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Who Gets the Rent When Landlord gets in Trouble with Lender?

By Howard C. Stross
April 21, 2014

As a Florida board certified real estate attorney, I receive inquires from lenders, commercial landlords and tenants asking about who the tenant should pay the rent to if the property owned by the landlord is being foreclosed on. Landlords want the rent money, especially when the landlord needs those funds to contest the foreclosure. Lenders want the rent money because the mortgage isn’t being paid. Tenants want to know the proper party to pay so the tenant receives credit for rent paid.

Florida law sets out the procedure to follow in the Assignment of Rents statute. Florida Statute, Section 697.07, provides for the landlord (the borrower) to pay rents to the lender after demand is made by the lender or the parties follow the language in the mortgage or promissory note secured by the mortgage. If landlord/borrower does not comply, lender can ask the court to enforce compliance.

However, Florida law does not affect the rights of the lender stated in the loan documents (e.g. mortgage, note, loan agreement). The loan documents may provide the lender with the right to collect rent directly from a tenant with no agreement from the tenant. Whether a tenant complies with the lender is another matter. A reluctant tenant may wait until it is served with a court order telling the tenant it must pay landlord.

Courts have decided against the direct collection by a lender. As an example, if the foreclosure is being contested by the landlord/borrower or the court ruled improper the direct collection of rent by a lender because of the facts considered by the court to be prohibited self–help because lender did not strictly follow the procedure laid out in Florida law. Another point that must be considered case by case is when direct collection of rent by lender could cause lender being seen as the party in control of the commercial real estate and consequently responsible to the tenant under the lease and responsible for the maintenance of the property. A lender in such a position is called a mortgagee in possession or a lender in possession.

A lender will want to strictly follow the Florida procedure to demand direct collection of rent from tenants and to obtain court enforcement if the landlord/borrower does not comply. Alternatively, the loan documents may give the lender the right to directly collect rent from tenants without an agreement from the tenants, assuming tenant will comply. Alternatively, a receiver may be appointed to collect rents, but we will save a discussion about receivers for another post.

This article is for general information only and is not intended to provide legal advice. The facts of your situation are unique and you should seek the guidance of a commercial real estate attorney. If you questions about paying rent when a commercial property is in foreclosure, please call us at 813-852-6500 for a free 30-minute consultation.

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