If you’re financing a rental property in Canada, you’ve likely encountered the term “assignment of rents” in your mortgage documents. While it may sound concerning at first, understanding this provision is essential for any property investor or landlord working with mortgage financing.
What Is Assignment of Rents?
Assignment of rents is a legal provision included in many mortgage contracts that gives the lender the right to collect rental income directly from your tenants if you default on your mortgage payments. This clause is most common when a property generates monthly rental income and that income is relied upon to support mortgage approval.
In Canada, this assignment of rental income is used heavily by private lenders because rental income often represents a critical layer of mortgage security. While it may sound aggressive, it’s important to understand that it does not impact borrowers who remain in good standing with their mortgage obligations.
Key takeaway: This provision is about risk control, not punishment.
The assignment of lease revenues ensures that if mortgage payments stop, the income generated by the property continues to support the debt rather than flowing to a borrower who is no longer meeting their obligations. This protects both the lender’s investment and the property’s financial viability during times of distress.
Why Mortgage Lenders Include Assignment of Rents
Mortgage lenders include assignment of rents clauses to protect their cash flow position. When a borrower stops making payments, the lender still faces ongoing expenses including property taxes, insurance premiums, legal costs, and interest exposure on their own borrowed capital. This assignment of rental income helps offset those risks by securing access to the property’s income stream.
Private lenders rely on these provisions more often than traditional banks. Many private mortgages are short-term arrangements, carry higher loan-to-value ratios, or are approved based primarily on rental income rather than traditional employment income verification. Without the assignment of lease revenues, the lender would have limited control over income tied directly to the property securing their loan.
Important to note: This security provision strengthens the lender’s position without increasing your mortgage balance or changing your payment terms.
For institutional lenders like banks and credit unions, the clause may be included in the standard mortgage charge but is rarely activated. For private lenders, it represents a more active component of their risk management strategy.
How Assignment of Rents Is Registered in Canada
The assignment of rental income is typically registered on title as part of the mortgage security package. The registration method varies by province and lender preference. In some cases, it appears as a separate registration on title. In other instances, it is embedded within the mortgage charge itself as a clause in the document.
The registration of this provision gives legal notice to future lenders, purchasers, and other interested parties, and it protects the mortgage lender’s priority position. Once registered, the assignment of lease revenues follows the property, not the borrower. This means that if the property is sold or transferred, the provision remains in effect until the mortgage is discharged.
This registration process is reviewed and completed by the borrower’s real estate lawyer at closing. Your lawyer will explain the implications and ensure you understand your obligations under the mortgage terms.
How Assignment of Rents Affects Your Mortgage
While your mortgage remains in good standing, the assignment of rents and profits has no operational impact on your day-to-day activities as a landlord. You continue collecting rent directly from your tenants, managing tenant relationships, handling maintenance issues, and using rental income as you see fit to cover mortgage payments, property expenses, and personal obligations.
The clause only becomes active when you miss mortgage payments or breach other significant terms of your mortgage agreement. Once payments are missed and the lender decides to enforce their rights, they may issue a formal notice activating the provision. At that point, your tenants may be instructed through legal notice to redirect their rent payments directly to the lender instead of to you.
Common mistake: Many borrowers assume rent redirection happens automatically and immediately upon missing a single payment. In reality, lenders typically provide notice and opportunity to cure the default before activating the assignment of income from the property.
The activation of this provision does not mean you lose ownership of the property. You remain the legal owner, but the lender temporarily controls the income stream to protect their security interest.
Assignment of Rents on Rental and Partially Rented Properties
The assignment of rental income applies to various property types including fully rented investment properties, duplexes, triplexes, fourplexes, and even owner-occupied homes with basement apartments or secondary suites.
If you own a property that is partially rented—for example, you live on the main floor and rent out a basement apartment, the provision typically applies only to the rented portion of the property. The lender does not collect owner-occupied value or imputed rent; they only have rights to actual rental income being collected from tenants.
This distinction is especially common in Ontario where secondary suites and basement apartments are widely used to support mortgage affordability for homeowners. Many first-time buyers rely on rental income from a portion of their home to qualify for financing, making the assignment of lease revenues a standard component of their mortgage security.
Multi-unit properties like duplexes and triplexes almost always include these provisions, as rental income represents the primary source of debt servicing for these investment properties.
Understanding Worst Case Scenarios
In a worst-case scenario, a borrower stops making mortgage payments while continuing to collect rent from tenants. This creates an imbalance where the lender’s security is deteriorating while the borrower continues to benefit from property income. The assignment of rents and profits prevents this imbalance by giving the lender legal access to redirect that income.
Once the provision is activated through proper legal notice, tenants are legally required to comply with rent redirection instructions. Tenants who continue paying rent to the defaulting borrower after receiving proper notice may find themselves obligated to pay rent twice—once to the borrower and again to the lender—creating significant legal and financial issues for tenants as well.
Key takeaway: This security mechanism protects the property’s cash flow during periods of financial distress, ensuring the property can continue to meet its obligations even when the borrower cannot.
In practice, lenders view the assignment of income from the property as a last resort tool. Most lenders prefer to work with borrowers to resolve payment issues before resorting to rent redirection, as managing tenants and collecting rent creates administrative burdens for lenders who are not in the property management business.
Who Collects Rent During Power of Sale or Foreclosure?
During a power of sale proceeding (the most common enforcement method in Ontario and other provinces), the lender typically collects rent directly from tenants or appoints a professional property manager to handle rent collection and tenant relations. Rent collected during this period is applied toward mortgage arrears, accrued interest, legal fees, and enforcement costs.
In foreclosure scenarios (more common in provinces like Alberta and British Columbia), rent may continue to be collected by the lender or their appointee until title to the property formally transfers. The assignment of rental income ensures there is no income gap during the enforcement period, maintaining property cash flow and protecting the interests of all parties involved.
The tenant’s lease typically remains in effect during power of sale or foreclosure proceedings, so tenants continue to have valid tenancy rights even as the property ownership situation is being resolved. This provision simply changes who receives the rent payments, not the tenant’s fundamental rights or obligations.
The Role of Assignment of Rents in Mortgage Refinancing
When refinancing a mortgage, this provision remains an important consideration. If you’re moving from one lender to another, the new lender will likely require their own assignment of lease revenues to be registered as part of the new mortgage security. Your lawyer will ensure the previous lender’s provision is discharged when the old mortgage is paid off, and the new one is properly registered.
Borrowers with strong payment histories and good relationships with their lenders may have more flexibility in negotiating the terms during refinancing, though the clause remains standard in most rental property mortgages.
Assignment of Rents vs. Other Security Interests
The assignment of rents and profits is just one component of a lender’s overall security package. It works alongside the mortgage charge itself, personal guarantees, insurance requirements, and other provisions to protect the lender’s interest in the property.
Unlike a general security agreement that might cover business assets or receivables, this provision is specific to rental income from real property. It is narrowly tailored to protect the income stream that supports the mortgage debt.
Understanding how this fits within the broader context of your mortgage security helps you see it as a reasonable protection mechanism rather than an overreach by lenders.
Common Myths About Assignment of Rents
Several misconceptions exist about this provision that can cause unnecessary concern for borrowers:
Myth 1: The clause means the lender owns the property. Reality: You retain full ownership. The lender only gains rights to redirect rental income upon default.
Myth 2: It affects tenants even when the mortgage is current. Reality: Tenants are not impacted unless the lender activates the provision following default.
Myth 3: It only applies to large commercial buildings. Reality: It applies to any rental property, from single basement apartments to multi-unit residential buildings.
Myth 4: The lender can activate it at any time for any reason. Reality: Specific default conditions must be met, and proper legal notice must be provided.
Myth 5: It makes it harder to get financing. Reality: It’s a standard clause that typically doesn’t affect mortgage approval for rental properties.
Final Key Takeaways
Assignment of rents is a standard and reasonable tool used by mortgage lenders to protect rental income tied to a property that serves as security for a loan. For property owners and investors, understanding this provision helps avoid surprises and clarifies lender rights in worst-case scenarios.
The presence of this clause in your mortgage documents should not cause alarm. It simply reflects the reality that rental income is tied to the property and should support the debt secured by that property. As long as you maintain your mortgage payments and fulfill your obligations, it remains a dormant clause that never impacts your operations as a landlord.
If you have concerns about the assignment of income from the property in your specific mortgage situation, consult with your real estate lawyer or mortgage professional who can explain how it applies to your unique circumstances.
Frequently Asked Questions About Assignment of Rents
What triggers the activation of assignment of rents?
The provision is typically triggered by mortgage default, which most commonly means missing mortgage payments. However, other breaches of the mortgage agreement—such as failing to maintain property insurance, not paying property taxes, or violating other material terms—may also trigger the lender’s right to activate it. The specific triggering events should be outlined in your mortgage documents.
Do I need to notify my tenants about assignment of rents when I first get my mortgage?
Generally, no. While the provision is registered on title, you are not usually required to notify tenants when you first obtain your mortgage. Tenants only need to be notified if and when the lender activates the assignment following a default. At that point, the lender will provide formal legal notice instructing tenants to redirect rent payments.
Can I negotiate to have assignment of rents removed from my mortgage?
It is difficult to have this clause removed entirely, particularly with private lenders who view it as essential security. However, borrowers with strong financial profiles, significant equity, or alternative security may have some negotiating power. Traditional bank mortgages on rental properties almost always include the provision as a standard term, leaving little room for negotiation.
How does assignment of rents work with multiple tenants in one building?
If your property has multiple rental units, the assignment of rental income applies to all rental income from the property. When activated, the lender can direct all tenants to pay rent to them or to a designated property manager. Each tenant would receive individual notice about the rent redirection, and all rental income would flow to the lender until the default is resolved or the mortgage is paid in full.
What happens to my security deposits if assignment of rents is activated?
Security deposits held in trust for tenants generally remain separate from rental income. The assignment of lease revenues typically applies to ongoing rental payments, not to security deposits that must be returned to tenants at the end of their tenancy. However, the specific treatment may depend on provincial legislation and the terms of your mortgage agreement. Consult with a lawyer if this situation arises.
Can I collect rent myself while working out a payment arrangement with my lender?
This depends on your lender’s approach and the severity of the default. Some lenders may allow you to continue collecting rent if you enter into a formal forbearance agreement or payment arrangement that brings the mortgage current. Other lenders may insist on activating the assignment of rents and profits as a condition of any workout arrangement. Communication with your lender is essential if you’re facing payment difficulties.
Does assignment of rents affect my ability to sell the property?
The provision does not prevent you from selling the property. However, the lender must be paid in full from the sale proceeds before you can discharge the mortgage and the associated clause. If the property is sold while the provision is active, the lender will typically collect rent up until the closing date, at which point the mortgage is paid off and the new owner takes possession free of that encumbrance.
What should I do if I receive notice that assignment of rents has been activated?
If you receive notice that your lender has activated this provision, contact the lender immediately to understand the default situation and discuss options for resolving it. Speak with a real estate lawyer to understand your rights and obligations. Also communicate with your tenants to explain the situation (in general terms, respecting privacy) and ensure they understand the rent redirection instructions. Taking prompt action may help you avoid further enforcement proceedings.
Are short-term rentals like Airbnb covered by assignment of rents?
This is an evolving area. Traditional clauses were written with long-term tenancies in mind. However, if your property generates income from short-term rentals and that income was considered in your mortgage approval, a lender could argue that the assignment of income from the property extends to that income stream. This is particularly important to clarify if you’re using short-term rental income to qualify for your mortgage. Discuss this specifically with your lender and lawyer.
Does assignment of rents show up on my credit report?
The registration of this provision on title does not appear on your personal credit report. It is a matter of public land registry records, not consumer credit reporting. However, if it is activated due to mortgage default, the underlying default and any subsequent enforcement actions could negatively impact your credit score.
Can a second mortgage lender also have assignment of rents?
Yes, second mortgage lenders often require the assignment of rental income as well. However, the first mortgage lender’s provision typically takes priority. If both lenders activate their provisions, the first lender would receive rent payments first, with any excess potentially going to the second lender. In practice, this creates complexity, which is why subordinate lenders scrutinize the property’s income and equity position carefully.
How long does assignment of rents remain in effect after activation?
Once activated, the provision typically remains in effect until the mortgage default is fully cured (all arrears paid and the mortgage brought current), the mortgage is paid in full, or the property is sold and the mortgage is discharged. Simply making one or two catch-up payments may not automatically deactivate it—you may need to negotiate with your lender for a formal release.
Is assignment of rents the same in all Canadian provinces?
While the concept exists across Canada, the specific legal framework and enforcement procedures vary by province. The land registration system, foreclosure versus power of sale procedures, and landlord-tenant laws all differ provincially, which can affect how the provision operates in practice. Always consult with a lawyer licensed in your province for specific guidance.
What rights do my tenants have if assignment of rents is activated?
Your tenants retain their full tenancy rights under provincial residential tenancy legislation. Their lease remains valid, they cannot be evicted simply because of the mortgage default, and they are entitled to all the protections and services outlined in their lease agreement. The only change is where they send their rent payment. Tenants should ensure they receive proper legal notice before redirecting rent payments.
Can I challenge the activation of assignment of rents in court?
You may be able to challenge the activation if you believe the lender has not followed proper procedures, has not provided adequate notice, or has activated the clause without a valid default having occurred. However, if you are genuinely in default on your mortgage, challenging it is unlikely to succeed and may simply delay the inevitable while increasing legal costs. Focus instead on resolving the underlying default.
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