Collateral assignment of lease is a contract where the ownership rights transfer of an asset are given as part of the security against the loan. Typically, lenders look for security against their lending in order to protect their interests. Ownership rights to a property are given as security in order to assure such creditors. Any rental income coming from such property goes to the creditor to whom such lease is assigned. Before one sits down to draft this agreement, one should have the following information at hand: negotiated terms, the loan to be taken, the purpose behind the loan, parties, timeline, assignment details, etc.
Purpose of a Collateral Assignment of lease Agreement
A collateral assignment of lease and rents is done in order to assure the creditor that his debt shall be repaid. The creditor till the time his debt remains unpaid, can reap the rent out of the assigned property. Such contracts are entered into for long term loans with heavy amounts of money. Having a written agreement in place helps as the details of the collateral, the creditor’s rights and obligations, the process of discharge, etc. are all mentioned therein.
Inclusions in a Collateral Assignment of lease Agreement
A collateral assignment of the lease agreement should necessarily include the assignor and assignee’s names. If they are companies, then the holding and subsidiaries’ names should also be included. The effective date of the assignment should also be mentioned. Please note that the effective date may differ from the actual date of the agreement. Recitals which explain the background of the assignment should also be included. Covenants and representations and warranties which represent and warrant that the assignor is the rightful owner of the assigned property should be included. A statement preventing the assignor to sell off the property in the interim should also be included. Apart from the above, standard boilerplate clauses such as dispute resolution, remedies, waiver and notices should also be provided for in the contract.
Key Terms of a Collateral Assignment of lease Agreement
Following are the key terms of a collateral assignment of lease and rents:
- Description of the assigned property: The property sought to be assigned should be described along with all its appendages in the agreement. The location and address along with its size should also be mentioned.
- Rights of the creditor over the property: Typically, the creditor is given the same rights as the debtor over the assigned property. However, if the negotiations so yield, limited rights may be given to the creditor. Also, it may be specified that only the rents and other profits arising out of the property may belong to the creditor.
- Proportionality: Such contracts also include a statement to the effect that the rents and profits arising would belong to the creditor in proportion to his debt.
- Right of the creditor on default: This is an important provision as it entitles the creditor to take possession and realise his money through the sale of the property in the event of default.
Drafting of a Collateral Assignment of lease Agreement
The following guidelines need to be followed while drafting an effective collateral assignment of lease contract:
- The recitals should explain the history of the loan transaction. The contract should open with the recitals which explain the context of the assignment.
- What benefits from the property accrue to the creditor should be mentioned clearly.
- A list of prohibited activities by the creditor should be included. For example, sale of the property until and unless default occurs should be prohibited.
- The events of defaults should be heavily negotiated and then included in the agreement.
- Remedies clause should provide an interim injunction as one of the alternatives.
- References to the earlier loan agreement and consonance with the same are essential in order to avoid any confusion later on.
- Debtor’s redemption rights should also be enumerated.
Benefits of a Collateral Assignment of lease Agreement
A collateral assignment of lease and rents has the following benefits:
- If the debtor has a property to assign, then it makes it easier for him to avail of the loan.
- The debtor can choose which benefits to confer on the creditor.
- Only benefits are assigned to the creditor the ownership remains with the debtor.
- The creditor is assured regarding the realisation of his debt.
- This arrangement works well for long term debts.
- Having a written agreement in place protects the interests of both the assignor and the assignee.
- Having clear redemption procedures mentioned in the contract, enable the debtor to pay off his debt and get his property released.
A collateral assignment of lease and rents is a very common contract used by debtors who have properties available to avail of loans. However, it is imperative that the terms are negotiated on an equal footing. Many times onerous terms are imposed upon debtors and they are not able to redeem their properties. Also, the duration of the assignment and the timeline for redemption need to be clearly embedded in the contract. Due to this being a secured debt, there are fewer chances of disputes. However, in the event of a dispute arising, litigation or arbitration may be resorted to. Interim injunctions can also be prayed for in the event assignor tries to sell off the assigned property.
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