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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The Michigan Court of Appeals recently held in an unpublished opinion that upon an occurrence of an event of default, a lender (through the receiver), properly collected rents and tax refunds that accrued prior to the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.

© 2020 BARNES & THORNBURG LLPNational Law Review, Volume II, Number 199

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About this Author

John Gregg, Restructuring and Bankruptcy Attorney, Barnes Thornburg, Law Firm
Partner

John T. Gregg is a partner in the Chicago and Grand Rapids, Michigan offices of Barnes & Thornburg LLP. Mr. Gregg focuses on corporate restructuring, bankruptcy, and insolvency law.

He has experience representing debtors, lenders, committees, trustees, asset purchasers, lessors, and other parties in interest in some of the country’s largest and most complex restructuring matters.

Mr. Gregg serves as the co-chairperson of the Bankruptcy Committee for the Real Property Law Section of the Michigan State Bar and is also a member of the American Bankruptcy Institute’s Central...

616-742-3945
Patrick E. Mears, Barnes Thornburg Law Firm, Grand Rapids, Corporate and Finance Law Attorney
Of Counsel (Retired)

Patrick E. Mears is retired of counsel in the Grand Rapids, Michigan office of Barnes & Thornburg LLP. He was a member of the firm's Finance, Insolvency and Restructuring Department and New York Law Practice Group. Mr. Mears concentrated his practice in distressed real estate, insolvency, workouts and restructurings, commercial finance, securitizations, and creditors’ rights. He represented financial institutions as individual creditors and as members of loan syndicates in matters throughout the state of Michigan and the remainder of the country. Although his primary practice was representing financial institutions as secured and unsecured creditors, he also represented debtors and creditors committees in bankruptcy cases and out-of-court workouts.

Mr. Mears has been an elected fellow of the American College of Bankruptcy and an elected member of the American Law Institute. He has been listed in Chambers USA, The Best Lawyers in America®, Euromoney’s Guide to the World’s Leading Insolvency and Restructuring Lawyers, Michigan Super Lawyers® 2006-2012 and Who’s Who in America. Mr. Mears is formerly the chairperson of the Real Estate Financing Group of the American Bar Association's Real Property, Probate and Trust Law Section and has served as chair of the Uniform Commercial Code Committee of the Michigan State Bar’s Business Law Section.

616-742-3936