Lender Entitled to Leases, Rents and Tax Refunds Accruing Prior to Default Under Michigan Law

The Michigan Court of Appeals recently held in an unpublished opinion that upon an occurrence of an event of default, a lender (through the receiver), properly collected rents and tax refunds that accrued prior to the default under an assignment of leases and rents agreement. 7800 W. Outer Road Holdings, LLC v. College Park Partners, LLC, Case No. 303182 (Mich. Ct. App. June 26, 2012).

In 7800 W. Outer Road, the mortgagor and assignor of leases and rents argued that the lower court, the Wayne County Circuit Court, erred when it determined that the lender was entitled to all rents and tax refunds upon default, not only those that accrued after an event of default. On appeal, the Michigan Court of Appeals affirmed and began by noting that under Michigan law, an assignment of rents is binding upon the assignor only upon an event of default. The court further observed that under MCL 554.232, which governs assignment of rents, permits a lender to enforce any obligations under an assignment of rents agreement, regardless of whether the mortgage is nonrecourse because the lender is seeking to collect income generated from the property itself.

The court next reviewed various pertinent sections of the assignment of rents agreement and found that the lender was entitled to “all rents” upon default due to the comprehensive definition of “Rents”, which included all tax refunds, rebates or credits related to the property. Importantly, the court emphasized that the agreement did not distinguish between rents collected and retained before default and those retained after default. Accordingly, the court found no reason to apply a temporal limitation that would prevent the lender from collecting rental income accrued before the default occurred. Rather, as a result of the plain and ordinary meaning of the assignment of rents agreement, the court held that lender was entitled to the pre-default rents, including tax refunds.

The decision in 7800 W. Outer Road provides further assurances to secured lenders and receivers with respect to the enforceability of the provisions in mortgages, assignment of leases and rents, and other loan documents. Secured lenders and receivers should carefully review the relevant loan documents to determine whether they contain any temporal limitations regarding the property eligible to satisfy indebtedness upon an event of default. Absent any restrictions and based on the decision in 7800 W. Outer Road, secured lenders and receivers are permitted to apply the pre-default rents, including any tax credits, to outstanding indebtedness.