Security Interests in Rents

1.  Mortgage lenders rely on the real property itself and rents as sources of security for a
mortgage obligations.  But in a lien theory state, mortgagee is not entitled to rents unless he takes actual or constructive possession.  And so, mortgagors often assign the rents (right to the rent usually triggered by default) as additional security to the lenders.
2.    Although assignments are recognized in every jurisdiction, the issue is when the assignments become effective and when lenders can begin collecting the rents.  What recording is required of assignments?  In the real estate records and perfect rent in UCC (useless because Article 9 does not apply to real estate).
3.    Oryx Energy Co. v. Union National Bank of Texas (TX 1995): Bank and Santa Fe had a subordination and nondisturbance clause.  Under the assignment of rents clause referenced in the subordination agreement, the Bank gave Santa Fe a license to collect rents from Oryx until the license was terminated by default.  Revocation of Santa Fe’s license to collect rents was a precondition to the activation of the assignment of rents clause.  Until the condition was met after default, a collateral assignment of rents occurred.
-    TX – lien theory: assignments of rent do not become operative until the mortgagee obtains possession of the property or takes some other similar action.
-    Assignments: When do they become effective between mortgagee and mortgagor?  When does the lien become effective (perfected) as against others with interest in the real estate or rents?  When does the mortgagee have the right to collect (foreclose upon) the rents and profits?
-    “Absolute Assignment”: Mortgagee obtains a present title to the rents even though the assignment itself postpones the right to collect until the mortgagor defaults.
-    “American common law”: Assignments do not convey title to real property, but merely create a lien on the property.  Until the debtor defaults and the lender takes an “effectual step” (foreclosure or possession), the lender has only an inchoate right (interest that is not present and will ripen later).
-    Can get around this approach if the parties make their intent clear.
-    The affirmative action requirement can be nominal.
-    Most states adopt a “middle ground”:   Assignment between the original parties is effective upon execution, and is perfected against third parties upon a recording, and right to commence collection still requires nominal affirmative action.
-    Restatement approach: Affirmative action includes delivery of a demand for the rents to the mortgagor.
-    California legislation: effective upon execution and delivery, need recording for perfection, and affirmative steps include appointment of a receiver, possession of rents, written demand delivery to tenant or assignor.