Assignment of Rents as Security: The Pitfall of Insolvency Proceedings (Cass. civ. 26 May 2010)

Imagine a landlord in Beaulieu-sur-Mer who has granted a mortgage loan to an investor. To secure himself, he takes an assignment of the rents received by the borrower from a rental property. Everything works well, the rents are paid directly to the lender. But then the borrower is placed in judicial reorganisation. The insolvency officeholders demand that the rents be repaid to them. Can the lender keep them?

This question, crucial for any secured creditor, was decided by the Court of Cassation in a judgment of 26 May 2010 (No. 09-13.388). The High Court recalls that the assignment of rents as security, if notified to the tenant in accordance with Article 1690 of the Civil Code, confers on the lender a right of retention over the rents. This right of retention is enforceable against the insolvency proceedings, allowing the lender to retain the rents collected after the opening judgment.

In short, the secured creditor is not an ordinary unsecured creditor. He benefits from special protection. But attention, this protection is not absolute: it requires that the assignment was properly notified and that the lender actually received the rents before the opening of the proceedings. The Court of Appeal's judgment, which ordered the restitution of rents collected after the opening, is quashed. Explanations.

The Facts: A Common Story

Mr. X, owner of a building in Villefranche-sur-Mer, grants a loan to Mr. Y, operator of a business. To secure repayment, Mr. Y assigns to Mr. X the rents he receives from his commercial tenant. The assignment is notified to the tenant on 15 January 1998. Thereafter, the tenant pays the rents directly to Mr. X. Until December 1999, everything goes well.

But on 1 December 1999, Mr. Y is placed in judicial reorganisation. The judicial representative considers that the rents received by Mr. X after that date must belong to the insolvency proceedings. He sues Mr. X for restitution. The Montpellier Court of Appeal rules in favour of the representative: in its view, the assignment of rents does not constitute a privilege within the meaning of insolvency law. Rents due after the opening must therefore be repaid.

Mr. X appeals to the Court of Cassation. He argues that the assignment, notified to the tenant, gives him a right of retention over the rents. This right of retention, provided for by Articles 2071 et seq. of the Civil Code (old), prevents restitution. The Court of Cassation agrees: the Court of Appeal did not draw the legal consequences from its own findings.

The Reasoning of the Court — Analysed

The Court of Cassation relies on Articles 1690, 2071, 2073 and 2075 of the Civil Code, in their wording prior to the Ordinance of 23 March 2006. These provisions govern the assignment of receivables and pledge. Article 1690 requires that the assignment be notified to the debtor (here, the tenant) to be enforceable. Articles 2071 et seq. define pledge: the debtor delivers a thing as security, and the creditor has the right to retain it until payment.

In this case, the assignment of rents was notified to the tenant before the opening of the insolvency proceedings. Mr. X therefore had the status of a secured creditor. Now, the right of retention is a real right enforceable against all, including the insolvency officeholders. The Court of Appeal had indeed noted this notification, but it drew an erroneous conclusion by denying the existence of a right of retention.

The Court of Cassation recalls that the right of retention gives the creditor the right to keep the thing until he is paid. This right takes priority over other creditors, even in the event of insolvency proceedings. Thus, the rents collected by Mr. X after the opening are validly retained.

Note however: the solution would have been different if the assignment had not been notified or had been notified after the opening of the proceedings. In that case, the lender would have no enforceable right of retention.

What This Means for You — Practically

For landlord-owners who grant loans secured by an assignment of rents, this judgment provides security. If you have notified the assignment to the tenant before the insolvency proceedings, you can keep the rents collected after the opening. You are not required to repay them to the officeholder.

Concrete example: suppose you have lent €100,000 to an investor in Villefranche-sur-Mer, with an assignment of the rents from his apartment. The monthly rents are €1,500. If the borrower is placed in judicial reorganisation, you can continue to receive the rents until your debt is exhausted. That is a saving of several tens of thousands of euros.

For tenants, nothing changes: you must pay the lender as soon as the assignment has been notified to you. In the event of insolvency proceedings of your landlord, you can continue to pay the lender without risk.

For professionals (banks, credit institutions), this judgment confirms the effectiveness of assignments of rents as security. It is essential to ensure proper notification to the tenant and to keep proof of that notification.

undefined, I have encountered cases where lenders neglected notification. Result: they lost their right of retention and had to repay the rents collected after the insolvency proceedings. Simple formalities can make all the difference.

Four Tips to Avoid This Type of Dispute

• Notify the assignment to the tenant by bailiff: notification must be made in accordance with Article 1690 of the Civil Code, i.e., by a bailiff's deed served on the tenant. Keep the original deed safe.
• Check that the assignment covers future rents: the assignment must be made before the rents arise. An assignment covering already due rents is less effective.
• Inform yourself about the borrower's situation: as soon as you become aware of insolvency proceedings, consult a lawyer to verify whether your right of retention is enforceable.
• Do not agree to repay the rents without legal advice: if the officeholder demands the rents, do not give in immediately. Assert your right of retention, relying on this judgment.

Further Reading: Related Case Law and Developments

This judgment is part of a line of decisions protecting the right of retention of the secured creditor. The Court of Cassation had already held, in a judgment of 17 December 2003 (No. 01-13.101), that the right of retention of the pledgee (secured creditor) is enforceable against insolvency proceedings. The 2010 judgment extends this solution to the assignment of rents.

Since the reform of security law by the Ordinance of 23 March 2006, the assignment of rents as security is now governed by Articles 2355 et seq. of the Civil Code. These provisions have clarified the legal regime, but the solution reached by the Court of Cassation remains relevant for assignments made before the Ordinance.

The trend of the courts is therefore favourable to the secured creditor, provided he has complied with the formalities. For the future, it is likely that the Court of Cassation will continue to protect the right of retention, even in the event of insolvency proceedings.

Summary and Next Steps

FAQ:

1. Can I keep the rents collected after my debtor's judicial reorganisation? Yes, if the assignment was notified to the tenant before the opening of the proceedings.
2. What should I do if the judicial representative demands the rents? Refuse by invoking your right of retention. Consult a lawyer to formalise your opposition.
3. What are the risks if I did not notify the assignment? You will have no right of retention and must repay the rents.
4. Does this decision apply to assignments concluded after 2006? Yes, the principle of the right of retention remains, but the applicable provisions are Articles 2355 et seq. of the Civil Code.
5. Can I still receive the rents after the closure of the insolvency proceedings? Yes, as long as your debt is not extinguished.

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