When financing an income-producing property, such as an apartment building or commercial rental, lenders often include an Assignment of Rents Clause in the loan documents. This clause gives the lender a legal right to collect rent payments directly from the property’s tenants if the borrower fails to meet mortgage obligations, helping protect the lender’s investment.
This clause remains inactive while the borrower meets payment schedules and manages the property as usual. However, if the borrower defaults—usually by missing several mortgage payments—the lender can activate the clause by notifying both the borrower and the tenants. Upon activation, tenants are instructed to direct their rent payments to the lender instead of the borrower.
For example, a landlord who owns a four-unit rental and falls behind on mortgage payments may have their lender collect rent directly from tenants. The rent proceeds are then applied to outstanding loan balances, including late fees and potentially foreclosure costs.
While activating the Assignment of Rents Clause does not transfer property ownership to the lender—that requires foreclosure—it provides a way for lenders to maintain cash flow and reduce losses. Borrowers should carefully review loan documents to understand such clauses and communicate with lenders early if financial difficulties arise. Tenants should verify any payment redirection notices and understand that leases remain valid despite rent payment changes.
Because enforcement can vary by state, reviewing local laws is advisable. For more detailed guidance, borrowers can refer to resources like Cornell Law School’s Legal Information Institute. This clause is a crucial element in landlord-lender relationships, balancing risk and protecting rental property investments.
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