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Texas has long been one of the few states which recognizes a legal concept called an “absolute assignment of rents.” This legal structure gives a lender ownership of its borrower’s rents, while the borrowing landlord only holds a license to receive those rents. The borrower’s license is subject to performance under the note, and can be revoked by the lender upon an event of default. Texas courts have upheld the absolute assignment of rents, even though most states have rejected the absolute assignment structure as a legal fiction.

Well, the Texas legislature agrees with the majority of states and has just eliminated the absolute assignment of rents.

New Chapter 64 of the Texas Property Code radically changes the way an assignment of rents works in Texas. The law was signed by Governor Perry in June and was effective immediately upon enactment. It applies to all outstanding assignments, regardless of when such assignment was made.

Some key features of the new law include:

1. All assignments of rents are now “collateral” assignments, meaning that the rents are pledged as security for a loan and not granted to the lender outright.

2. Every commercial deed of trust filed after the statute’s enactment is interpreted as including an assignment of rents, whether or not such document expressly includes an assignment.

3. The assignment of rents is perfected for priority purposes upon the recording of the underlying deed of trust.

The statute also expressly sets forth the procedures by which payments are to be made in the event of a default. These provisions are likely the most relevent aspects of the new law to landlords and tenants. Upon a default, the lender must give notice to both the landlord and tenant of its right to receive rents. Once notice has been delivered, the lender is entitled to all unaccrued rent under the lease. That means that (i) the landlord must pay to the lender all future/advance rent received, but not accrued, and (ii) tenant must direct its payments to the lender going forward, instead of to the landlord.

If a commercial tenant directs payment to the landlord after it has received notice under the statute, the tenant will still be liable for making the scheduled payment to the lender. Thus, tenants must be careful to comply with the notice, or they risk being responsible for double rent. Likewise, if a borrower/landlord receives payments which should be directed to the lender under the notice, the landlord must forward such payments to the lender.

These points are just the tip of the iceberg when evaluating the ins-and-outs of the new statute. Much of how the law will affect parties to commercial leases will be revealed as the statute is interpreted by Texas courts. What is clear, however, is that lenders, landlords and tenants in Texas will have to relearn everything they know about assignments of rents – and need to do so now.

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