Foreclosure  ·  September 20, 2026

The Building Defaulted. Who Gets the Rent?

A twelve-unit building stops covering debt service. The owner misses two payments. Somewhere in the loan file is an assignment of leases and rents that nobody has read since closing, and the question everyone asks at once — the owner, the property manager, the tenants, and the broker trying to keep a sale together — is the same. Who gets the rent on the first of next month?

The short answer: the owner keeps collecting until the lender takes one of the four enforcement steps described below. Default alone does not move the rents. But once the lender takes any of those steps — including a written demand delivered to the owner directly — the owner must stop treating the rents as its own. Where the lender has proceeded by demand on the tenants or on the owner, the owner must turn over the cash proceeds it still holds; where a receiver has been appointed, the accounting runs to the receiver, who answers to the court rather than to the lender. Continuing to collect after a receiver is in place can be a contempt problem, not a negotiating position.

The longer answer is in Civil Code section 2938, which tells you what the lender's interest in the rents actually is and the four ways it may be reached, and in Code of Civil Procedure section 564, which supplies the receiver. Between them they explain a pattern that otherwise looks strange: lenders holding a perfectly good assignment of rents will often go to the expense of asking a court to appoint someone else to collect. Section 2938(g) is why.

This article is for owners, investors and brokers on income property. It is about the rents specifically, not the foreclosure — our overview of judicial versus non-judicial foreclosure covers what happens to the property itself.

Does the lender own the rents, or just have a lien on them?

A lien. The statute forecloses the argument in its opening words.

Civil Code section 2938(a) provides that a written assignment of an interest in leases, rents, issues or profits made in connection with an obligation secured by real property — "irrespective of whether the assignment is denoted as absolute, absolute conditioned upon default, additional security for an obligation, or otherwise" — is effective upon execution and delivery by the assignor to create a present security interest in existing and future leases, rents, issues or profits.

Read that phrase again: irrespective of whether the assignment is denoted as absolute. Loan documents are still drafted calling the assignment absolute. In California, for contracts entered into on or after January 1, 1997, the label does not control. Section 2938(i)(1) sets that date, and pre-1997 contracts are governed by the former sections 2938 and 2938.1. Older case law using the language of absolute assignment has to be read against that line.

Two consequences follow. The lender holds security, not ownership, so the rents are not simply the lender's to take on the day of default. And because it is a security interest, the machinery for reaching it is statutory rather than contractual.

Note also that subdivision (a) is about attachment — the interest arises on execution and delivery. Perfection is subdivision (b), and it happens on recordation, in the same manner as any other conveyance of an interest in real property. Section 2938(b)(2) adds a clause worth knowing: once recorded, the interest is deemed fully perfected as of the time of recordation, notwithstanding any provision of the assignment or of law that would otherwise preclude or defer enforcement until a later event — the statute's own examples being "a subsequent default of the assignor, or the assignee's obtaining possession of the real property or the appointment of a receiver." Perfection and the right to enforce are different questions, and the statute separates them deliberately.

Section 2938(j) defines "real property" for this purpose as "real property or any estate or interest therein." The definition carries no owner-occupancy carve-out and no unit-count threshold, so the section reaches a duplex and a regional shopping center alike. Occupancy does matter in one narrower place — the residential-tenant rule discussed below — but not to whether the section applies.

How can a lender start collecting the rents?

On default, section 2938(c) provides that the assignment "shall be enforced by one or more of the following":

1. The appointment of a receiver.
2. Obtaining possession of the rents, issues or profits.
3. Delivering to one or more tenants a written demand for turnover in the form specified in subdivision (k), with a copy to the assignor and copies mailed to other assignees of record.
4. Delivering to the assignor a written demand for the rents, with copies mailed to other assignees of record.

That "shall be enforced by" makes these the exclusive methods, but not mutually exclusive ones: the lender may use more than one, and the statute does not require it to try one before another.

Timing matters, though not as an invitation to move quickly. Once the lender takes one or more of those steps, it is entitled to rents that have accrued but remain unpaid and uncollected as of that date, plus everything accruing afterwards. For a tenant demand, the operative date is when the tenant actually receives it, not when it was sent.

Rents the owner has already collected and applied in the ordinary course of operating the property are outside that particular step. An owner should not treat that as a reason to accelerate collections or drain accounts. Where the lender has proceeded by tenant demand or assignor demand — routes three and four — section 2938(f)(1) adds a right to immediate turnover of cash proceeds still in the owner's or its agent's hands, net of any expenses the lender authorized in writing, and a right to sue for them "without the necessity of bringing an action to foreclose a security interest that it may have in the real property." The loan documents usually impose their own covenants on the handling of rents after default, and spending outside the ordinary course of operating the property creates its own exposure.

Route three has formal requirements that catch people out. The tenant demand must use the statutory form in subdivision (k), and under subdivision (d) it must be signed under penalty of perjury by the assignee or an authorized agent, and is effective against the tenant only when actually received at the notice address under the lease, or at the property if the lease gives none.

Even then, the tenant's obligation to pay the lender does not arise in two situations named in subdivision (d): where the tenant has already received a facially valid demand from another assignee, sent in accordance with subdivisions (c) and (d), or where the tenant, in good faith and in a manner that is not inconsistent with the lease, has already paid the assignor, or so pays within 10 days of receiving the demand. Outside those circumstances, a tenant who pays the lender has satisfied its obligation under the lease, and the tenant's obligation to pay the lender continues until either a court directs the tenant to pay differently or the lender cancels the demand in writing.

There is also a protection running the other way. Subdivision (d) provides that a tenant who pays the assignor after receiving a demand, other than in the circumstances the subdivision describes, is not discharged — "unless the tenant occupies the property for residential purposes." A residential tenant who pays the owner is discharged either way, which matters to an owner of mixed residential and commercial space working out its accounting with the lender.

What does collecting the rents directly cost a lender?

This is the provision that explains the receiver, and it is not intuitive.

Section 2938(g)(1) applies where the assignee enforces the assignment "by means other than the appointment of a receiver" and receives rents. In that situation, the assignor — or another assignee of the same property — may make written demand on the lender to pay the reasonable costs of protecting and preserving the property, including taxes, insurance and compliance with building and housing codes.

Subdivision (g)(2) then requires the lender, on and after the date it receives that demand, to pay those reasonable costs, but only "to the extent of any rents, issues, or profits actually received." Two protections are built in: subdivision (g)(2) says on its face that no such acts by the assignee shall cause it to become a mortgagee in possession — though subdivision (e)(1), which reaches not only enforcement actions under (c) but any collection, distribution or application of rents following one, carries the actual-possession limit discussed below, so a lender should not read (g)(2) as an unqualified safe harbor — and the duty "shall not be construed to require the assignee to operate or manage the property, which obligation shall remain that of the assignor."

Now the part that drives behavior. Under subdivision (g)(3), that obligation continues until the earlier of two events: the date the lender obtains the appointment of a receiver, or the date the lender ceases to enforce the assignment. Subdivision (g)(4) confirms that none of this diminishes the lender's right to a receiver.

So a defaulting borrower has a limited lever — one the lender can neutralize by obtaining a receiver. A lender that sends tenant demands and starts collecting rents can be met with a written demand that turns those rents into a fund for property taxes, insurance premiums and code compliance work. The lender is not obliged to manage the building, but it is obliged to pay those costs out of what it collects, up to the amount it collects. The lender has two ways to end that obligation: stop collecting, or obtain a receiver.

Note the trigger. The duty runs from the date the written demand is received, not retroactively over everything collected beforehand. So where the lender is enforcing by a route other than a receiver and is in fact receiving rents, the demand has to be sent to start the clock. Whether to send it is a judgment call rather than an obvious move, because it can prompt the lender to seek the receiver that ends the obligation.

Why do lenders go to a receiver instead?

Because a receivership ends the section 2938(g) exposure and solves several other problems at once.

Code of Civil Procedure section 564(b) lists the grounds. Three matter on income property.

Section 564(b)(2) applies in an action by a secured lender for judicial foreclosure. Its elements repay close reading: the first requirement has two branches, either of which will do — that the property is in danger of being lost, removed or materially injured, or that the condition of the deed of trust or mortgage has not been performed — and then a second, conjunctive requirement that the property is probably insufficient to discharge the debt. A lender that is comfortably oversecured should not obtain a receiver under this paragraph merely because payments stopped. That is cold comfort on its own, though, because the next two paragraphs carry no insufficiency requirement at all.

Section 564(b)(11) authorizes a receiver in an action by a secured lender for specific performance of an assignment of rents provision in a deed of trust, mortgage or separate assignment document, and provides that the appointment may be continued after entry of a judgment for specific performance "if appropriate to protect, operate, or maintain real property encumbered by a deed of trust or mortgage or to collect rents therefrom while a pending nonjudicial foreclosure under power of sale in a deed of trust or mortgage is being completed." This is the paragraph that pairs with a trustee's sale.

Section 564(b)(12) covers a case brought by an assignee under section 2938(g) — the statute pointing back at itself.

Then the sentence that makes the strategy work. Section 564(d) provides that "[a]ny action by a secured lender to appoint a receiver pursuant to this section shall not constitute an action within the meaning of subdivision (a) of Section 726." Asking for a receiver does not trip the one-action rule.

What can a receiver actually do?

Less unilaterally than people assume, and more than a lender could do alone.

A receiver is not the lender's agent. California Rules of Court, rule 3.1179(a) states it plainly: "The receiver is the agent of the court and not of any party," is neutral, acts for the benefit of all who may have an interest in the receivership property, and holds assets for the court rather than for either side. Rule 3.1179(b) separately bars the nominating party from side arrangements with the receiver about fees, hiring or capital expenditures. Owners who assume the receiver works for the bank are starting from the wrong premise, and so are lenders who assume the same thing.

Code of Civil Procedure section 568 gives the receiver power, "under the control of the Court," to bring and defend actions in its own name, take and keep possession, receive rents, collect debts, compromise them, make transfers, and generally do such acts respecting the property "as the Court may authorize." The operative words are under the control of the Court and as the Court may authorize — the appointing order is the receiver's charter, which is why the terms of that order repay close attention.

A receiver can sell real property in the receiver's possession, but not casually. Section 568.5 permits a sale "pursuant to an order of the court," on the notice and in the manner prescribed by the execution-sale provisions beginning at section 701.510, and "[t]he sale is not final until confirmed by the court."

The housekeeping rules are real obligations. Under rule 3.1181 the receiver must file an inventory within 30 days of appointment, or within such other time as the court orders. Under rule 3.1182 the receiver must provide monthly reports to the parties and, if requested, to nonparty client lien holders — a narrative report, a financial report, and a statement of fees itemized in tenth-of-an-hour increments — and those reports are not filed with the court unless the court so orders. Rule 3.1184 governs discharge, by noticed motion or stipulation of all parties, with notice to every person known to the receiver to have a substantial unsatisfied claim that will be affected, whether or not that person is a party.

One practical point for anyone with a claim against a receivership. In Vitug v. Griffin (1989) 214 Cal.App.3d 488, 493, the Court of Appeal applied the rule that failure to obtain leave to sue a receiver "is not jurisdictional, and failure to obtain is an irregularity which may be cured at any stage of the proceedings" (quoting Ostrowski v. Miller (1964) 226 Cal.App.2d 79, 83, which in turn quotes Larson v. Baird (1931) 60 N.D. 775) — and treated the objection as waived by a receiver who litigated without raising it. The safe course is still to obtain leave before filing; the point is only that a suit already filed without it is not automatically lost.

Does collecting the rents cost the lender its right to foreclose?

For post-1996 assignments, no. The codes say so four separate times, which tells you how contested the question once was.

Section 2938(c) provides that applying or failing to apply the rents shall not result in the loss of any lien or security interest, render the obligation unenforceable, "constitute a violation of Section 726 of the Code of Civil Procedure," or otherwise limit a right available to the assignee with respect to its security. Section 2938(f)(1) provides that a turnover action for cash proceeds "shall not violate Section 726." Section 564(d) covers the receiver application. And section 2938(e)(2) provides that an enforcement action shall not "[c]onstitute an action, render the obligation unenforceable, violate Section 726 of the Code of Civil Procedure, or, other than with respect to marshaling requirements, otherwise limit any rights available to the assignee with respect to its security."

Note where that reservation in (e)(2) sits. The marshaling carve-out attaches only to the closing catch-all — enforcement does not otherwise limit the assignee's rights in its security, other than with respect to marshaling requirements. It does not qualify the section 726 protection itself. That is a narrow point, but it is the sort of qualifier that migrates to the wrong clause when a statute is summarized.

Two other provisions in subdivision (e) deserve an owner's attention. Under (e)(1), enforcement does not make the lender a mortgagee in possession "except if the assignee obtains actual possession of the real property." Actual possession is the line, and route two of the four enforcement routes is taking possession — so the case is not hypothetical. And the closing sentence of subdivision (e) provides that applying rents to the secured obligation satisfies that obligation to the extent of those rents and, notwithstanding contrary loan documents, "shall be credited against any amounts necessary to cure any monetary default for purposes of reinstatement under Section 2924c."

Read that credit carefully, because the distinction decides money. The credit attaches to rents the lender has applied to the secured obligation — not to every dollar it has collected. Rents the lender spends on taxes, insurance or code compliance under subdivision (g) are collected but not applied to the debt. A borrower working out a reinstatement figure should ask the lender which rents it has applied, and should not assume the two numbers are the same. The reinstatement right itself runs until five business days before the sale date in the initial recorded notice of sale; our article on the notice of default and the reinstatement window explains how that clock runs and when it can revive.

What is unsettled

Two honest limits.

There is very little recent appellate authority here. As of September 20, 2026, our research has not identified a published California appellate decision from 2024 through 2026 construing section 2938, or applying it to a lender's receivership over income-producing real property. Semaan v. Mosier (2026), a published Fourth District decision confirming quasi-judicial immunity for a receiver's discretionary acts, is the recent authority closest to the subject, but it concerned a receivership over investment accounts rather than real property.

The leading cases on mortgagee in possession — Kinnison v. Guaranty Liquidating Corp. (1941) 18 Cal.2d 256 and Childs etc. Co. v. Shelburne Realty Co. (1943) 23 Cal.2d 263 — long predate the current statute. They remain useful on how the status arises, but their rule that a mortgagee must take possession or obtain a receiver to perfect a claim to rents is displaced, for post-1996 contracts, by section 2938(b)(2).

The appointing order does most of the work. What a receiver may do about leases, capital expenditures or borrowing against receivership certificates is a question about the order, not about a general body of receiver powers. California has no direct equivalent of the federal bankruptcy power to reject a lease. If the order does not authorize it, the receiver has to come back to court.

If you are dealing with any of this, our contract disputes page describes how we approach it.

Frequently asked questions

This article is general information about California law, not legal advice, and reading it does not create an attorney-client relationship. Statutes and case law change, and how they apply depends on the specific facts. Attorney advertising. Prior results do not guarantee similar outcomes. Robert B. Mobasseri, State Bar No. 193193, ROMO Law Group, Encino, California.