The Proposed Texas Assignment of Rents Act: A Legislative Escape from the Common Law Morass

Abstract

When a loan is secured by a mortgage or deed of trust on an income-producing property, such as an office building, shopping center, or apartment complex, rents are a significant part of the security for the loan, in addition to the land and improvements.Rents provide the funds necessary to pay for operating and maintaining the mortgaged property and to make payments on the mortgage loan.After a default on the mortgage loan, a borrower, facing the possibility of losing the property to foreclosure, may apply rents to purposes unrelated to the property or the mortgage loan. The lender, on the other hand, wants rents collected after default to be applied to operation and maintenance of the property or to the mortgage debt. Therefore, a lender wants the ability to control rents from mortgaged property in the event of a default, and to this end will require the borrower to execute an assignment of rents at the loan closing. Unfortunately, the law governing assignments of rents is illogical and confusing. Because of problems in many states with the common law relating to assignments of rents, the National Conference of Commissioners on Uniform State Laws (NCCUSL) appointed a drafting committee in 2003 to draft uniform legislation governing assignments of rents, and NCCUSL approved the Uniform Assignment of Rents Act (UARA) in 2005. In early 2009, the Real Estate, Probate, and Trust Law Section (REPTL) assembled a committee to study UARA and adapt the Act to Texas law. In May 2010, the committee completed drafting of the proposed Texas Assignment of Rents Act (TARA), which is attached as Appendix A. TARA was approved by REPTL and by Texas State Bar leadership and is included in the State Bar legislative package for 2011. TARA would be a vast improvement over current Texas law. This Article explains the problems under current law and describes this legislative escape from the morass of existing common law.

Keywords: Texas Assignment of Rents Act, Uniform Assignment of Rents Act, Commercial real estate, Income-producing property, Rents, Assignment of rents, Rents as security, Mortgages, Mortgage loan, Bankruptcy law, Absolute assignment, Absolute assignment of rents, Real estate finance, Real property law