It has become standard in commercial loan transactions for commercial lenders to require a borrower to execute an absolute assignment of leases and rents as additional security for the repayment of a loan. Unlike a mortgage, which serves as a lien or encumbrance on real estate, an absolute assignment of leases and rents conveys present and immediate ownership of the leases and rental income to the lender under New Jersey law. Generally, most absolute assignments of leases and rents confer a revocable license to the borrower to collect and use the rental stream until an event of default. Upon a default, the lender is authorized to demand possession of the rental income from the borrower and tenants and to use the proceeds to pay-down the debt and fund the carrying costs associated with the property.
In the bankruptcy context, an absolute assignment of leases safeguards the lender’s rights and remedies to collect and use the rents generated from a mortgaged property both before and after bankruptcy action is commenced. Under the Bankruptcy Code, property of the bankruptcy estate consists of all property in which a debtor holds an interest upon the commencement of the case. Section 541(a)(1), (6). However, because New Jersey law provides that an absolute and unconditional assignment of rents transfers legal title to the rents to the lender, the Third Circuit Court of Appeals held in Jason Realty LP, 59 F.3d 423 (3d Cir. 1995), that a debtor retains no interest in the rents, and the rents are not property of the bankruptcy estate within the meaning of Section 541.
