Assignment of Rents is Not an Assignment of the Underlying Lease

In Sturgis Building LLC v Kirsch Industrial Park LLC, the mortgagor granted a mortgage and assignment of rents to the mortgagee.  The mortgagee exercised the assignment of rents and collected rents from the tenants during the foreclosure and the redemption period.  At the end of the redemption period, one of the tenants moved out, claiming that the lease had been terminated by the foreclosure. The trial court held that the lease, executed subsequent to the mortgage, was terminated by the mortgage foreclosure.  The mortgagee appealed.

The matter was affirmed on appeal.  The assignment of rents statute, MCLA 554.231, only provides for assignment of rents, not the leases themselves.  The mortgage also provided only for assignment of rents, not leases.  Under common law, foreclosure of a mortgage extinguishes junior encumbrances on the property, including leases.

If a tenant and a foreclosing lender wish to keep a lease in effect subsequent to foreclosure of a mortgage, they should enter into a separate agreement providing for attornment by the tenant after foreclosure.

© Steve Sowell 2017