Lesson. When a lender’s loan collateral involves income-producing property, an assignment of rents, particularly when coupled with a typical subordination, non-disturbance and attornment agreement, can be powerful collection tools permitting a lender to collect money from a lessee – funds otherwise owed to the borrower/lessor.
Case cite. Bob Evans Rests., LLC v. Bank Ozk, 245 N.E.3d 657 (Ind. Ct. App. 2024)
Legal issue. Whether commercial tenant owed lender rent-related settlement payments that tenant made to borrower/landlord.
Vital facts. Tenant operated a restaurant on real estate upon which Lender held a mortgage. The mortgage secured Lender’s loan to Borrower, which leased the real estate to Tenant. The loan also was secured by “all rents, income and other benefits to which [Borrower] may now or hereafter be entitled to from, and all proceeds of” the real estate (commonly known as an assignment of rents). Upon a default under the loan, Lender was entitled to demand payment of, and collect, rents due under the lease. Tenant, Borrower and Lender also executed a subordination, non-disturbance and attornment agreement (a so-called SNDA) that, among other things, provided that the lease was subject to Lender’s mortgage and that, upon written notice, Tenant must make lease payments directly to Lender.
Tenant later closed the restaurant and stopped paying rent, thereby defaulting under the lease. This led to Borrower defaulting under the mortgage loan. Borrower and Tenant subsequently entered into a settlement agreement in which Tenant paid $225k to Borrower to terminate the lease and resolve any claimed damages. Lender was not a party to that deal.
Procedural history. Lender filed a foreclosure suit and named Borrower and Tenant. Following a sheriff’s sale in which Lender became the owner of the real estate, Lender demanded payment from Tenant for amounts due under the lease. Tenant denied payment, so Lender amended its action to pursue a breach of contract claim against Tenant, identifying damages of $225k. The trial court granted summary judgment for Lender. Tenant appealed.
Key rules. The outcome of the case turned, not on any substantive legal rules, but instead on basic contract interpretation principles.
Holding. The Indiana Court of Appeals affirmed the trial court’s grant of summary judgment.
Policy/rationale. Tenant asserted that Lender suffered no damages because the settlement agreement terminated the lease. The Court disagreed, concluding that Borrower’s collateral assignment of the lease, coupled with the SNDA, essentially trumped the settlement agreement. The assignment gave Lender a security interest in the rents and the right to demand payment of amounts due. The SNDA required Tenant to pay rent to Lender upon notice.
The Court found that “when Lender sent the Assignment of Lease Notice to Tenant’s counsel requiring payment of rents to be made directly to Lender … Tenant was required to send lease payments to Lender pursuant to the [SNDA].” Importantly, Tenant made the settlement payment of $225k to Borrower after the Assignment of Lease Notice. Thus, Tenant breached the SNDA by paying Borrower, which at that point technically was not entitled to the money. (It should not be lost on you that, painfully, the outcome meant that Tenant was forced to pay the $225k twice.)
• Lender’s Redirection Of Rents Does Not Constitute “Unclean Hands” When Supported By Loan Documents
Part of my practice involves the enforcement of assignments of rents and SNDAs. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at john.waller@dinsmore.com. Also, don’t forget that you can follow me on X @JohnDWaller or on LinkedIn, or you can subscribe to posts via email as noted on the bottom of this page.