Designing a solid security package: Rents and leases

My name is Stephanie Harvey and I'm a Corporate/ Commercial Lending Lawyer with Gowling WLG. This video is part of our Types of Security video series.

In this video we are going to discuss the Assignment of Rents and Leases, which is often a supplement to the Charge/Mortgage addressed in one of our other videos.

When a borrower owns real property that will be subject to a Charge/Mortgage and that real property is or will be rented to one or more third party tenants, an Assignment of Rents and Leases is another important security option for lenders to consider. 

An Assignment of Rents and Leases to the lender provides the lender with a security interest in the rental stream owing by the tenants to the borrower. It also gives rights and remedies of the borrower as landlord under the leases.

Assignment of Rents and Leases gives the lender two main benefits if the borrower defaults on the loan.

1. Firstly – provided the lender gives appropriate notice to the tenants – the lender will be entitled to receive payment directly from the tenant of the rental amounts. This may have previously been paid through the borrower.  
2. Secondly, following the issuance of appropriate notices and the expiry of statutory notice periods, the lender will be able to step into the shoes of the borrower, acting as landlord to exercise all of the rights available to the landlord to ensure that the full benefit of the lease is realized.

In most cases, an Assignment of Rents and Leases will be a stand-alone security document signed by the borrower and the lender.  However, in some cases certain lenders have included an Assignment of Rents within the Standard Charge Terms applicable to their Charge/Mortgage such that a separate document is not required to acquire these benefits.

Once again, in order to be effective an Assignment of Rents and Leases must be registered after the Charge/Mortgage in both the applicable land registry office and under the relevant provincial or territorial Personal Property Security Act.

An Assignment of Rents and Leases may be General or Specific, depending on the revenue streams and leases to which the assignment applies.

In a General Assignment of Rents and Leases, all of the existing and future rental income and leases associated with a particular real property or properties are captured. In contrast, in a Specific Assignment, only those leases associated with the property are identified in the Assignment are subject to the security. So, in the event that a new lease is put in place on the real property, the Specific Assignment alone will not apply to this new lease and it will not provide the lender with any right to the rental income or rights resulting from the new lease.

Lenders often prefer General Assignments of Rents and Leases because of their breadth, but a borrower might view this form of security as too broad.

A Specific Assignment of Rents and Leases gives the lender and the borrower a place to meet in the middle.

Specific Assignments are also a great security option where multiple lenders are taking security in the same real property that is subject to multiple leases.  Specific Assignments allow the various lenders to divide the rental income and leases among themselves, with each lender only obtaining security in a specifically agreed upon lease or group of leases.  Specific Assignments are often used for very important and valuable leases where the lender wishes to obtain the tenant's consent to the Specific Assignment in advance.

Lenders should keep in mind that, in Ontario, in order to register a Assignment of Rents and Leases in the land registry system, a Notice of Lease must first be registered by the borrower and the tenant for each of the leases intended to be covered by a Specific Assignment.

Should you have any questions about the content of this video, please feel free to reach out to me directly, or to any one of the Gowling WLG lending team.  Thank you so much for watching this video.