Texas Homeowners In Foreclosure, Residential Tenants Could Feel Some Effects From New State 'Assignment Of Rents' Law

Lexology reports:

• The Texas legislature just rewrote all real estate loan documents in Texas which include an assignment of rents to the lender (and almost all commercial real estate loans do) when it passed the new Chapter 64 of the Texas Property Code. The Governor signed the bill on June 17, and the law is effective immediately.
  
  What does this mean to you?
  
  
• LANDLORDS: As of now, a landlord cannot collect rents after its lender gives it notice of default and demands the rents and must turn over any rents it collects to the lender. The landlord can keep the rents already collected except pre-paid rents.
  
  COMMERCIAL TENANTS: As of now, a commercial tenant should not pay the landlord rent after it receives notice from the landlord's lender demanding the rents, or the tenant may have to pay rent twice.

Among the effects on homeowners & tenants in residential property:

• An assignment of rents is not effective in a home equity loan or a reverse mortgage and cannot be enforced against a against the borrower's homestead if the homestead is a one to four family dwelling and the property was the borrower's homestead both when the assignment was executed and when the enforcement action is taken.(1)



• Upon giving notice, the lender is entitled to all uncollected rents and all pre-paid rents. The lender is not entitled to rents already collected by the borrower, except for pre-paid rents that accrue on or after the date the lender gives notice. The tenant is not obligated to pay to the lender any rent that was prepaid to the borrower (i.e. the landlord) before the tenant received notice from the lender.



• After the tenant receives the notice, the tenant is obligated to pay rent to the lender and cannot satisfy its obligation to pay rent by paying the landlord (unless the property is the tenant's primary residence).



• If the property is the tenant's primary residence, the tenant can discharge his or her obligation to pay rent by paying either the lender or the borrower (i.e. the landlord).(2)

For more, see The Texas legislature may have just rewritten your real estate loans (requires subscription; if no subscription, TRY HERE; or GO HERE - then click the appropriate link for the story).

(1) Arguably, this law (at least in theory) should make it that much easier for rent-skimming, non-owner occupant homeowners to be charged criminally with theft, conversion, etc. when pocketing tenants' rent payments while contemporaneously stiffing lenders out of their loan payments when facing foreclosure (provided, of course, that the homeowner's mortgage contains an assignment of rents to begin with - which is not uncommon for mortgages securing 2 to 4-family homes).

(2) Where the residential tenant has the legal option of paying either a financially strapped landlord facing foreclosure or a lender seeking to preserve its loan collateral, he may be well-advised to pay the lender. A landlord facing foreclosure is more likely to pocket the cash and not pay the utility bills (ie. water, electric, trash pick-up, etc.) or make necessary repairs than the foreclosing lender (although don't hold your breath expecting the lender to be too efficient in handling the situation).