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Assignment of Rents – What, Why, and How?

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Madelaine prescott, esq., share this post:.

• November 29, 2023

These days, almost all commercial loans include an Assignment of Rents as part of the Deed of Trust or Mortgage. But what is an Assignment of Rents, why is this such an important tool, and how are they enforced?

An Assignment of Rents (“AOR”) is used to grant the lender on a transaction a security interest in existing and future leases, rents, issues, or profits generated by the secured property, including cash proceeds, in the event a borrower defaults on their loan. The lender can use the AOR to step in and directly collect rental payments made by the tenant. For an AOR to be effective, the lender’s interest must be perfected, which has a few fairly simple requirements. The AOR must be in writing, executed by the borrower, and recorded with the county where the property is located. Including an AOR in the recorded Deed of Trust or Mortgage is the easiest and most common way to ensure the AOR meets these requirements should it ever need to be utilized.

When a borrower defaults, lenders can take advantage of AORs as an alternative to foreclosure to recoup their investment. With a shorter timeline and significantly lower costs, it is certainly an attractive option for lenders looking to get defaulted borrowers back on track with payments, without the potential of having to take back a property and attempting to either manage it or sell it in hopes of getting your money back out of the property. AORs can be a quick and easy way for the lender to get profits generated by the property with the goal of bringing the borrower out of default. But lenders should carefully monitor how much is owed versus how much has been collected. If the AOR generates enough funds so that the borrower is no longer in default, the lender must stop collecting rents generated by the property.

Enforcement of an AOR can also incentivize borrowers to work with the lender to formulate a plan, as many borrowers rely on rental income to cover expenses related to the property or their businesses. Borrowers are generally more willing to come to the table and negotiate a mutual, amicable resolution with the lender in order to protect their own investment. A word of warning to lenders though: since rental income is frequently used to pay expenses on the property, such as the property manager, maintenance, taxes, and other expenses, the lender needs to ensure they do not unintentionally hurt the value of the property by letting these important expenses fall behind. This may hurt the lender’s investment as well, as the property value could suffer, liens could be placed on the property, or the property may fall into disrepair if not properly maintained. It is also important for lenders to be aware of the statutes surrounding the payment of these expenses when an AOR is being used, as some state’s statutes require the lender to pay certain property expenses out of the collected rents if requested by the borrower.

In addition to being shorter and cheaper than foreclosure, AORs can be much easier to enforce. In California, the enforcement of an AOR is governed by California Civil Code §2938. This statute specifies enforcement methods lenders can use and restrictions on use of these funds by the lender, among other things. Under CA Civil Code §2938(c), there are 4 ways to enforce an AOR:

• The appointment of a receiver;
• Obtaining possession of the rents, issues, profits;
• Delivery to tenant of a written demand for turnover of rents, issues, and profits in the correct form; or
• Delivery to assignor of a written demand for the rents, issues, or profits.

One or more of these methods can be used to enforce an AOR. First, a receiver can be appointed by the court, and granted specific powers related to the AOR such as managing the property and collecting rents. They can have additional powers though; it just depends on what the court orders. This is not the simplest or easiest option as it requires court involvement, but this is used to enforce an AOR, especially when borrowers or tenants are uncooperative. Next is obtaining possession of the rents, issues, profits, which is exactly as it seems; lenders can simply obtain actual possession of these and apply the funds to the loan under their AOR.

The third and fourth options each require delivery of a written demand to certain parties, directing them to pay rent to the lender instead of to the landlord. Once the demand is made, the tenant pays their rent directly to the lender, who then applies the funds to the defaulted loan. These are both great pre-litigation options, with advantages over the first two enforcement methods since actual possession can be difficult to obtain and courts move slowly with high costs to litigate. The written demands require a specific form to follow called the “Demand To Pay Rent to Party Other Than Landlord”, as found at CA Civil Code §2938(k). There are other notice requirements to be followed here, so it is essential to consult with an experienced attorney if you are considering either of these options. California Civil Code §2938 specifically provides that none of the four enforcement methods violate California’s One Action Rule nor the Anti-Deficiency Rule, so lenders can confidently enforce their AORs using the above methods with peace of mind that they are not violating other California laws.

Whether you are looking to originate a new loan, or you are facing a default by your borrower, understanding what an Assignment of Rents is and how it operates can be extremely beneficial. Enforcing an AOR can be an easier option than foreclosure and can help promote a good relationship with your borrower when handled correctly. If you have any questions about AORs, or need further details on how to enforce them, Geraci is here to help.

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Assignment of Lease: How It Works and Parties Involved

Jump to section, what is an assignment of lease.

The assignment of lease is a title document that transfers all rights possessed by a lessee or tenant to a property to another party. The assignee takes the assignor’s place in the landlord-tenant relationship.

You can view an example of a lease assignment here .

How Lease Assignment Works

In cases where a tenant wants to or needs to get out of their lease before it expires, lease assignment provides a legal option to assign or transfer rights of the lease to someone else. For instance, if in a commercial lease a business leases a place for 12 months but the business moves or shuts down after 10 months, the person can transfer the lease to someone else through an assignment of the lease. In this case, they will not have to pay rent for the last two months as the new assigned tenant will be responsible for that.

However, before the original tenant can be released of any responsibilities associated with the lease, other requirements need to be satisfied. The landlord needs to consent to the lease transfer through a “License to Assign” document. It is crucial to complete this document before moving on to the assignment of lease as the landlord may refuse to approve the assignment.

Difference Between Assignment of Lease and Subletting

A transfer of the remaining interest in a lease, also known as assignment, is possible when implied rights to assign exist. Some leases do not allow assignment or sharing of possessions or property under a lease. An assignment ensures the complete transfer of the rights to the property from one tenant to another.

The assignor is no longer responsible for rent or utilities and other costs that they might have had under the lease. Here, the assignee becomes the tenant and takes over all responsibilities such as rent. However, unless the assignee is released of all liabilities by the landlord, they remain responsible if the new tenant defaults.

A sublease is a new lease agreement between the tenant (or the sublessor) and a third-party (or the sublessee) for a portion of the lease. The original lease agreement between the landlord and the sublessor (or original tenant) still remains in place. The original tenant still remains responsible for all duties set under the lease.

Here are some key differences between subletting and assigning a lease:

• Under a sublease, the original lease agreement still remains in place.
• The original tenant retains all responsibilities under a sublease agreement.
• A sublease can be for less than all of the property, such as for a room, general area, portion of the leased premises, etc.
• Subleasing can be for a portion of the lease term. For instance, a tenant can sublease the property for a month and then retain it after the third-party completes their month-long sublet.
• Since the sublease agreement is between the tenant and the third-party, rent is often negotiable, based on the term of the sublease and other circumstances.
• The third-party in a sublease agreement does not have a direct relationship with the landlord.
• The subtenant will need to seek consent of both the tenant and the landlord to make any repairs or changes to the property during their sublease.

Here is more on an assignment of lease here .

Parties Involved in Lease Assignment

There are three parties involved in a lease assignment – the landlord or owner of the property, the assignor and the assignee. The original lease agreement is between the landlord and the tenant, or the assignor. The lease agreement outlines the duties and responsibilities of both parties when it comes to renting the property. Now, when the tenant decides to assign the lease to a third-party, the third-party is known as the assignee. The assignee takes on the responsibilities laid under the original lease agreement between the assignor and the landlord. The landlord must consent to the assignment of the lease prior to the assignment.

For example, Jake is renting a commercial property for his business from Paul for two years beginning January 2013 up until January 2015. In January 2014, Jake suffers a financial crisis and has to close down his business to move to a different city. Jake doesn’t want to continue paying rent on the property as he will not be using it for a year left of the lease. Jake’s friend, John would soon be turning his digital business into a brick-and-mortar store. John has been looking for a space to kick start his venture. Jake can assign his space for the rest of the lease term to John through an assignment of lease. Jake will need to seek the approval of his landlord and then begin the assignment process. Here, Jake will be the assignor who transfers all his lease related duties and responsibilities to John, who will be the assignee.

You can read more on lease agreements here .

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Assignment of Lease From Seller to Buyer

In case of a residential property, a landlord can assign his leases to the new buyer of the building. The landlord will assign the right to collect rent to the buyer. This will allow the buyer to collect any and all rent from existing tenants in that property. This assignment can also include the assignment of security deposits, if the parties agree to it. This type of assignment provides protection to the buyer so they can collect rent on the property.

The assignment of a lease from the seller to a buyer also requires that all tenants are made aware of the sale of the property. The buyer-seller should give proper notice to the tenants along with a notice of assignment of lease signed by both the buyer and the seller. Tenants should also be informed about the contact information of the new landlord and the payment methods to be used to pay rent to the new landlord.

You can read more on buyer-seller lease assignments here .

Get Help with an Assignment of Lease

Do you have any questions about a lease assignment and want to speak to an expert? Post a project today on ContractsCounsel and receive bids from real estate lawyers who specialize in lease assignment.

ContractsCounsel is not a law firm, and this post should not be considered and does not contain legal advice. To ensure the information and advice in this post are correct, sufficient, and appropriate for your situation, please consult a licensed attorney. Also, using or accessing ContractsCounsel's site does not create an attorney-client relationship between you and ContractsCounsel.

Meet some of our Assignment of Lease Lawyers

I have over 25 years' experience representing individual and company clients, large and small, in transactions such as mergers and acquisitions, private offerings of securities, commercial loans and commercial endeavors (supply contracts, manufacturing agreements, joint ventures, intellectual property licenses, etc.). My particular specialty is in complex and novel drafting.

Brianna is a well-respected New York licensed attorney with a Juris Doctorate degree in law from Touro College Jacob D. Fuchsberg Law School and bachelor’s degree in Business Administration and Management from Dowling College. Since becoming an attorney, she has practiced in various areas including business law, corporate law, residential real estate, commercial real estate, criminal law, traffic law, employment law, landlord tenant law, estate planning, and has represented intermediaries in procurement and the personal protective equipment industry. Brianna has broad and extensive business experience; She is an entrepreneur and co-owner of a microtechnology manufacturing company that was built by her and her partner, where she also served as the Chief Legal Officer and Human Resource Manager for the company. While building the manufacturing business, she created a brokerage firm for business transactions and has managed several other businesses which she has ownership interest in. Brianna’s involvement in these various businesses over the past 15 years provides a unique skillset to her clients; Not only does she understand contractual principals and obligations from a legal perspective while drafting and negotiating agreements, but she also has the foresight, experience, and ability to ensure the agreement reflects the practical aspects of the business. Based on the client’s needs and desired outcome, she has the forethought to cover different angles that would be overlooked from a legal standpoint, and as a result she is able to help prevent unforeseen business ramifications. She conducts extensive risk assessments on behalf of her clients and minimizes exposure to potential liability without “over lawyering” agreements. One of Brianna’s main areas of focus is drafting and negotiating agreements. Negotiation is a passion of hers which was applied in law school while she was a member of the Alternative Dispute Resolution Society, notably winning Touro Law School’s intraschool negotiation competition. In her more recent years, Brianna has removed herself from her various business interests to focus on her law practice. Brianna has a strong moral compass and believes in quality over quantity. She treats every client as a top priority; thus, she will not take on many cases at a time because she wants to give each client the focus and attention they deserve. She has sharp attention to detail and is a forceful advocate for every client. Brianna has broad and extensive business experience; She is an entrepreneur and co-owner of a microtechnology manufacturing company that was built by her and her partner, where she also served as the Chief Legal Officer and Human Resource Manager for the company. While building the manufacturing business, she created a brokerage firm for business transactions and has managed several other businesses which she has ownership interest in. Brianna’s involvement in these various businesses over the past 15 years provides a unique skillset to her clients; Not only does she understand contractual principals and obligations from a legal perspective while drafting and negotiating agreements, but she also has the foresight, experience, and ability to ensure the agreement reflects the practical aspects of the business. Based on the client’s needs and desired outcome, she has the forethought to cover different angles that would be overlooked from a legal standpoint, and as a result she is able to help prevent unforeseen business ramifications. She conducts extensive risk assessments on behalf of her clients and minimizes exposure to potential liability without “over lawyering” agreements. Additionally, she specializes in drafting and negotiating agreements. Negotiation is a passion of hers which was applied in law school while she was a member of the Alternative Dispute Resolution Society, notably winning Touro Law School’s intraschool negotiation competition. In her more recent years, Brianna has removed herself from her various business interests to focus on her law practice. Brianna has a strong moral compass and believes in quality over quantity. She treats every client as a top priority; thus, she will not take on many cases at a time because she wants to give each client the focus and attention they deserve. She has sharp attention to detail and is a forceful advocate for every client.

Experienced and broad based corporate/business attorney and Outside General Counsel (OGC), for start-ups, small businesses and growing companies of all sizes, advising and assisting clients with corporate and LLC formation, contracts and agreements, internet and terms of use/service agreements, trademarks and intellectual property protection, the purchase and sale of businesses (M&A), labor and employment matters, compliance and risk management, corporate governance, and commercial leasing matters. See other reviews on my website at www.ogcservices.net/reviews

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Assignment of Lease

Contract to lease land from a church?

I’m planning on leasing land from a church. Putting a gym on the property. And leasing it back to the school.

Ok; first step is that you will need a leasing contract with the church. Ask them to prepare one for you so you would just need an attorney to review the agreement and that should cost less than if you had to be the party to pay a lawyer to draft it from scratch. You need to ensure that the purpose of the lease is clearly stated - that you plan to put a gym on the land so that there are no issues if the church leadership changes. Step 2 - you will need a lease agreement with the school that your leasing it do (hopefully one that is similar to the original one your received from the church). Again, please ensure that all the terms that you discuss and agree to are in the document; including length of time, price and how to resolve disputes if you have one. I hope this is helpful. If you would like me to assist you further, you can contact me on Contracts Counsel and we can discuss a fee for my services. Regards, Donya Ramsay (Gordon)

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Demystifying Assignment of Lease: Your Go-To Guide

LegalGPS : July 25, 2024 at 12:20 PM

When you’re talking about property leasing, it’s important to understand that there are a lot of terms and concepts that you may have never heard before. One of them is the assignment of lease, which refers to a situation where a tenant transfers their rights and responsibilities under the lease agreement to another party.

Assignment of Lease Template

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What is an Assignment of Lease, and why is it so crucial?

An Assignment of Lease is a term you may have heard thrown around, especially if you're involved in rental properties. It’s a pretty important document. But what exactly is it? Well, in simple terms, an Assignment of Lease is an agreement where the original tenant of a property transfers their leases and all of its rights and obligations to a new tenant. Now, you might be wondering, "When would this scenario ever occur?"

Let's imagine you're a tenant who signed a three-year lease for an office space. However, two years in, you need to relocate due to unprecedented growth of your business. Instead of breaking the lease, you might choose to assign your lease to another business looking for office space. This means that you, as the original tenant, no longer have any obligations under the lease. The new tenant is now responsible for paying rent and complying with all of the terms of the previously signed agreement.

Now that you understand, let's get into the step-to-step guide on how to create an Assignment of Lease!

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Steps to Write an Assignment of Lease

Creating a thorough Assignment of Lease agreement doesn't need to be an overwhelming task. Simply follow these steps to ensure your agreement is both comprehensive and legally binding:

Step 1: Identify the Parties

The information of each party should be included. For the existing tenant (the assignor), make sure to include:

Full legal name or business name

Postal mailing address

Phone number and email address

Do the same for the new tenant (the assignee). Make sure all the information is up-to-date and accurate to avoid any unnecessary confusion or disputes. For example, if the assignor is a business, make sure they have updated their mailing address with the post office to reflect their new building location. If a party has multiple addresses, be sure to list them all.

Step 2: Specify the Lease

This section requires exact information from the original lease agreement, including:

Property address and description

Lease start and end date

A reference to the original lease agreement (for instance, a sentence like "the lease agreement dated...")

Remember to include a copy of the original lease as an attachment to ensure the assignee understands the terms they're adhering to. If not already included in the original lease agreement, be sure to add the following information: Description of rental property, Lease term (how long the lease is good for), Rent amount, and Security deposit amount.

Step 3: Detail the Assignment

State that the assignor is transferring all their interests and obligations in the lease to the assignee. Here, write something like:

"The Assignor hereby assigns, transfers, and conveys to the Assignee all of the Assignor's rights, title, and interest in and to the Lease, together with all the Assignor's obligations, liabilities, and duties under the Lease."

This means that the assignor is transferring all of their interests and obligations in the lease to the assignee. This includes any future rent payments, repairs and maintenance responsibilities, notices of default by either party, and so on.

Step 4: Landlord's Consent

Many leases require the landlord's consent to assign the lease. The assignor should request written consent from the landlord and include a clause like:

"The assignment of the lease is not valid unless and until the landlord provides written consent."

This is followed by a place for the landlord to affirm consent by signing or initialing. This is important because the landlord can elect to withhold consent and the assignment will not be valid. If this is the case, you may need to provide additional consideration for your landlord's assent (for example, an increase in rent).

Step 5: Assignee Acceptance

Include a statement in which the new tenant agrees to the assignment and the terms of the lease. It may look like:

"The Assignee hereby accepts this assignment, assumes all duties and responsibilities under the Lease, and agrees to perform all of the Assignor's obligations under the Lease."

You need to do this because the new tenant needs to have an affirmative acceptance of the assignment in order for it to be valid. This is typically done through a letter from the assignee stating that they agree to perform all of your obligations under the lease.

Get Your Assignment of Lease Template with a Legal GPS Subscription

Step 6: Signature and Date

Every binding legal document needs a date and a signature. Make sure that there is a proper place for the assignor and the assignee to sign and print their names, with a line for the date.

By following these clear, actionable steps, you'll be able to construct an effective Assignment of Lease agreement. Remember, every situation is unique, so adjust the template as necessary, being sure to include all relevant details.

Clear so far? Great! Now, let's focus on the tips to draft a perfect Assignment of Lease.

Tips to Draft a Perfect Assignment of Lease

Accurate Dates: Be sure to include the date when this agreement will take effect. Precision avoids any confusion about durations, when the assignee takes over, or when the assignor's obligations end.

Clear Terms: This document should restate the terms of the original lease. The assignee needs a clear understanding of what they're stepping into. Bit ambiguous? Think of it like this: the assignee should be able to step into the assignor's shoes comfortably.

Specify Rent Terms: Stating the rent amount, due dates, and method of payment in the assignment helps create a record of the agreed-upon rent terms, ensuring no misunderstanding arises in the future.

Specify the Term: The assignment should state how long the new lease lasts. For example, if the original lease is for one year, then the assignee will assume only a one-year term.

Specify Other Conditions: If there are other conditions in place—such as tenant improvements or utility allowances—then specify these too.

An assignment of lease doesn't have to be a formidable task to overcome. With a cautious and considered approach, these documents can be a smooth and seamless part of managing a successful lease transition.

Our contract templates can offer you even more support, empowering you towards crafting an excellent and individualized Assignment of Lease ready for your task. So why not take your next step towards leasing success and check them out today? Click here to get started!

Get Legal GPS's Assignment of Lease Template Now

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Navigating the assignment of a residential lease

A landlord can assign his leases to a new buyer of his building. Likewise, a tenant may be able to assign his lease if he needs to relocate. Find out how to assign your lease and what you can do to protect yourself when doing so.

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Assignment of lease by the tenant

Assignment of lease vs. sublease, assignment of lease by the landlord.

As a tenant, you may want to get out of your residential lease without paying the remaining rent. Likewise, if you're a landlord and sell your rental property, the buyer must now collect rent from the tenants, who may have no idea you sold the property. In both situations, assignment of a lease with a release for the tenant and assignment of leases with notice by the landlord accomplish these goals.

If you're the tenant and want to leave before the end of your lease term, you may be able to assign your lease to a third party if the landlord doesn't let you out of the lease. The third party then becomes the new tenant, who is bound by the terms of the original lease and pays rent to the landlord.

Most often, the lease won't permit assignment without the landlord's approval, but leases often state that the landlord cannot unreasonably withhold consent. As long as you produce a tenant who's shown a history of payment under prior leases and has been a model tenant, a landlord should consent to assignment.

The assignment of lease form should include places for the tenant-assignor, the new tenant-assignee, and the landlord to sign. If the master lease allows assignment, then the tenant doesn't need the landlord's permission; the tenant can sign an assignment of lease agreement without the landlord's signature.

If the landlord allows an assignment of the lease, you, as the tenant, also want him to sign a release stating that you're not responsible for the new tenant's failure to pay or for any damage she causes. Without such a release, you may still be liable for both.

When you, as the tenant, assign the lease, you sign an agreement that either reads “Assignment of Lease," “Lease Assumption Agreement," or “Assignment and Assumption Agreement." An assumption of the lease means that the new tenant assumes your obligations, such as paying rent and keeping the apartment in good condition.

An assignment of a lease transfers the tenant's entire rights in the property to a third party. With a sublease, on the other hand, the tenant transfers only a portion of the remaining lease. For example, if the original tenant has six months remaining on his lease and he gives the entire six months to a third party, the tenant is permanently assigning his rights to live on the property to the third party. If, however, the tenant allows that third party to stay at the premises for only three months, and the tenant intends to return after three months, he is subleasing the premises.

A landlord can assign the right to collect rent to someone who has purchased the property. An assignment of lease from the seller to the buyer allows the new landlord to collect rent from any and all current tenants in the building. The language in the landlord's assignment of lease agreement can include assignment of security deposits, if the parties agree to it. An assignment of leases by the landlord to the buyer affords protection to the buyer so he can collect rent.

An assignment of leases by the landlord to the buyer is meaningless if tenants aren't aware the landlord sold the property, which is why it's important for the assignor-landlord to give tenants proper notice. A notice of assignment of lease, which is a form signed by both the assignor-landlord and the assignee, or new landlord, is one way to give notice. Another way is to send a letter on the landlord's letterhead. Either way, the notice must include the new landlord's address and how rent is to be paid.

Both landlords and tenants who become assignors should sign a formal assignment of lease agreement, which an online service provider can prepare for you. If you're the tenant who has assigned your lease, try to get a release or you'll still be liable to the landlord. If you're the landlord, make sure you can count on the new tenant to pay the rent before you release the primary tenant from his obligations under the lease.

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Assignment of Rents & Leases

Assignment of rents and leases in business and real estate transactions.

An “Assignment of Rents and Leases” is a crucial legal instrument that significantly impacts commercial and residential real estate, and mergers and acquisitions of real estate. Having a properly drafted and executed assignment means the rights and assets that are transferred give the new party (the assignee) the right to receive payments.

What is an assignment of rents and leases?

An assignment of rents and leases is a legal agreement in which the individual or company entitled to receive payments transfers that right to another party. Most often, this occurs (1) when a property owner hires a property manager, or (2) in acquisitions, such as a property management company selling their accounts to another property management company or a commercial landlord selling their portfolio to a buyer.

How is an assignment of rents and leases used?

This arrangement is often utilized in business sales, account sales, financing, and investment transactions as a means of securing debt or protecting the interests of the lender or property owner.

In the financing context, an assignment often grants the lender or assignee the authority to collect and apply the rents from the property should the borrower default on their loan; this is important when the borrower collateralizes real estate in order to receive the loan. In a property management context, an assignment often serves to effectively transfer management rights to the new company.

An assignment of rents and leases is probably most commonly used in a commercial real estate context when there is a sale of a commercial property, or in the residential real estate context when there is a change in property managers.

What terms should be included in an assignment of rents and leases?

Certain components should be included in a proper assignment. Here are a few of the foundational terms for an assignment of rents and leases:

• Parties. All parties should be clearly identified and defined. This can include the borrower, lender, assignee, assignor, successor, etc.
• Property description. The real estate parcel(s) involved in the assignment should be described by legal description, street address, and more.
• Lease terms, rents, and disclosures. The actual lease agreements that are being transferred to the new landlord, property manager, lender, etc. should be provided to the assignor/successor, along with an easy-to-read schedule of rents and other crucial details per parcel or premises.
• Rights and obligations. Each party should have their rules, permissions, and contractual rights and obligations outlined in the assignment language. The rights and obligations of each stakeholder will be widely varied based on the needs and financial position of each party, the existing leases being assigned, and the specifics of the subject properties.

Best Commercial Real Estate Attorneys in Oklahoma

It is crucial to engage an attorney with experience in properly negotiating, drafting, and executing assignments of rents and leases. They can guide you through the process, ensuring that the assignment is tailored to your specific needs and complies with all relevant legal requirements. The attorneys of Avenue Legal Group have the experience you need and want in your transaction. Contact our firm to discuss your transaction, assignment of rents and leases, or other real estate documentation.

Looking for local counsel in Oklahoma for your commercial real estate transaction? Our firm frequently works with attorneys, investors, and lenders from outside the state. Contact us by call, text, email, or website submission to discuss your matter.

Other helpful information:

• Commercial Real Estate Transactions in Oklahoma
• Due Diligence in Oklahoma Real Estate Transactions
• Essential Terms for Every Commercial Lease
• Attorney for Real Estate Contract Review
• Estate Planning
• Real Estate and Investing

Have Questions?

What is Assignment of Lease?

An assignment of lease, or lease assignment, is a critical concept in property management that, when properly understood and managed, can significantly impact the fluidity and adaptability of lease agreements.

This article aims to clarify the process, emphasizing the significance, consequences, and best practices for landlords and property managers to navigate these transactions smoothly.

What is an Assignment of Lease?

Lease assignment occurs when an existing tenant (assignor) transfers their rights and obligations under a lease agreement to a new tenant (assignee).

Unlike subletting, where the original tenant retains some degree of responsibility for the lease, a lease assignment completely transfers the lease obligations to the assignee, making them directly responsible to the landlord for rent and other lease obligations.

Key Features:

• Complete transfer : The original tenant relinquishes their rights to the property.
• Landlord approval : Most lease agreements require landlord approval for an assignment to be valid.
• Obligation shift : All tenant obligations under the lease are transferred to the assignee.

The Importance of Lease Assignment in Property Management

Consider how these arrangements increase flexibility and benefit all parties.

• Flexibility : Allows tenants to move or expand without breaking their lease.
• Financial stability : Ensures continuous occupation and rent payment for the landlord, reducing vacancy periods.
• Tenant suitability : Allows landlords to vet and approve new tenants, maintaining control over who occupies the property.

Navigating the Process

Successfully managing lease assignments involves several critical steps and considerations:

• Reviewing the original lease : Before proceeding, confirm the lease terms allow for assignment and the conditions under which they are applicable.
• Vetting the assignee : Conduct thorough background and credit checks on the potential assignee to ensure they meet your tenant criteria.
• Landlord approval : The assignor should obtain written approval from the landlord before finalizing the assignment.
• Assignment agreement : Draft an assignment agreement detailing the transfer of responsibilities from the assignor to the assignee. Make sure all parties sign it.
• Amending the lease : Consider amending the original lease to reflect the tenant change and ensure all lease terms remain enforceable.

Best Practices

To streamline the process and protect your property interests, consider these best practices:

• Clear assignment clauses : Include specific clauses in your original lease agreements to set clear expectations and processes from the start.
• Maintain communication : To ensure a smooth transition, keep open lines of communication with both the assignor and assignee throughout the process.
• Document everything : Ensure all agreements and approvals are documented in writing to protect each party’s rights and obligations.
• Seek legal advice : Consult with legal professionals to navigate complex situations.

An assignment of lease offers a flexible solution for tenants seeking to exit a lease early and for landlords aiming to maintain continuous occupancy and income.

By understanding the intricacies of lease assignments and employing strategic management practices, landlords and property managers can effectively navigate these transactions, ensuring a seamless transition for new and departing tenants while safeguarding their property interests.

Properly managed, these arrangements can enhance the adaptability of lease agreements , benefiting landlords, tenants, and property managers alike.

What is “Assignment of Income” Under the Tax Law?

Gross income is taxed to the individual who earns it or to owner of property that generates the income. Under the so-called “assignment of income doctrine,” a taxpayer may not avoid tax by assigning the right to income to another.

Specifically, the assignment of income doctrine holds that a taxpayer who earns income from services that the taxpayer performs or property that the taxpayer owns generally cannot avoid liability for tax on that income by assigning it to another person or entity. The doctrine is frequently applied to assignments to creditors, controlled entities, family trusts and charities.

A taxpayer cannot, for tax purposes, assign income that has already accrued from property the taxpayer owns. This aspect of the assignment of income doctrine is often applied to interest, dividends, rents, royalties, and trust income. And, under the same rationale, an assignment of an interest in a lottery ticket is effective only if it occurs before the ticket is ascertained to be a winning ticket.

However, a taxpayer can shift liability for capital gains on property not yet sold by making a bona fide gift of the underlying property. In that case, the donee of a gift of securities takes the “carryover” basis of the donor.  

For example, shares now valued at $50 gifted to a donee in which the donor has a tax basis of $10, would yield a taxable gain to the donee of its eventual sale price less the $10 carryover basis. The donor escapes income tax on any of the appreciation.

For guidance on this issue, please contact our professionals at 315.242.1120 or [email protected] .

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• What is an assignment of rents?

by Brian D. Moreno, Esq., CCAL | General Real Estate Law , Homeowners Association

With the collection of assessments, community associations are always looking for creative ways to increase the chance of recovery.  One underutilized remedy that may provide associations good results is an assignment of rents.  If an owner-landlord fails to pay HOA assessments but continues to collect rent payments from his or her tenant, the association should consider rent assignment.  There are prejudgment and post-judgment rent assignment remedies that can be pursued with regard to the delinquency.  A post-judgment rent assignment can be pursued by way of a request to the court after a Judgment is entered against the owner-landlord.

A prejudgment rent assignment can be pursued even before filing a lawsuit if executed properly.  In California, Civil Code Section 2938 regulates the formation and enforcement of the assignment of rents and profits generated by a lease agreement relating to real property.  It provides that “[a] written assignment of an interest in leases, rents, issues, or profits of real property made in connection with an obligation secured by real property. . .shall, upon execution and delivery by the assignor, be effective to create a present security interest in existing and future leases, rents, issues, or profits of that real property. . . .”   Once a written assignment of rents is properly authorized and formed, the law creates a security interest (i.e., lien) against the rents and profits paid by a tenant. 

The question then is whether the association’s CC&Rs, by itself, creates an assignment of the right to a tenant’s rent payment in favor of the association.  Indeed, section 2938(b) provides that the assignment of an interest in leases or rent of real property may be recorded in the same manner as any other conveyance of an interest in real property, whether the assignment is in a separate document or part of a mortgage or deed of trust.  Since a homeowners association’s CC&Rs is a recorded document and contains covenants, equitable servitudes, easements, and other property interests against the development, it follows that the assignment of rents relief provided in Section 2938(b) can be extended to community associations provided the CC&Rs contains an appropriate assignment of rents provision.

Section 2938, however, does not clarify whether the CC&Rs document on its own creates a lien and enforceable assignment right.  Moreover, a deed of trust is much different than a set of CC&Rs, in that the deed of trust creates a lien against the trustor’s property upon recordation, while a homeowners association would not have a lien until an owner becomes delinquent with his or her assessments and the association records an assessment lien against the property.  Therefore, depending on the scope of the assignment of rents provision in the CC&Rs, a homeowners association would likely need to record an assessment lien first before pursuing rents from a tenant.  Moreover, even after a lien is recorded, homeowners associations should consider adding a provision in the assessment lien giving notice to the delinquent owner that an assignment right is in effect upon recordation of the assessment lien.  Nevertheless, association Boards should consult with legal counsel to ensure proper compliance with the law.

Once the assignment right becomes enforceable, the next issue is how the Association can and should proceed.  Section 2938(c)(3) allows the association to serve a pre-lawsuit demand (a sample of which is included in the statute) on the tenant(s), demanding that the tenant(s) turn over all rent payments to the association.  This can be a powerful tool for homeowners associations.  Moreover, if the tenant complies, the association will receive substantial monthly payments that can be applied towards the assessment debt, and collecting the funds does not appear to preclude the association from pursuing judicial or non-judicial foreclosure proceedings at a later time.

While homeowner associations have the option of pursuing a lawsuit against the delinquent owner and seeking to collect the rent payments after a judgment has been obtained, there are obvious advantages to enforcing the assignment of rents provision prior to pursuing litigation.  A pre-lawsuit assignment of rents demand may prove to be more effective and cheaper.  Additionally, the tenant affected by the assignment of rents demand may place additional pressures on the delinquent owner/landlord having received such a demand.  Given this, the options available pursuant to Section 2938, including the pre-lawsuit demand for rents, should at least be considered and analyzed before action is taken.

Truly, the initial pre-lawsuit demand for rents may persuade the landlord-owner to resolve the delinquency with the association in the face of the potential disturbance of the landlord-tenant relationship.  Even if the tenant fails to comply with the demand and/or the owner fails to bring the account current, the association could nonetheless pursue foreclosure remedies and/or seek to have a receiver appointed to specifically enforce the assignment of rents provision.

In sum, if a delinquent homeowner is leasing the property to a tenant, the homeowners association should consider making a pre-lawsuit demand for rent payments.  If the association’s CC&Rs does not contain an assignment of rents provision, the board of directors should consider amending the CC&Rs to include an appropriate provision.  Without question, the pre-lawsuit demand for rents could provide an excellent opportunity for recovery of unpaid assessments during these difficult economic times.

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Legal Aspects of Lease Assignments

A well-structured lease assignment agreement is vital to facilitating a seamless transfer of rights and obligations from the original lessee to the assignee. The agreement must address critical legal aspects, including liability allocation, landlord consent, and dispute resolution mechanisms. Key considerations include the assignor's retained liabilities, the assignee's assumed duties, and the process for obtaining landlord consent. Clearly defining liability and indemnification provisions is also imperative. By understanding the legal intricacies of lease assignments, parties can navigate the process with confidence and mitigate potential risks. As the complexity of lease assignments unfolds, it becomes clear that meticulous planning is necessary to protecting all involved parties.

Table of Contents

Understanding Lease Assignment Agreements

A lease assignment agreement is a contractual document that formalizes the transfer of rights and obligations from the original lessee to the assignee, outlining the terms and conditions of the assignment. This document is vital in facilitating a seamless transfer of interests, avoiding potential disputes, and providing clarity on the responsibilities of all parties involved. A well-structured lease assignment agreement should address key aspects, including the effective date of assignment, rent and payment obligations, and any ongoing liabilities. It is also vital to distinguish between a lease assignment and a lease novation, as the latter involves the replacement of the original lease agreement with a new one, whereas assignment involves the transfer of existing rights and obligations. Additionally, the tax implications of a lease assignment, including assignment taxation, must be carefully considered to guarantee compliance with relevant laws and regulations. By understanding the intricacies of lease assignment agreements, parties can navigate the complexities of lease transfers with confidence, minimizing potential risks and disputes.

Assignor and Assignee Rights Obligations

In the context of lease assignments, the assignor and assignee have distinct rights and obligations that govern their respective roles. The assignor, having transferred their interest in the lease, retains certain liabilities, while the assignee assumes specific duties and responsibilities. Understanding these reciprocal obligations is crucial in navigating the complexities of lease assignments.

Assignor's Rights and Liabilities

Upon assigning a lease, the assignor's rights and liabilities are substantially altered, as they are released from primary liability, yet remain secondarily liable for the assignee's performance. This shift in liability has significant implications for the assignor, particularly with regards to tax implications. The assignor may be liable for any outstanding tax obligations incurred prior to the assignment, and may also be subject to tax implications arising from the assignment itself. In addition, the assignor's insurance coverage may also be affected, as the policy may not automatically transfer to the assignee. It is crucial that the assignor reviews their insurance coverage to guarantee that they are adequately protected in the event of any claims or damages arising from the assignee's performance. The assignor's ongoing liability for the assignee's performance highlights the importance of due diligence in selecting a suitable assignee and verifying that the assignment is properly documented. By understanding the assignor's rights and liabilities, parties can better navigate the complex legal landscape of lease assignments.

Assignee's Duties and Obligations

The assignee, as the new lessee, assumes primary liability for performing the lease obligations, including payment of rent, taxes, and insurance premiums, and is responsible for complying with the lease terms and conditions. This includes adhering to the original lease agreement, as well as any subsequent modifications or amendments. The assignee is also bound by the fiduciary standards of a lessee, which entails exercising due care and diligence in fulfilling their obligations under the lease.

As a successor in interest, the assignee may be held liable for any breaches or defaults by the assignor, a concept known as successor liability. This means that the assignee may be responsible for resolving any outstanding issues or disputes that arose during the assignor's tenure. To mitigate this risk, the assignee should conduct thorough due diligence on the lease and the assignor's performance before assuming the lease obligations. By understanding their duties and obligations, assignees can navigate the complexities of lease assignments and minimize potential liabilities.

Landlord Consent and Approval Process

Landlord consent is a critical component of the lease assignment process, as it guarantees that the landlord's interests are protected and that the assignment does not violate the terms of the original lease agreement. This consent process ensures that the landlord is aware of the assignment and has approved the transfer of obligations from the assignor to the assignee.

To facilitate a smooth consent process, the following steps should be taken:

• Review the lease agreement : Identify any clauses that may impact the assignment, such as waiver clauses or silent partners.
• Notify the landlord : Provide the landlord with written notice of the assignment, specifying the terms and conditions of the transfer.
• Obtain consent : Secure the landlord's written consent to the assignment, which may be conditional upon certain requirements.
• Document the process : Maintain a record of all correspondence and agreements related to the consent process.

Lease Term and Condition Amendments

During the lease assignment process, amendments to the original lease terms and conditions may be necessary to reflect the changed circumstances. This is particularly important when the assignee requires modifications to the lease to suit their operational needs. In such cases, the lease agreement should include alteration clauses that permit alterations to the lease terms. These clauses facilitate the parties to agree on changes to the lease, guaranteeing that the modified terms are legally binding.

Term extensions are a common amendment, allowing the assignee to occupy the premises for a longer period. This may be necessary if the assignee requires additional time to fulfill their business objectives. The lease amendment should clearly outline the extended term, including the revised expiration date and any corresponding changes to the rent or other lease obligations. It is vital to obtain the consent of all parties involved in the lease assignment to the amendments, and that the modified lease terms are properly documented to avoid potential disputes. By including alteration clauses and accommodating term extensions, parties can facilitate a smooth handover and a mutually beneficial agreement.

Liability and Indemnification Provisions

Amendments to the lease terms and conditions, such as term extensions, may also raise questions about the allocation of liability between the assignor, assignee, and landlord, highlighting the need for clear liability and indemnification provisions in the assignment agreement.

In considering liability and indemnification provisions, the following key considerations should be taken into account:

• Insurance Coverage : Securing adequate insurance coverage to mitigate potential risks and liabilities.
• Risk Allocation : Clearly defining the allocation of risks and liabilities between the assignor, assignee, and landlord.
• Financial Backing : Obtaining sufficient financial backing to secure the performance of contractual obligations.
• Contractual Protections : Including contractual protections, such as indemnity clauses, to safeguard against potential losses or damages.

Dispute Resolution and Litigation

In the context of lease assignments, disputes and litigation can arise from various sources, including disagreements over liability, indemnification, and contractual obligations. Effective dispute resolution mechanisms, such as mediation and arbitration, can provide an alternative to litigation, offering a more efficient and cost-effective means of resolving disputes. In situations where litigation is unavoidable, developing a well-planned litigation strategy is essential to achieving a favorable outcome.

Mediation and Arbitration

Disputes arising from lease assignments can be effectively resolved through alternative dispute resolution mechanisms, including mediation and arbitration, which offer a more efficient and cost-effective approach to litigation. Mediation, in particular, is a valuable tool for conflict avoidance, allowing parties to engage in open communication and negotiate a mutually beneficial agreement. Neutral evaluation, a process in which a neutral third-party specialist assesses the strengths and weaknesses of each party's case, can also facilitate settlement.

Key benefits of mediation and arbitration in lease assignment disputes include:

• Cost savings : Mediation and arbitration can substantially reduce the financial burden of litigation.
• Time efficiency : Alternative dispute resolution mechanisms can resolve disputes more quickly than traditional litigation.
• Flexibility : Mediation and arbitration allow parties to craft creative solutions tailored to their specific needs.
• Confidentiality : Alternative dispute resolution mechanisms can maintain confidentiality, protecting sensitive business information.

Litigation Strategies

While alternative dispute resolution mechanisms can be effective in resolving lease assignment disputes, litigation may be necessary when negotiations break down or the parties' interests are fundamentally at odds, requiring a more formal and adversarial approach to dispute resolution. In such cases, a well-crafted litigation strategy is vital to achieving a favorable outcome.

Effective litigation strategies in lease assignment disputes involve careful trial preparation, including thorough document review, witness preparation, and specialized testimony. Skilled attorneys must develop a deep understanding of the lease agreement, assignment terms, and relevant legal precedents to build a compelling case. In the courtroom, effective advocacy and persuasive storytelling are vital to persuading judges and juries. Courtroom tactics, such as strategic questioning and evidence presentation, can greatly impact the outcome of the case. Additionally, attorneys must be prepared to respond to unexpected developments and adapt their strategy accordingly. By combining meticulous preparation with adept courtroom skills, parties can increase their chances of success in lease assignment litigation.

Frequently Asked Questions

Can a lease assignment be terminated by the landlord?.

A lease assignment can be terminated by the landlord if the assignee breaches Landlord obligations or if the Lease duration is exceeded, allowing the landlord to regain possession of the property.

Is a Lease Assignment the Same as a Sublease?

A lease assignment and sublease differ in contractual distinctions, as an assignment transfers all rights and liabilities, whereas a sublease creates a new, separate agreement, shifting liability between parties.

What Happens to the Security Deposit in a Lease Assignment?

In a lease assignment, the security deposit typically remains with the original landlord, who is responsible for refunding the deposit to the assignor. Alternatively, the deposit can be transferred to the assignee, facilitating a smooth handover and avoiding potential disputes over deposit refunds.

Can an Assignee Assign the Lease Again to Another Party?

In a successive assignment, an assignee may reassign the lease to another party, but this secondary assignment does not extinguish the original assignee's privity obligations, which remain intact and binding.

Is a Lease Assignment Considered a Novation of the Original Lease?

A lease assignment is not inherently a novation of the original lease, as it does not extinguish the original contractual obligations; rather, it transfers rights and duties, with the assignee assuming liability, while the assignor remains liable, pending contractual or legal precedent modifications to lease obligations.

A lease assignment agreement is a contractual arrangement where the original tenant (assignor) transfers their rights and obligations to a new tenant (assignee). This agreement outlines the terms and conditions of the assignment, including the effective date, rent, and lease duration.

Assignor and Assignee Rights and Obligations

The assignor and assignee have distinct rights and obligations. The assignor is released from liability, while the assignee assumes the lease obligations. The assignee is entitled to occupy the premises and enjoy the benefits of the lease.

Landlord consent is typically required for a lease assignment. The landlord may withhold consent if the assignee lacks financial stability or has a poor credit history. The approval process may involve a thorough review of the assignee's credentials.

A lease assignment may involve amendments to the original lease terms and conditions. The parties may renegotiate the lease duration, rent, or other provisions to reflect the changed circumstances.

Lease assignment agreements often include liability and indemnification provisions to protect the parties from potential claims. The assignor and assignee may agree to indemnify each other against breaches of the lease terms.

Disputes arising from lease assignments can be resolved through alternative dispute resolution mechanisms, such as arbitration or mediation. Litigation may be necessary in cases where the parties fail to resolve their disputes amicably.

Lease assignments involve complex legal considerations. Careful attention to the assignment agreement, landlord consent, and lease term amendments is essential to ensure a smooth transfer of lease rights and obligations.

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Assignment of Rents

What you need to know about Assignment of Rents and Leases

Collateral Assignment of Rents

The collateral assignment of rents, on the other hand, grants the lender a more delimited authority. In this arrangement, the property owner conveys control over rental income to the lender, but the lender’s authority is conditional. It comes into effect only when the borrower fails to meet their obligations, typically by defaulting on the loan. Collateral assignment strikes a balance between risk and control, offering lenders a measure of security without exercising complete dominance over the property’s income.

The decision to opt for collateral assignment reflects a nuanced approach for lenders. While they seek a level of control, it is conditional and comes into play only when specific circumstances, such as borrower default, are met. For property owners, collateral assignment provides a more balanced approach, allowing them to maintain a degree of autonomy unless triggered by specific conditions. This can be appealing to property owners who wish to preserve control over rental income while providing lenders with a security mechanism.

The Cost of Assignment of Rents

A primary consideration in the cost of assignment of rents is legal fees. Engaging legal professionals in the drafting and execution of necessary documents is essential, as the legal documents define the terms and conditions of the assignment, ensuring clarity and enforceability. Additionally, there will be costs associated with registering the document according to the Land Titles Act.

Negotiating the allocation of costs is a critical aspect of the assignment of rents process. Lenders and borrowers may discuss and agree upon how certain costs will be distributed between the parties. Clearly defining these terms in the agreement can prevent misunderstandings and disputes in the future. 

Releasing Assignment of Rents

Releasing assignments of rents is a collaborative process requiring mutual agreement between the property owner and the party holding the assignment rights. However, in most cases it will only be released when the mortgage has been paid.

To initiate the release, a formal agreement or termination document is drafted, clearly outlining the terms, conditions, and effective date of the release. Negotiations may be required to get to a place where you can be released if possible. Once the release agreement is prepared, both parties execute it, with signatures often witnessed or notarized in accordance with local laws. 

If tenants were previously informed of the assignment, they should be given written notice to inform them of the release, with clear instructions regarding future rent payments. Filing the release agreement or necessary notices with the Alberta Land Title Office ensures the update of property records. 

How a Lawyer Can Help With Assignment of Rents

Getting assistance from a real estate lawyer is essential for both lenders and borrowers involved in the assignment of rents in Alberta. Lawyers bring essential expertise in real estate law to the process, adeptly navigating the intricacies of the law and the legal landscape.

Legal Expertise and Document Drafting

Lawyers play a pivotal role in drafting comprehensive and legally sound assignment agreements. Their deep understanding of Alberta’s real estate law and legal frameworks ensures that the terms are clear, enforceable, and comply with relevant regulations. 

Dispute Resolution and Advocacy

In cases of disputes, lawyers serve as advocates, representing the interests of their clients. They employ negotiation skills to facilitate resolutions and, when necessary, escalate matters to litigation to seek a fair outcome.

Legal Compliance and Risk Management

Lawyers ensure legal compliance and proactively manage risks associated with the assignment. They stay updated on legal changes, identify potential pitfalls, and guide clients in making informed decisions to avoid legal complications.

Customization of Agreements

Recognizing the uniqueness of each assignment, lawyers tailor their services to the specific needs, property characteristics, and preferences of the parties involved. This customization ensures that the assignment of rent agreement aligns with the context of the transaction.

Land Titles and Regulatory Compliance

Lawyers also ensure that the assignment of rents complies with Alberta’s Land Titles Act , overseeing proper registration of the land titles. This step is crucial for transparency, legal clarity, and enforceability of the agreement.

Recording Interests and Due Diligence

Lawyers navigate the process of recording interests, ensuring that assignments of rents are properly registered in the land titles. This not only serves as public notice but also aids in due diligence for buyers and mortgagors, allowing them to make informed decisions in their real estate transactions.

Navigating the real estate landscape can be tricky. Making the right decisions can have a significant financial impact when purchasing or selling a property. If you would like help with your assignment of rents matter, or if you are unsure whether assignment of rents is in your best interest, contact DLegal today.

Our experienced real estate lawyers know the ins and outs of Alberta real estate law . They will provide legal advice and guidance on any assignment of rents matters or other real estate matters.

The DLegal team is here to support. We will do our best to assist or connect you with those who can help.

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Assignment of leases and rents: absolutely collateral.

[caption id="attachment_25168" align="aligncenter" width="616"]

Jeffrey B. Steiner[/caption] Generally speaking, rents comprise the principal income derived from commercial real property ownership prior to the sale of the property. In traditional, non-recourse lending, where the special purpose entity borrower may become insolvent, lenders rely on the rent and related income from the property as security for the loan. One mechanism employed by commercial mortgage lenders to secure their interest in the rental stream is to require in the mortgage document an assignment of leases and rents pursuant to which the borrower ‘presently and absolutely’ assigns to the lender the rents from the real property. In turn, the lender grants the borrower a license, revocable upon an event of default, to collect and use the rents. Lenders have elected to include the language purporting to affect a “present” and “absolute” transfer with the hope of achieving the benefits of an “absolute” assignment of the rents over a “collateral” assignment. If the assignment is deemed to be an “absolute” transfer of legal title of the rents from the borrower to the lender, then such assignment would become enforceable immediately upon an event of default and revocation of borrower’s license to collect and use the rents—meaning, that the lender would have the right and ability to collect the rents directly from the tenants as soon as an event of default has occurred. By contrast, if the assignment is considered “collateral,” the lender runs the risk that, following an event of default and a resulting borrower bankruptcy, the rents will be deemed property of the bankruptcy estate, subject to a bankruptcy plan and protected by the Bankruptcy Code’s automatic stay. Case Law New York case law surrounding the treatment of assignments of leases and rents, whether by “absolute” or “collateral” assignment nominally suggests that judges will give effect to the intended purpose of these assignments, ignoring such “absolute” assignment language and interpreting the assignment as a “collateral” one for the mortgage loan. For this reason, a majority of New York state courts have ruled that lenders cannot create an absolute assignment of leases and rents in a mortgage transaction regardless of the language used. In Dream Team Assocs. v. Broadway City , 2003 N.Y. Slip Op 50894U, 2003 WL 21203342 (N.Y.Civ.Ct. May 7, 2003), for instance, the court addressed the question of whether an assignment of rents constitutes an absolute assignment and ruled that “[u]nder New York law…the language used in the assignment instrument itself is not determinative of what rights are actually transferred.” Relying on the fact that New York is a “lien theory” state rather than a “title theory” state, state courts typically hold that an assignment of leases and rents, regardless of the wording of the provision or form taken, will not be a present assignment when given as security for the loan. It follows then that, if assignments of rents do not serve to transfer immediate title to the rents, they instead transfer equitable title and constitute a pledge of the rents to which the lender cannot become entitled until taking some extra, affirmative enforcement steps. In In re Soho 25 Retail , No. ADV. 11-1286-SHL, 2011 WL 1333084, at *6–8 (Bankr. S.D.N.Y. March 31, 2011), the court sought to summarize certain potential steps to enforcement as follows: “requesting the appointment of a receiver to collect the rents, demanding or taking possession [of the property], commencing foreclosure proceedings, or seeking an order for the sequestration of rents.” These additional, affirmative steps do not seem onerous at first glance. However, as any mortgage lender will attest, the foreclosure process in New York State is slow. Furthermore, mortgage lenders are properly advised to avoid the exercise of any such rights prior to an appointment of a receiver or the consummation of foreclosure for fear of being found to be a mortgagee in possession, which could cause lenders to be deemed to have assumed all of the same duties and liabilities of the owner of the property. The rule was recently restated by the court in Allen v. Echeverria , 11 N.Y.S.3d 170, 173 (N.Y. App. Div. 2015), that is, a mortgagee who takes possession of the property mortgaged as collateral is “bound to employ the same care and supervision over the mortgaged premises that a reasonably prudent owner would exercise in relation to his own property; he is bound to make reasonable and needed repairs, and is responsible for any loss or damage occasioned by his willful default or gross neglect in this regard.” Most commercial mortgage lenders are not in the business of managing properties and do not want to be subject to the liability that could arise during such management, especially when the title to the property remains vested in an adverse party, i.e., its defaulted borrower. In light of the bankruptcy risks and the potential that an assignment of rents will not be deemed an absolute assignment, vigilant lenders will avail themselves of alternative mechanisms to exert control over the rents, namely, (i) cash management arrangements and (ii) guaranties that provide for liability in the event of a misappropriation of the rents. Through “lockbox” arrangements between the lender, the borrower and third-party banks, lenders will control the rents deposited by tenants directly into such lender-controlled clearing accounts. The rents will then be distributed according to the terms agreed upon by the parties at closing or otherwise at the direction of the lender in order to pay debt service and to accumulate reserves for the payment of property taxes and insurance. Borrowers will typically have no right to access these funds and, in all cases following an event of default, the banks will be prohibited from following any instructions received from borrowers. For loans in which lenders perceive greater risk, they can structure cash management to exercise greater control of the rents and to make less funds available to the borrower, decreasing the risk that rents will be misused. Additionally, loan documents always provide that, during an event of default, the rents deposited into the cash management accounts will be deemed to be additional collateral for the loan and may be applied by the lender to pay down the debt in lender’s sole discretion. Lenders may also protect against the misuse of rents by including a carve-out to the non-recourse nature of the mortgage loan in a guaranty executed by a borrower-affiliated person or entity. In such a guaranty, the guarantor will be liable to the lender to the extent of any loss suffered by the lender due to the misapplication or misappropriation of rents by the borrower or its affiliates.

Mortgage lenders should not rely on assignments of leases and rents, whether as a clause in the mortgage or as a separate agreement, to protect their interests in the income from their collateral prior to the appointment of a receiver or the final sale of the property at foreclosure. The enforcement of these agreements may take considerable time and money before the lender even gains a legal right to collect rents. Lenders should account for these risks by taking other legal measures which grant them greater control and actually give them enforceable rights immediately upon default. Jeffrey B. Steiner is a member of DLA Piper. Shane Goodhue, a law clerk (assoc.) at the firm, assisted in the preparation of this article.

The Importance of Lease Assignment Agreements

Understanding Lease Assignment Agreements: A Vital Guide for Franchisees

Running a franchise is no small feat, especially when you’re managing multiple locations. Amidst the hustle of daily operations, financial reporting, marketing strategies, and employee management, the importance of lease agreements can often be overlooked. However, understanding and managing lease assignment agreements is crucial for the long-term success and stability of your franchise business.

Lease assignment agreements are crucial in real estate transactions as they facilitate the transfer of lease rights and obligations from one party to another. For tenants, they offer flexibility by allowing them to exit leases before expiration without penalties, while for landlords, they ensure continuity of rental income and compliance with lease terms.

This article will dive deeper into lease assignment agreements, how they can impact your business, and why you should keep an eye on them.

What is a Lease Assignment Agreement?

A lease assignment agreement is more than just a piece of paper; it is a vital legal document that can significantly impact your business operations and financial health. This agreement comes into play when you need to transfer the lease of one of your locations to another party, perhaps when selling a location or restructuring your business. It ensures that the new tenant assumes all rights and responsibilities associated with the lease, protecting both the franchisee and the landlord from potential legal disputes and financial losses.

For franchisees, particularly those with multiple locations, keeping a close eye on lease assignment agreements is essential. These agreements ensure smooth transitions, whether you are expanding, downsizing, or selling parts of your business. They help maintain operational continuity and safeguard your investments, allowing you to focus on growth and profitability without the looming threat of legal complications or unexpected financial burdens.

A lease assignment agreement is a legal document that transfers the rights and responsibilities of an existing lease from one party (the assignor) to another party (the assignee). This is common in business scenarios where a franchisee, who operates multiple locations, wants to transfer the lease of one of their locations to another party.

Why is a Lease Assignment Agreement Important to Franchisees?

For a franchisee with multiple locations, a lease assignment agreement is crucial for several reasons:

Transferring Responsibilities : When a franchisee decides to sell or transfer ownership of one of their locations, they often need to transfer the lease agreement along with it. The lease assignment agreement outlines the terms of this transfer, including the new tenant’s responsibilities for rent, maintenance, and compliance with lease terms.

Avoiding Breach of Contract : Without a proper lease assignment agreement, attempting to transfer a lease to a new tenant could be a breach of contract with the landlord. This could lead to legal issues, including eviction or financial penalties. The agreement ensures that the transfer is done in accordance with the terms of the original lease.

Protecting Investment : For a franchisee, each location represents a significant investment of time and money. Properly managing lease agreements ensures that this investment is protected, even if the franchisee decides to sell or exit a particular location.

Maintaining Brand Reputation : Franchise businesses rely on maintaining a consistent brand image across all locations. Ensuring that lease agreements are transferred smoothly helps maintain this consistency and avoids disruptions in operations that could harm the franchise’s reputation.

Facilitating Growth or Restructuring : Having clear processes for lease assignments makes it easier for franchisees to expand their business by acquiring new locations or reorganizing their existing portfolio. It provides flexibility for future growth or strategic changes.

These agreements mitigate financial risks for both parties and serve as negotiation tools, enabling tenants to find suitable replacements and landlords to vet new occupants. By formalizing the transfer of lease interests, lease assignment agreements provide legal clarity, documentation, and record-keeping, thereby minimizing disputes and ensuring smooth transitions in tenancy arrangements.

Kal Gullapalli, CEO of MPZ Holdings, explains the importance of lease assignment agreements in our latest webinar .

“We spend a lot of time and money on the assignment language. In one scenario, when I first sold a portion of my European Wax Center franchise in early 2020, we were going through a lease assignment. It was 7 stores that I was taking private equity capital on that we were rolling into the new holding company. I offered the landlord everything. So I said, ‘Hey, I’m going to be CEO of the new company. I’m gonna keep my personal guarantee on in the new holding company, you have nothing to worry about’.

6 months later, he held out. There was a time where I even said to the landlord, ‘Here’s $50,000, sign the assignment’. He wouldn’t respond.

I finally got him to sign on March 11th, 2020, just before Covid shut everything down. If this had gone on to mid or late March, my deal with private equity would not have been consummated, which was in the 8 figures. 

It’s really important as you think about these leases that you focus and spend extra money on these assignments and try to make the assignment as liquid as humanly possible”.

The Benefits of Lease Assignments:

Lease assignment agreements play a crucial role in real estate transactions, particularly in the context of commercial leases. Here are some key points highlighting their importance:

Transfer of Lease Obligations :

A lease assignment agreement allows a tenant (assignor) to transfer their rights and obligations under a lease to another party (assignee). This transfer typically includes responsibilities such as paying rent, maintaining the property, and complying with lease terms.

Flexibility for Tenants :

For tenants, lease assignment agreements provide flexibility. They allow tenants to exit a lease before its expiration without incurring penalties or breaking lease terms. This can be beneficial if a business needs to relocate or downsize.

Opportunities for Landlords :

Lease assignment agreements also offer benefits for landlords. They provide landlords with the assurance that the lease obligations will continue to be met even if the original tenant decides to assign the lease to another party. This helps landlords maintain a steady stream of rental income and minimizes vacancies.

Risk Management :

Lease assignment agreements help manage risks associated with leasing property. For tenants, it can mitigate financial risks by transferring lease obligations to a new party. For landlords, it ensures that the property remains occupied and lease terms are honored, reducing the risk of income loss.

Legal Compliance :

By formalizing the transfer of lease rights and obligations through a lease assignment agreement, both parties ensure legal compliance. The agreement outlines the terms of the assignment, including any conditions or restrictions, protecting the interests of both the assignor and the assignee.

Negotiation Tool :

Lease assignment agreements can serve as negotiation tools for both tenants and landlords. Tenants may negotiate favorable terms with prospective assignees to facilitate the transfer, while landlords may negotiate additional guarantees or concessions to mitigate potential risks associated with the new tenant.

Documentation and Record-Keeping :

Having a lease assignment agreement in place provides clear documentation of the transfer of lease rights and obligations. This documentation is essential for record-keeping purposes and can help resolve disputes or misunderstandings that may arise in the future.

What Happens if Lease Assignments Aren’t Handled Correctly?

If lease assignments are not handled properly, it can have significant implications for the franchisee’s business down the road:

Legal Issues : Improperly executed lease assignments can lead to legal disputes with landlords or new tenants, resulting in financial losses or even the loss of the location.

Financial Impact : If a lease assignment is not structured favorably, it could result in increased costs for the franchisee or limit their ability to negotiate favorable terms with the landlord.

Operational Disruptions : Without clear agreements in place, transferring a lease could disrupt operations at the location, affecting revenue and customer relationships.

Impact on Sale Value : When selling a location, having unclear or unfavorable lease terms can reduce the attractiveness of the business to potential buyers, impacting its sale value.

In conclusion , lease assignment agreements are vital components of real estate transactions, offering flexibility, risk management, legal compliance, and negotiation opportunities for both tenants and landlords. They provide a structured framework for the transfer of lease interests while safeguarding the interests of all parties involved.

Leasecake is used by multi-unit operators and franchisees to manage their lease and location data, so they never have to risk losing a location again. To learn more about  Leasecake’s lease management platform  and how we can help you grow your business, manage multiple locations, save money by understanding exactly what’s in your documents, and minimize the risk of overpaying or missing a lease renewal,  schedule a demo .

Using a Lease Audit to Avoid Overpaying Landlords

Mastering advanced lease negotiation with leasecake, you may also like, lease administration: key insights and best practices.

Lease administration is a crucial component of real estate management that encompasses a range of tasks essential to maintaining and optimizing leased properties.

Lease Portfolio Management Software: A Guide to Streamlining Your Lease Portfolio

Lease portfolio management is the strategic oversight and administration of an organization’s collection of lease agreements, essential for optimizing real estate assets and aligning them with business goals

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A banker asked us: General vs specific assignments of rents and leases in Ontario

Q: What is the difference between a general assignment of rents and leases and a specific assignment of rents and leases, and when should I include them in my term sheet for a commercial real estate financing of an Ontario property?

A: In situations where a borrower owns real property in Ontario that either is or will be leased to third party tenants, a lender should consider obtaining either a general assignment of rents and leases or a specific assignment of rents and leases in addition to a mortgage on the secured property. Like a mortgage, an assignment of rents and leases should be registered against title to the subject property, and in addition, should be registered under the applicable personal property security legislation as the rents and leases that are being secured by the assignment fall within the definition of personal property under that legislation. [1]

An assignment of rents and leases, be it a general assignment of rents and leases or a specific assignment of rents and leases, provides a lender with two principal benefits which may be realized by the lender after an event of default:

• it permits the lender to receive the rent payments that the borrower/landlord would otherwise be entitled to, and this revenue stream from the tenants is a significant asset that should be secured; and,
• it permits the lender to step into the shoes of the borrower/landlord and exercise all of the rights and remedies available to the landlord to ensure that the full benefit and value of the lease is realized by the lender, which includes for example, the right to demand payment in the event of non-payment of rent by a tenant and to assign the lease to a purchaser in the event of a power of sale proceeding.

The only difference between a general assignment of rents and leases and a specific assignment of rents and leases is the revenue streams and leases to which they apply. A general assignment of rents and leases applies to all present and future rental income and leases in respect of a particular property. Once in place, a general assignment of rents and leases gives the lender a right to the rental income and the ability to exercise all of the rights of the landlord under a lease in respect of all leases of the property, including but not limited to any new leases, subleases or assignments of lease entered into after the assignment is granted and registered. In contrast to this, a specific assignment of rents and leases only applies to leases which are specifically listed in the document. In the event that any of the specifically listed leases expire or are terminated, and/or a new lease or sublease is put in place, the specific assignment of leases will not apply to this new lease or sublease and the lender will have no right to the rental income or rights resulting from the new lease or sublease.

In most lending situations, the lender will prefer a general assignment of rents and leases as it provides the most comprehensive security. The lender will have security over all rental income, and be able to exercise the rights of the landlord, regardless of who the tenants are in the future, or what leases the borrower has in place at the time of default under the terms of the loan or credit facility. However, where there is a principal or anchor tenant that represents a preponderance of the rental income, and/or the borrower objects to a general assignment of rents and leases securing all rents and leases as too broad a security interest, the lender may only be interested in securing the rental income and landlord rights associated with a specific principal or anchor lease, or a particular group of leases. In such a situation, a specific assignment of rents and leases may be a reasonable compromise position for a lender to adopt. Alternatively, in situations where multiple lenders are taking security in a particular parcel of real property, specific assignments of rents and leases 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.

The above is a general overview of general and specific assignments of rents and leases. The professionals in Gowling WLG (Canada) LLP’s financial services practice group would be pleased to discuss your lending and real property security needs in greater detail, and help you chose the security documents most appropriate for your lending needs.

[1] Some financial institutions have chosen to incorporate into their Standard Charge Terms for their mortgages various provisions that serve as a general assignment of rents, and they do not register a separate general assignment of rents as a result.

NOT LEGAL ADVICE. Information made available on this website in any form is for information purposes only. It is not, and should not be taken as, legal advice. You should not rely on, or take or fail to take any action based upon this information. Never disregard professional legal advice or delay in seeking legal advice because of something you have read on this website. Gowling WLG professionals will be pleased to discuss resolutions to specific legal concerns you may have.

Assignment of Leases and Rents (Commercial Real Estate Loan) (Pro-Lender) (NJ) | Practical Law

Assignment of Leases and Rents (Commercial Real Estate Loan) (Pro-Lender) (NJ)

Practical law standard document w-029-4459  (approx. 25 pages).

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• Capital gains tax on property leases
• Technical activities and advice

Assignment of a lease

Assignment of a long lease, assignment of a short lease, grant of a lease, grant of a long lease, grant of a short lease, acca guide to... getting out of a lease.

A property lease is basically a right to use an asset. A lease is a contract by which one party (lessor) gives the use and possession of land and building to another party (lessee) for a specific period of time, usually in return for a specific rent.

This contrasts with a licence, which entitles a person (licensee) to the use of the property, but which is subject to termination at the will of the owner of the property (licensor).

Leases usually run for many years, while licences cover a relatively short period of time (up to two years).

The key point in determining the tax treatment of a lease transaction is to establish whether there is an assignment of a lease or a grant of a lease.

An assignment of a lease is the legal term used for the sale of a lease. On assignment, the owner relinquishes rights over the property.

A grant of a lease is the creation of a new asset. The person who owns the property grants a lease to a tenant for a specific period of time; however, the rights in the property will eventually revert back to the freehold landlord.

The tax treatment on the assignment of a lease depends on whether the taxpayer is selling a long or  short lease.

A long lease is a lease that has more than 50 years to run at the date it was sold; a lease with less than 50 years to run is a short lease.

The capital gains tax (CGT) computation on the assignment of a long lease is quite straightforward; the original cost is deducted from the proceeds and the resulting gain is then subject to CGT (after the annual exemption).

The CGT computation on the assignment of a short lease is slightly more complex.

A lease with a useful life of less than 50 years is called a ‘wasting asset’. As wasting assets depreciate over time, the allowable base cost for CGT purposes is calculated using the lease depreciation tables (Schedule 8 Paragraph 1, TCGA 1992).

The allowable base cost is the original acquisition cost multiplied by the fraction S/P, where: 

• ‘S’ is the percentage from the lease depreciation table for the years of the lease remaining at the date of assignment
• ‘P’ is the percentage from the lease depreciation table for years of the lease remaining at the date of purchase. 

For example:

Sarah purchased a 42-year lease for £100,000 in January 2000. In January 2012, she sells the lease for £150,000.

As 12 years have passed since original acquisition, Sarah is selling a lease with 30 years left to run.

From the proceeds of £150,000, we deduct the allowable base cost (which is the original acquisition cost multiplied by the fraction S/P).

From the lease depreciation table, the relevant percentage for a 42-year lease is 96.593 and for a 30-year lease the relevant percentage is 87.33.

The capital gain is therefore:

Proceeds: £150,000

Allowable cost:

100,000 x 87.33/96.593 (90,410)

Gain: £59,590

A long lease will become a short lease once less than 50 years are remaining.

Louise bought a 60-year lease on 1 January 1990 for £90,000. She sells the lease on 1 January 2010 for £120,000.

As 20 years have passed since original acquisition, Louise is selling a lease with 40 years left to run.

Accordingly, Louise is selling a short lease and we need to refer to the lease depreciation tables.

The percentage for 50 years or more is always 100, and the percentage for a 40-year lease is 95.457.

Proceeds: £120,000

90,000 x 95.457/100 (85,911)

Gain: £34,089

As with the assignment of a lease the tax implication on the grant of a lease depends on the length of the lease granted.

Where a freeholder grants a long lease to a tenant, CGT is calculated by using the part-disposal formula:

The allowable cost is the acquisition cost multiplied by the fraction A/(A+B), where:

• ‘A’ is the gross amount of the premium paid
• ‘B’ is the value of the remainder or the reversionary interest. 

Rose grants a 55-year lease on a freehold property which she purchased in 2000 for £100,000.

She receives a premium of £150,000 from the leaseholder. The value of the freehold reversion is £200,000.

Premium: £150,000 

100,000 x 150,000/(150,000+200,000) (42,857)

Gain: £107,143

The premium received from the grant of a short lease must be split between the amount chargeable to income tax (under property income rule ITTOIA 2005 S 277 (4)) and the amount chargeable to CGT.

The capital element chargeable to CGT is 2 per cent x (N-1) x P, where:

• ‘N’ is the number of years of the lease
• ‘P’ is the premium received. 

The grant of a lease out of a freehold is treated as a part-disposal; accordingly, allowable cost is calculated as the acquisition cost multiplied by the fraction a/(A+B), where:

• ‘A’ is the gross premium paid
• ‘B’ is the reversionary interest
• ‘a’ is the part of the premium that is chargeable to CGT. 

Elizabeth bought a freehold property 20 years ago for £50,000. In 2010, she granted a 40-year lease for a premium of £100,000, the reversionary interest being £200,000.

We first need to split the premium of £100,000 into the amount subject to income tax and the amount subject to CGT:

The capital element is 2% x (40-1) x £100,000 = £78,000.

The amount chargeable to income tax (as property income) is the difference between the premium received and the amount charged to CGT (£100,000-£78,000 = £22,000).

The capital gain is as follows:

Capital element of the premium: £78,000

Less allowable cost:

50,000 x 78,000/(100,000+200,000) (13,000)

Gain: £65,000

The above only looks at tax implications on assigning or granting of a lease; however, there might be legal implications if the taxpayer wishes to get out of a lease agreement before the end of the term.

This guide can be downloaded from the 'Related documents' section on this page.

Related documents

Related links.

TCGA 1992: Schedule 8, Paragraph 1

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• Assignment of Leasehold Rights on Land – Critical analysis

• Last Updated
• June 2, 2023

Table of Contents

Leasehold rights on land play a crucial role in various real estate transactions and business operations. Many units are set up on leasehold land provided by state industrial development corporation.

What Is Assignment Of Leasehold Rights?

• The assignment of leasehold rights on land refers to the transfer of the leasehold interest or rights from one party to another.
• It involves the transfer of the rights and obligations associated with a lease agreement from the original lessee (assignor) to a new party (assignee).

Leasehold rights on land typically arise when a lessee enters into a lease agreement with the lessor to use and occupy the land for a specific period, usually for commercial, industrial, or residential purposes. The lessee holds the leasehold rights, which include the right to possess and use the land within the terms and conditions outlined in the lease agreement.

However, there may be situations where the original lessee, for various reasons, decides to transfer or assign their leasehold rights to another party for consideration. This can occur when the lessee wants to exit the lease, restructure their business operations, or transfer the lease to a new owner.

The assignment of leasehold rights involves a formal agreement between the assignor and assignee that outlines the terms of the transfer. The assignor relinquishes their rights and responsibilities as the original lessee, while the assignee assumes those rights and obligations for the remaining lease term.

It is important to note that the assignment of leasehold rights does not necessarily involve the transfer of ownership of the land itself. The assignee steps into the shoes of the original lessee and continues to hold the leasehold interest for the remaining term specified in the lease agreement.

The assignment of leasehold rights on land can have various legal, financial, and operational implications for both the assignor and assignee. It is crucial for all parties involved to carefully review the terms of the lease agreement, understand their rights and obligations, and ensure compliance with any legal or regulatory requirements related to the assignment.

Income Tax Implication

Lease hold rights is a capital asset as per Section 2(14) of the Income Tax Act,1961 and Assignment of lease hold rights falls under definition of transfer u/sec. 2(47) of the Income Tax Act by way of relinquishment of rights in Immovable property.

• Assignment as discussed herewith results into capital gain tax implication u/sec. 45 of Income Tax Act.
• Leased Land Property assigned for a consideration is cost of Acquisition for the capital purpose. Holding period of Lease beyond 3 years is considered as long-term Capital Asset and tax rate applicable is 20% plus applicable surcharge and cess. Short term capital Asset has holding period less than 3 years and normal rate of tax would be applicable.
• Further, since the Lease hold right is neither a Land nor Building, provisions of Section 50C, which deems the Stamp Duty Value as Consideration in case if the actual consideration is less than Stamp Duty Value shall not apply.
• Wherein Capital Gains on Land is liable to be taxed as Long Term Capital Gains and Capital Gains on Structure is liable to tax short term capital gain.
• Other view is Entire Gains on Transaction is treated as short term capital gain.

GST Implications

The Goods and Services Tax (GST), introduced in India in 2017, has brought significant changes to the taxation system. It is important to understand the implications of GST on the assignment of leasehold rights on land and how it affects different stakeholders involved.

As per Section 7(1) of the CGST Act, 2017, supply” includes:

All forms of supply of goods or services or both, such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business. Thus, under the GST regime, leasehold rights on land can be considered as a supply of services and thereby subject to taxation.

Upfront amount called as premium, salami, cost, price, development charges or by any other name payable in respect of long term lease of 30 years, or more of industrial plots or infrastructure development plots for financial business, provided by the State Government Industrial Development Corporations or Undertakings or by any other entity having 50 % or more ownership of Central Government, State Government, Union territory to the industrial units or the developers in any industrial or financial business area subject to following conditions:

• the leased plots shall be used for industrial or financial activity in an industrial or financial business area
• the State Government shall monitor and enforce the condition as per the order issued by the State Government
• in case of any violation or subsequent change of land use, the original lessor, original lessee as well as any subsequent lessee or buyer or owner shall be jointly and severally liable to pay tax along with the applicable interest and penalty
• the lease agreement entered shall incorporate in the terms and conditions that the tax was exempted on the long term lease of the plots by the original lessor to the original lessee subject to above condition and the parties to the said agreements undertake to comply with the same.

Thus, GST on assignment of lease hold rights has been classified as exempt only if it falls within the ambit of above entry satisfying all the conditions.

Contradictory View

As per Section 7(2)(a) of the CGST Act 2017 read along with Entry no. 5 of Schedule III, sale of land is treated neither as supply of goods nor as supply of services.

As per the Registration Act 1880, “immovable Property” includes land, buildings, hereditary allowances, rights to ways, lights, ferries, fisheries or any other benefit to arise out of land, and things attached to the earth, or permanently fastened to anything which is attached to the earth, but not standing timber, growing crops nor grass.

As per the General Clauses Act 1897:, “Immovable property’ shall include land, benefits to arise out of land, and things attached to the earth or permanently fastened to anything attached to the earth”.

Leasehold rights can be construed as benefit arising from land, thereby treating the same as Immovable Property or Land itself for the purpose of Registration Act attracting Stamp Duty and registration charges.  Thus, as per State Governments, the assignment of leasehold rights on land is considered as a transfer of ownership for state revenue purposes.

Irony created due to non-alignment of definition of Assignment of Lease hold rights under Registration Act and GST leading to double taxation as the individuals or businesses involved in the assignment of leasehold rights on land must comply with both the state revenue requirements, such as stamp duty and the GST obligations.

It is important to note that under the erstwhile service tax regime in India, the assignment of leasehold rights on land was specifically listed as an exempted service. This means that no service tax was applicable on such assignments, regardless of the purpose of the lease (residential, commercial, or industrial). The exemption from service tax on the assignment of leasehold rights was provided to avoid double taxation since the leasehold rights were considered immovable property, and the transfer of immovable property was already subject to other taxes, such as stamp duty.

Burning Issue In MIDC Areas For GST Matter

Thousands of units in Maharashtra including Thane, Navi Mumbai, Pune, Nagpur etc have not paid GST on assignment of lease considering this as sale of land and assuming that the exemption under Sr. No. 41 of notification No. 12/2017 dated 28.06.2017 would be available to them. However, it does not cover subsequent transfers of lease premium on assignment of leasehold right.

Also, there are many GST Advance Rulings stating that long term lease cannot be equivalent to sale of land and would be taxable under the GST law, thereby confirming GST on such supply.

Thus, the GST department has also started issuing notices under the CGST Act 2017 on the assignment of lease hold rights charging 18% GST on the total value of the assignment agreement.

While, the State Revenue department is considering this assignment of lease as sale of land and building and thus charging full stamp duty and registration charges accordingly.

The above contradictory views from the GST Laws and State Laws are creating multiplicity of taxes for the same transactions, which should not be viable in the eyes of the law. Thus, the government should hence analyse the situation and take pertinent action on urgent basis.

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Business Income Manual

Bim46265 - specific deductions: premiums: assignment of lease.

S61 Income Tax (Trading and Other Income) Act 2005, S63 Corporation Tax Act 2009

Where a taxed lease is assigned (or sold - see PIM1204 ) and the new tenant occupies or uses the land subject to the lease for the purposes of a trade, the new tenant inherits the old tenant’s entitlement to a deduction in respect of the premium.

The facts are the same as the example in BIM46255 , except that B Limited vacates the property after ten years and sells its lease to C Limited. The consideration for the sale is £100,000.

C Limited inherits B Limited’s entitlement to a trading deduction of £8,572 per annum for eleven years (21 less 10) or for such lesser period as C Limited occupies the property for trade purposes. If the rules dealing with the assignment of a lease at undervalue (see PIM1222 ) do not apply, the sum of £100,000 paid by C Limited to B Limited as consideration for the assignment of the lease is a capital payment which is not a premium taxable on B Limited and does not rank as a trading deduction allowable to C Limited.

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