When a landlord defaults on a mortgage of its rental property, the lending institution will typically seek to collect rent from the borrower’s tenants in order to secure repayment of the loan.

Due to a confusing patchwork of laws and regulations applicable to a landlord/borrower’s assignment of rent to the lending institution, the Uniform Law Commission drafted a model law to clarify and streamline applicable procedures. Recently, Michigan adopted a modified version of the model act, known as the Michigan Uniform Assignment of Rents Act, effective September 22, 2022. MCL 554.1051 et seq.

Under the Michigan version of the UARA, a “presently effective security interest” in rental payments can be created through a written assignment from the borrower/landlord to the lending institution. The assignment can either be a separate assignment agreement or it can be contained within the mortgage documents.

Where the borrower/landlord has agreed to assign rents to the lender and the borrower/landlord has defaulted on the mortgage, the lender will enforce the assignment by recording a notice and serving it on the borrower/landlord. Such notice will entitle the lender to receive the gross rents payable by the tenant(s). Following notice that the security interest (lien) has been recorded, the borrower/landlord is obligated to turn over all gross rents it receives to the lender.

The MUARA also addresses a problem that often arose under prior statutes: a mortgage being discharged without the lender also discharging the related assignment of rents that was the subject of a separate agreement. Under the act, an assignment of rents made with a security agreement is automatically discharged when the security agreement itself is discharged by the lender.