Right & wrong ways to for a leasehold mortgagee to subordinate: BRE v Farmers Bank


THE EDITOR’S TAKE: Some years ago, I wrote a column on Vallely Invs. v BancAmerica Commercial Corp. (2001) 88 CA4th 816 (reported at 24 CEB RPLR 201 (July 2001)), in which the tenant’s mortgage lender, after foreclosing on its leasehold mortgage, had not only acquired that leasehold, but also “assumed” the lease. That assumption made the lender responsible for all rent due for the remainder of the lease term because it had thereby created privity of contract with the landlord (the opposite of what happened here). See Leasing and Loaning but Losing Track of the Difference, 24 CEB RPLR 188 (July 2001) (also on my website at RogerBernhardt.com).


The lease assumption in Vallely had been executed inadvertently, because the original lease had not required any assumption by the mortgagee after any later foreclosure, whereas the landlord and tenant in BRE certainly appeared to contemplate that there would be an assumption after any foreclosure (their lease providing that “in the event the Leasehold Mortgagee succeeds to Tenant’s interest under this lease ... it shall assume all of Tenant’s obligations under this Lease”). That notion also must have been shared by the leasehold mortgagee, who certainly would have reviewed the lease before making a loan and accepting the leasehold as security. Thus, in both situations, the clients apparently paid little attention to what their lawyers had laid out for them.


The result of the inattentiveness in BRE was that a leasehold mortgagee who had taken over the leasehold that secured its loan did not owe the rent due for the balance of the term once it had abandoned the premises, because there was neither privity of estate (possession) nor privity of contract (assumption) to support such an obligation—even though it had probably made its loan with the expectation of having to confront such a potential rental obligation in the future, if its debtor/tenant failed.


The landlord was alert enough to demand an estoppel certificate from the leasehold tenant, which the lender executed on behalf of the tenant as its majority member. I wonder what effect a differently drafted certificate would have had if that certificate had declared that the lender “intended” to or had in fact “assumed” the lease. But there was apparently no such helpful language in that certificate, and I did not find any such [142] language in the various model forms in the databases (unless the boilerplate provision that the lease is in “full force and effect” is supposed to have that meaning, although that seems like a pretty risky way of creating privity).—Roger Bernhardt


40 Real Property Law Reporter 141 (Cal CEB Nov. 2017), © The Regents of the University of California, reprinted with permission of CEB.