, such as power of sale, foreclosure, receivership,
taking possession and suing the borrower on its promise to pay the
debt (which remedies will be discussed in future articles), a
lender holding an assignment of rents as additional security to the
mortgage may consider "scooping" the rents by diverting
the rental payments generated by the borrower's tenants to the
lender in order to exercise control over the borrower's revenue
and reduce the lender's exposure. This remedy, often an interim
step, has significant advantages to the lender.
First, cutting off the borrower's revenue stream can be
accomplished relatively quickly with minimal expense and will
surely get the borrower's immediate attention, if the lender
has otherwise been unsuccessful in its attempts to so do. If the
borrower did not appreciate the serious nature of its failure to
perform its mortgage obligations, the diversion of its revenue will
provide a powerful message.
Secondly, exercising the rights under the assignment of rents
can usually be accomplished within a short time period and without
initiating any legal proceedings. The tenants can be redirected to
pay rents to the lender 10 days following delivery to the borrower
of notice of the lender's intention to enforce security
pursuant to section 244(1) of the Bankruptcy and Insolvency Act, in
the likely situation that the borrower is insolvent.
Thirdly, merely capturing the rents will not itself result in
the lender having the burden of being considered a "mortgagee
in possession" with all of the obligations which come with
such status. In other words, the lender will not, by exercising
this remedy alone, become responsible for "management"
and "landlord" obligations or risk potential
environmental liability or the cost of retaining a property manager
However, the blunt instrument of "scooping" rents does
also have some inherent risks which must be considered:
Was the mortgage default triggered by the fact that the tenants
defaulted in payment of rent to the borrower or have the tenants
prepaid rents to the landlord at a discount so that there is little
or no rent to be collected, rendering this action impractical?
Will sending the tenants a notice requiring them to pay rents
to a mortgage lender be met with resistance because of poor
landlord/tenant relations or other reasons?
Will the use of this remedy destroy the likelihood of any
future potential co-operation between the borrower and the lender
which may prove mutually beneficial in dealing with challenges they
both face in respect of the distressed real estate asset?
As is the case with respect to the choice of any remedy, the
particular situation in which the lender and the borrower find
themselves must be carefully assessed. Of course, if the lender has
a security package which affords a wide range of choices, it will
be in an advantageous position vis-a-vis its debtor. In particular,
a security package which includes an "assignment of
rents" provides the lender with the opportunity to take some
degree of control of the most important benefit of ownership and
management of a property without necessarily being burdened with
the obligations attached thereto.
From the borrower's perspective, its early recognition that
its real estate asset has become "distressed" and keeping
the lender continuously informed of the situation will, in many
cases, be instrumental in establishing a dialogue and result in
work out solutions which may avoid the lender's temptation to
enforce its legal remedies.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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