Houston, TX — On June 17, 2011, Governor Perry signed Senate Bill 889, which dramatically changes the landscape between Owners, Lenders and Tenants involved in commercial real estate. The Bill, which creates the new Chapter 64 of the Texas Property Code, affects all Texas secured commercial real estate loans and is immediate and retroactive in its passing.
Previously, Texas law was unclear as to whether a Lender could take the rental income of a commercial property without first foreclosing on the property. Although all commercial loan documents provide that rents are to be assigned to a lender upon a default, this assignment/taking was rarely enforced because there was a strong argument that Texas law first required the lender to foreclose before they could seize rents. As a result, commercial real estate owners could receive and collect rents until the property was foreclosed or the property was placed in receivership.
Effective immediately, this new law, which applies to ALL commercial real estate loans, means that:
Lenders need only to send written notice to tenants that the Landlord/Owner is in default under its loan agreement and, as a result, all tenants are thereafter required to pay rents directly to the Lender.
Tenants, upon receipt of Lender’s notice, must pay rents to the Lender. Any rents that are paid by Tenant to the Owner after receipt of this notice are not recognized by the Lender, resulting in the Tenant being in default of their Lease for failing to pay rent (even though Tenant paid rent to the Owner).
Owners can no longer continue to collect rents once the Lender(s) serves notice of default and must also relinquish any pre-paid rents.
Unfortunately, the new law is not clear as to Tenants’ rent payment obligations in cases of 2nd lien holders, potentially requiring Tenants to determine the validity of conflicting notices and the rightful recipient of the rents or risk default under their leases.
With the total overhaul of Texas law on assignments of rents to lenders, the contours and practical implications of Bill 889 will be better defined through the courts in coming years. In the meantime, Owners and Tenants should review their respective loan documents, leases and subordination and non-disturbance agreements, paying particular attention to the notice provisions. More importantly, Tenants should ensure that they maintain a current address for notice with their respective Landlords, or they could find themselves doubly liable for rent payments.
If you would like more information regarding the new Chapter 64 of the Texas Property Code, or need assistance in reviewing and updating your loan or lease agreements, please contact Patrick Hayes at 713.850.4218 or email him here.
