michigan assignment of rents statute

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In May 2017,  we highlighted the Sixth Circuit’s opinion   in Town Center Flats. Briefly, Town Center Flats held that ownership of a commercial property’s rents transferred to a lender when (1) a commercial loan is secured by a recorded assignment of rents, (2) the borrower defaults, and (3) a lender follows Michigan’s statutory procedure to enforce the assignment of rents. Subsequently, a bankruptcy court held that tenants need not receive notice of the borrower’s default for ownership to transfer.[1] Without rents being part of the bankruptcy estate, some borrowers could not finance a bankruptcy proceeding.

On June 24, 2022, the Legislature changed that by enacting the Michigan Uniform Assignment of Rents Act (MUARA).[2] The MUARA protects lenders by clarifying that an assignment of rents is a perfected security interest as soon as it is recorded. It changes the outcome in  Town Center Flats , however, by confirming that an assignment of rents does not transfer  ownership  of rents to a lender, no matter how the loan documents are worded. If a borrower files for bankruptcy protection post-MUARA, the rents are property of the bankruptcy estate and may help pay for the bankruptcy case—if the borrower either obtains lender permission or demonstrates that the lender’s security interest in the rents is adequately protected, of course.

The MUARA considerably enhances Michigan law, clarifies numerous other ambiguities, and adjusts the Uniform Assignment of Rents Act (UARA) (upon which the MUARA is based) to harmonize it with Michigan practice.[3] For instance, under the UARA, every commercial mortgage automatically creates an assignment of rents unless the mortgage states otherwise; under the MUARA, an assignment of rents is only created if a mortgage or separate agreement grants one.

Because the MUARA substantially affects the borrower-lender relationship, Miller Canfield will be issuing a series of articles focused on it. Should you have any questions or would like assistance in understanding how this might affect your matters, please feel free to contact us.

[1]  In re Skymark Properties II, LLC , 597 B.R. 363 (Bankr. E.D. Mich. 2019).

[2] Public Act No. 115 of 2022 .  The MUARA takes effect September 22, 2022.

[3] The Uniform Law Commission proposes legislation covering a variety of topics and urges states to adopt them so as to provide consistent legal expectations throughout the United States. The Uniform Commercial Code is one well-known example of legislation recommended by the ULC, in partnership with the American Law Institute.

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2020 Michigan Compiled Laws Chapter 554 - Real and Personal Property Act 210 of 1953 Assignment of Rents to Accrue as Additional Mortgage Security (554.231 - 554.233) Section 554.231 Assignment of Rents to Accrue From Leases as Additional Mortgage Security.

Hereafter, in or in connection with any mortgage on commercial or industrial property other than an apartment building with less than 6 apartments or any family residence to secure notes, bonds or other fixed obligations, it shall be lawful to assign the rents, or any portion thereof, under any oral or written leases upon the mortgaged property to the mortgagee, as security in addition to the property described in such mortgage. Such assignment of rents shall be binding upon such assignor only in the event of default in the terms and conditions of said mortgage, and shall operate against and be binding upon the occupiers of the premises from the date of filing by the mortgagee in the office of the register of deeds for the county in which the property is located of a notice of default in the terms and conditions of the mortgage and service of a copy of such notice upon the occupiers of the mortgaged premises.

History: 1953, Act 210, Eff. Oct. 2, 1953 ;-- Am. 1966, Act 151, Imd. Eff. June 24, 1966

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How Michigan's New Assignment Of Rents Act Affects Commercial Tenants

Contributor.

The Michigan Uniform Assignment of Rents Act (MUARA) will take effect on September 22, 2022, and has important implications for a tenant's rights. If a tenant's landlord defaults on its loan, to whom must the tenant pay rent, and how does the tenant avoid getting caught in the crossfire?

When a landlord defaults on its loan, its lender may notify the tenants that rents must be paid to the lender instead of the landlord. The MUARA provides a form of notice that the lender may use; however, the lender can use a different form if it includes detail on how and where the tenant must deliver those payments as well as other related information, and the lender must notify the tenant that it may consult with a lawyer about any questions. 1 Critically, if the tenant complies with the lender's notice and delivers the rent due to the lender instead of the landlord, the tenant will have satisfied its obligation to pay rent under its lease. This obligation to deliver rent to the lender will continue until the tenant receives a court order directing the tenant to pay rent in a different manner or a signed document from the lender canceling its notice, whichever occurs first. 2 Further, once the lender delivers such notice to the tenant, any modifications to the existing lease will not be binding on the lender unless the lender has consented in writing to such changes. 3

Tenants should carefully review and comply with these notices because they can have a significant impact on the tenant's rights and obligations. For example, if a tenant continues to pay its landlord after receiving the lender's notice, the lender may still require that the tenant make that same payment to it—from the tenant's perspective, a double payment. Thankfully for tenants, the MUARA allows for additional time for tenants to review the notice with its counsel before having to make the next payment of rent. The MUARA specifically provides that a tenant will not be in default under its lease with respect to rent payments becoming due within 30 days after receiving lender's notice until the earlier of the 10th day after the due date for the next regularly scheduled rent payment or 30 days after tenant's receipt of the lender's notice. 4 So, if a tenant receives the lender's notice on the 28 th day of the month and rent is regularly due on the 1 st , the tenant has at least until the 10th to review the lender's notice and deliver rent to the correct party.

1. Public Act No. 155 of 2022. The MUARA takes effect September 22, 2022.

2. Id. § 9(3)(d)

3. Id. § 9(3)(e)

4. Id. § 9(4)(a-b)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Michigan Law Review

Home > Journals > Michigan Law Review > MLR > Volume 52 > Issue 7 (1954)

MORTGAGES-ASSIGNMENT OF RENTS AND PROFITS-NEW MICHIGAN STATUTORY TREATMENT

J. David Voss S.Ed. , University of Michigan Law School Follow

The Michigan legislature recently approved an act which affects the validity of assignments of rents in or in connection with mortgages on industrial or commercial property. To understand the impact of the new legislation, it is necessary to refer to the general mortgage law of Michigan. In particular, a similar act passed in 1925 relating to trust mortgages is an aid in construing the new act.

Recommended Citation

J. D. Voss S.Ed., MORTGAGES-ASSIGNMENT OF RENTS AND PROFITS-NEW MICHIGAN STATUTORY TREATMENT , 52 M ich. L. R ev. 1085 (1954). Available at: https://repository.law.umich.edu/mlr/vol52/iss7/20

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Hotel Revenues Are "Rents" Under New Michigan Law

On June 24, 2022, Michigan passed the Michigan Uniform Assignment of Rents Act (MUARA). When it did, Michigan became the first state with a Uniform Assignment of Rents Act that expands the definition of "rents" to include hotel revenues. [1] This distinction makes a significant difference and, perhaps surprisingly, is not clear in many states.

Michigan had not previously addressed this question directly. Although lenders in Michigan and elsewhere often act as though hotel receipts are rents, the majority position among courts is actually that hotel room revenues are personal property. [2] Whether they are rents or personal property changes how a lender perfects and enforces its interest: security interests in rents are typically perfected through recording a mortgage or assignment of rents, while personal property security interests are established in accordance with the Uniform Commercial Code (UCC). For example, if rents are personal property, a lender with a recorded mortgage or deed of trust who inadvertently files a financing statement in the wrong state or allows it to lapse might find itself behind other creditors in priority as to the hotel’s revenue stream.

With the MUARA, Michigan provides lodging lenders with a level of comfort that does not exist in many other states. The MUARA applies to any loan that is enforced after its enactment, even loans made before its enactment. [3] This may affect how loans secured by such properties are underwritten, documented, and enforced going forward. Critically, though, multistate loans will still require examining each State’s law separately.

This is part of our continuing series of alerts regarding the MUARA. Should you have any questions about this first-of-its-kind statutory right, or otherwise regarding the MUARA, please feel free to contact your Miller Canfield attorney or the authors of this alert.

[1] Public Act 115 of 2022, § 2(m)(vi). Nevada, New Mexico, Texas, Utah, and North Dakota have also implemented versions of the Uniform Assignment of Rents Act, but at most contain general “catch-all” language.

[2] See, e.g. , In re Ocean Place Dev., LLC , 447 B.R. 726, 732-33 (Bankr. D. N.J. 2011).

[3] Public Act 115 of 2022, § 19(1).

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