Who Can Collect Rents Under Michigan’s Uniform Assignment of Rents Act (MUARA)?
When a borrower defaults on a commercial loan, Michigan law allows lenders to collect rents directly from tenants on the borrower’s properties. This right comes from the Michigan Uniform Assignment of Rents Act (MUARA), MCL 554.1051 et seq. To enforce this right, the lender must have a recorded assignment of leases and rents and must provide notice to the tenants. While the process may seem straightforward, there is an important limit. The lender’s enforcement is subject to the tenant’s assertion of defenses affecting the lender’s ability to collect.
How Do Courts Evaluate These Assignments of Rents?
Courts focus on whether the lender properly recorded the assignment and provided notice to the tenants. MUARA allows tenants to continue asserting defenses or claims under state law even after notice is given. This means that a lender cannot collect rents if the borrower or tenant raises a valid legal defense, such as usury, fraud, or another contractual issue, without first addressing that defense.
When Might MUARA Enforcement Be Challenged?
In Private Financing Alternatives, LLC v. Walloon Lake Holdings, LLC et al, a lender sought to collect rents from tenants of the borrower’s commercial properties after the borrower defaulted. While the lender had a properly recorded assignment and provided notice, the borrower argued that the underlying loan might violate Michigan’s criminal usury law. Because MUARA explicitly allows tenants to assert defenses arising under state law, the court denied the lender’s motion to collect rents until the usury and wrongful-conduct issues could be resolved. This illustrates that even if a lender follows the technical steps required under MUARA, enforcement is not absolute and can be blocked by a potentially valid defense.
What Actions Should You Take Before Attempting to Collect Rents?
Before asking tenants to pay rents directly to you, make sure the underlying loan and all related agreements are enforceable and do not cause potential legal disputes. Consult with legal counsel to ensure that your notices comply with MUARA and that you are prepared to respond to any defenses that the borrower or tenants may assert. Proper preparation can save you from headaches and costly delays when attempting to collect rents after a borrower defaults.