Michigan Adopts Its Version Of The Uniform Assignment Of Rents Act

• Published date: 14 July 2022
• Subject Matter: Corporate/Commercial Law, Real Estate and Construction, Insolvency/Bankruptcy/Re-structuring, Corporate and Company Law, Insolvency/Bankruptcy, Contracts and Commercial Law, Landlord & Tenant - Leases
• Law Firm: Miller, Canfield, Paddock and Stone P.L.C.
• Author: Scott R. Lesser and Ronald A. Spinner

In May 2017, we highlighted the Sixth Circuit's opinion in Town Center Flats. Briefly, Town Center Flats held that ownership of a commercial property's rents transferred to a lender when (1) a commercial loan is secured by a recorded assignment of rents, (2) the borrower defaults, and (3) a lender follows Michigan's statutory procedure to enforce the assignment of rents. Subsequently, a bankruptcy court held that tenants need not receive notice of the borrower's default for ownership to transfer.¹ Without rents being part of the bankruptcy estate, some borrowers could not finance a bankruptcy proceeding.

On June 24, 2022, the Legislature changed that by enacting the Michigan Uniform Assignment of Rents Act (MUARA).² The MUARA protects lenders by clarifying that an assignment of rents is a perfected security interest as soon as it is recorded. It changes the outcome in Town Center Flats, however, by confirming that an assignment of rents does not transfer ownership of rents to a lender, no matter how the loan documents are worded. If a borrower files for bankruptcy protection post-MUARA, the rents are property of the bankruptcy estate and may help pay for the bankruptcy case'if the borrower either obtains lender permission or demonstrates that the lender's security interest in the rents is adequately protected, of course.

The MUARA considerably enhances Michigan law...