Leasehold Mortgage vs. Assignment of Lease

A leasehold mortgage is a specialized mortgage arrangement in which a leaseholder puts up his leasing interest as security on the mortgage. Assigning a lease transfers all rights under a lease to another party. Those with questions about the distinction regarding a specific lease should seek professional advice.

Definition of Lease

In real estate terms, a lease is a legal agreement between two parties: a landlord and a lessee, or tenant. The landlord owns the property and the lessee wishes to use it. The lease agreement defines the scope of their relationship, setting forth all conditions of the lease and any requirements for both parties (for instance, rent and the duration of the lease.) Unless a lease states otherwise, the law typically allows both parties, landlord and lessee, to transfer away their interests in the lease.

Leasehold Mortgage

In a traditional mortgage, a property owner gives a lender certain rights to his property as collateral on a loan. If the owner fails to live up to the terms of his mortgage, the lender may take the property to fulfill the debt. A leasehold mortgage occurs when the lessee takes his interest in the lease and offers it up as collateral. The leasehold mortgage functions in much the same way as a regular mortgage, except that, rather than an ownership interest in the event of failure to pay, the lessee is simply offering his rights under the lease.

Lease Assignment

In an assignment of a lease, the lessee wishes to completely transfer away his entire remaining role in the lease. He does so by signing an assignment contract with a new lessee (known as the assignee.) For instance: John is in month five of his year-long lease on his apartment and wishes to move. However, if he simply leaves, the landlord may be able to sue him for the remaining rent. Instead, John assigns his lease to Sue, who will then finish out the year in the apartment and take over all of John's duties, effectively releasing him from the lease. Typically, an assignment requires the landlord's consent, and the lease itself may prohibit assignment. Assignment should not be confused with sublease; in a sublease, the lessee is not completely released from the lease contract; he will still have obligations to the landlord.

Comparison

Assignment of a lease is very different from a leasehold mortgage. Assignment is designed to effectively free a lessee from a lease contract that he doesn't want to be involved in anymore. In the typical leasehold mortgage, there's no intent to free the lessee from the lease; the mortgage simply allows the lessee to borrow money with the lease interest as collateral. Assignment of leases may occur in many different types of property, but a leasehold mortgage typically occurs in large commercial developments of real estate, where the leasehold rights are significant enough to make them an effective form of collateral.

References

• “Property (6th Edition)”; James E. Krier et al.; 2006
• U.S. Legal: Leasehold Mortgage Law and Legal Definition
• Lawyers.com: Subleasing and Assignment of Leases