Lessor

A lessor is the owner of real property who grants a lease — a contractual right to use and occupy the property — to another party (the lessee) in exchange for rent. In common usage, the lessor is the landlord. While "lessor" is a general real estate and contract law term, it has specific relevance in mortgage note investing when the borrower on a defaulted loan is not living in the property but is instead renting it out to a tenant.

Lessor vs. Lessee

The lessor-lessee relationship is defined by a lease agreement that specifies the terms of occupancy:

The lessor retains ownership of the property — the lease transfers a possessory interest, not an ownership interest. This distinction matters in note investing because the borrower (property owner) may be the lessor while a third-party tenant occupies the collateral.

Why Lessors Matter in Note Investing

When a note investor acquires a non-performing loan, one of the first questions during due diligence is whether the property is owner-occupied, tenant-occupied, or vacant. If the borrower is acting as a lessor — renting the property to a tenant — it changes the resolution calculus in several ways:

• Borrower income — the borrower may be collecting rent, which means they have cash flow that could support a loan modification or discounted payoff
• Occupancy verification — the person living in the property is not the borrower, which complicates door-knock visits and borrower outreach
• Foreclosure complications — in many states, tenants have rights that survive foreclosure, including the right to remain through the end of their lease term under the federal Protecting Tenants at Foreclosure Act
• Property condition — tenant-occupied properties are generally in better condition than vacant properties because someone is maintaining them day-to-day
• Post-resolution management — if the note investor takes the property through deed-in-lieu or foreclosure, they inherit the tenant and become the new lessor

Lease Survival After Foreclosure

The Protecting Tenants at Foreclosure Act (PTFA) requires that bona fide tenants receive at least 90 days' notice before being required to vacate after a foreclosure sale, even if the lease term has expired. If the tenant has a valid lease with time remaining, the new owner must generally honor that lease. This federal protection means note investors cannot simply foreclose and immediately remove tenants — they must plan for the transition.

Identifying the Lessor During Due Diligence

Note investors use several methods to determine whether a borrower is acting as a lessor:

• Credit report — if the borrower's mailing address differs from the property address, the property may be tenant-occupied
• Property inspection or BPO — a drive-by inspection may reveal tenants, and a BPO agent can often confirm occupancy status
• Tax records — if the borrower claims a different homestead exemption address, the collateral property is likely a rental
• Utility records — utilities in a name other than the borrower's suggest tenant occupancy
• Servicer notes — the loan servicer may have records of borrower communications indicating the property is rented out

Understanding whether the borrower is a lessor — and whether the property is producing rental income — directly informs loss mitigation strategy and the investor's resolution approach.