Court Holds that Mortgage Lender Does Not
Have to Honor Tenants’ Obligations Under a Lease After a Foreclosure
In BRE DDR BR Whittwood CA LLC v. Farmers and Merchants Bank of Long Beach, a California appellate court held that where a commercial tenant defaulted on a loan secured by his lease, the lender who foreclosed and took possession of the premises, was not bound by the tenants’ right to remain in possession for the full term of the lease. In BRE, a tenant entered a 15 year lease for restaurant space in a shopping center. The tenant recorded a memorandum of lease with the County Recorder’s Office. The tenant subsequently took out a loan from Farmers and Merchants Bank of Long Beach and recorded a construction Deed of Trust securing the loan. The Deed of Trust identified the property as being a leasehold estate. The tenant assigned all of its rights, title and interest in the lease to the lender. The tenant defaulted on the loan and the lender recorded a Notice of Trustee Sale of the property and later recorded a Trustee's Deed upon sale identifying itself as a successful bidder of the lease hold estate. Both documents described the property with the same language as the Deed of Trust. The shopping center owner, plaintiff, sued Farmers for breach of contract. The trial court found in favor of Plaintiff, holding that Farmers succeeded to the original tenant’s rights and obligations. A court of appeal reversed holding that Farmers was not bound by the terms of the original lease. The court found that unless there was an assignment, which expressly bound Farmers, Farmers was not bound by the terms of the lease. Farmers never assumed the lease obligation and was required to pay the rent only until it surrendered possession of the premises, which it did.
Shannon B. Jones