Leasehold Mortgage vs. Assignment of Lease

Lease assignment and leasehold mortgage are two legal arrangements with different functions. If someone leases a piece of property but wishes to be released from the lease before the lease is complete, she can choose to assign her lease to someone else, making that person responsible for all of her duties. But in a leasehold mortgage, a borrower takes her interest in the lease and offers it as collateral on a mortgage attached to the same piece of property.

What's a Lease?

In a typical lease, the lessor -- the landlord -- allows the lessee to rent his property. The lessor usually doesn't give up any part of his ownership; the lessee only has the right to use of the property. The terms of the lease will generally be defined in the lease agreement, but if there's no agreement, or if the agreement doesn't cover all situations that may arise, state law will take over and govern the lease.

Assigning a Lease

As long as the lease allows it, both the lessor and the lessee can assign some or all of their rights and obligations under the lease to a third party at any time during the lease. As opposed to sublease, which releases the lessee from only part of his obligations, an assignment has the power to release the lessee completely from his lease duties, including payment of rent and maintenance of the property. A lessee who wants to assign his lease must first find a third party who's willing to step into his shoes and take his legal place under the lease agreement. This third party -- the "assignee" -- then has the responsibility to pay the rent; if he fails to do so, the lessor can sue only the assignee, not the original lessee.

Leasehold Mortgages

In a mortgage, a lender loans money to a property owner, who uses the money for the purchase price. Typically, the property is used as collateral for the loan and may be seized by the lender if the owner doesn't make mortgage payments. However, in a leasehold mortgage, the lessee of a piece of property takes out a mortgage and uses his interest under the lease as collateral. If he doesn't make mortgage payments, the lender will seize not the property itself, but the lessee's remaining rights under the lease. Leasehold rights are generally not valuable enough to be effective collateral for a small residential mortgage; the leasehold mortgage is more common in large or multi-unit real estate developments. The original lease must not prohibit the lessee from using the lease as collateral.

Similarities and Differences

Lease assignments and leasehold mortgages do share certain aspects. If a lender forecloses on a leasehold mortgage, it does effectively "boot" the lessee out of the lease and substitute the lender in his place. However, this is usually the incidental result of some sort of unforeseen failure in the mortgage; release of the lessor wasn't the point of creating the leasehold mortgage. An assignment of a lease, on the other hand, is a legal step that's generally taken intentionally, with the goal of removing the lessee from the lease.

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About the Author

Erika Johansen is a lifelong writer with a Master of Fine Arts from the Iowa Writers' Workshop and editorial experience in scholastic publication. She has written articles for various websites.

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