Court Opinion

ID: 9746113
Source: CourtListenerOpinion
Date Created: 2023-08-27 13:59:53.012619+00
Date Added: 2024-06-11T07:25:08.899123
License: Public Domain

HOLLENHORST, Acting P. J.
I dissent.
I agree with the majority that (1) the nonjudicial foreclosure of a trust deed extinguishes a subordinate lease and (2) the lender did not exercise an option to obtain a subordination agreement that would change this result by making the lease senior to the deed of trust.
I disagree with the majority’s conclusion that there was nevertheless a subordination agreement here because (1) the lease contained an attornment clause and (2) the lender requested payment of rent to it after the foreclosure.
I agree with the trial court that the lease, including the attornment clause, was extinguished by the foreclosure sale by operation of law, leaving the tenant on a month-to-month tenancy.
*13331. The General Rule Is That a Junior Lease Is Automatically Extinguished by a Nonjudicial Foreclosure.
In my view, the trial court properly relied on Dover Mobile Estates v. Fiber Form Products, Inc. (1990) 220 Cal.App.3d 1494 [270 Cal.Rptr. 183]. That case succinctly states the applicable general principles: “Title conveyed by a trustee’s deed relates back to the date when the deed of trust was executed. [Citation.] The trustee’s deed therefore passes the title held by the trustor at the time of execution. [Citation.] Liens which attach after execution of the foreclosed trust deed are extinguished. The puchaser at the trustee sale therefore takes title free of those junior or subordinate liens. [Citations.] [<iD A lease is generally deemed to be subordinate to a deed of trust if the lease was created after the deed of trust was recorded. . ..[<][] A lease which is subordinate to the deed of trust is extinguished by the foreclosure sale. [Citations.] A foreclosure proceeding destroys a lease junior to the deed of trust, as well as the lessee’s rights and obligations under the lease.” (Id., at p. 1498.)
The majority agrees with these general principles, stating that “there is no dispute that the general rule is that foreclosure of a senior encumbrance terminates subordinate liens, including leases.” (Maj. opn., ante, at p. 1326.) I refer to this rule as the automatic termination rule.
2. A Subordination Agreement Could Have Been Used to Prevent Automatic Termination of the Lease Upon Foreclosure.
“The priority of interests in or liens on real property can be altered by a voluntary agreement between the parties. A person holding an existing interest in real property can agree, for a consideration, that his interest is to be junior in priority to an interest subsequently created and recorded. As a result of the agreement, the interest subsequently created obtains priority over the previously existing interest. Such an agreement is called a ‘subordination agreement.’ ” (3 Miller & Starr, Cal. Real Estate (2d ed. 1989) Recording and Priorities, § 8:157, p. 617.)
The lease here contains a subordination and attornment provision. It contains four sentences. The first sentence of the subordination clause in this lease requires the tenant, upon request, to subordinate its rights to the lien of a first mortgage or first deed of trust. Since the lease was already junior to the lien of the first deed of trust, I agree with the majority that this sentence is not directly applicable to the current situation.
The second sentence is the nondisturbance clause. It provides a degree of protection to the tenant by assuring the tenant that, before it is required to *1334sign a subordination agreement, it can obtain assurances from its new landlord that, so long as it is not in default, the lease will remain in effect for the full term.
Again, Dover is instructive: it provides that “. . . the tenant under a subordinate lease can obtain some protection by requiring the landlord to obtain from its lender a non-disturbance agreement in favor of the tenant. Such an agreement provides that the lender with a superior lien will not, ‘by foreclosure or otherwise, disturb the tenant’s possession, as long as the tenant is not then in default under the lease.’ [Citation.]” (Dover Mobile Estates v. Fiber Form Products, Inc., supra, 220 Cal.App.3d 1494, 1500.) As discussed below, the majority’s interpretation of the lease has the effect of eliminating this protection from the lease.
The third sentence states: “The holder of any security interest may, upon written notice to Tenant, elect to have this Lease prior to its security interest regardless of the time of the granting or recording of that security interest.” In other words, this sentence, read together with the second sentence, provides that the holder of the security interest has the option of avoiding the automatic termination rule by requiring the tenant to enter into a subordination agreement that will preserve the lease. If it does so, the tenant can require an agreement which includes the nondisturbance provisions stated in the second sentence.
If preservation of the lease was important to the lender, it could have defeated automatic termination of the lease upon foreclosure by electing to subordinate its security interest to the lease, and it could have forced the tenant to accept it as the new landlord.
I agree with the majority that there was no such election here. As the majority opinion states, “The only potential effect of the clause was to allow the lender to elect that the lease become senior, and this did not happen.” (Maj. opn., ante, at p. 1328.)
Having so decided, the majority should have followed Dover. In that case, as in this, the lease provided that the holder of a security interest could elect to have the lease be prior to the security interest. (Dover Mobile Estates v. Fiber Form Products, Inc., supra, 220 Cal.App.3d 1494, 1496, fn. 1, 1499.) In that case, as in this, the option was never exercised. “Accordingly, it is clear that the lease is subordinate to the deed of trust and was therefore extinguished by the trustee’s sale.” (Dover Mobile Estates, supra, at p. 1499.)
Instead of so holding, the majority goes on to find that no subordination agreement was necessary because the attornment clause, plus certain unrecorded letters from the lender, constituted an agreement which avoids the automatic termination rule.
*13353. The Attornment Clause.
The fourth sentence is the attornment clause. It provides: “In the event of any foreclosure sale, transfer in lieu of foreclosure or termination of the lease in which Landlord is lessee, Tenant shall attorn to the purchaser, transferee or lessor as the case may be, and recognize that party as Landlord under this Lease, provided that party acquires and accepts the Premises subject to this Lease.”
The majority opinion gives this sentence unwarranted weight by interpreting it to be part of an agreement to alter priorities without the use of a subordination agreement. Before examining the majority’s strained construction, we need to briefly review the historic function of an attornment clause.
At common law, the feudal obligation between lord and tenant was a personal and reciprocal one. The consent of the lord was therefore required for a sale of the tenant’s interest, and the consent of the tenant was required for an alienation of the reversion or remainder interest in property. Thus, the lord could not alienate his reversion or remainder interest without the consent of the tenant. The consent was called an attornment. (2 Blackstone’s Commentaries 71-72; 49 Am.Jur.2d, Landlord and Tenant, § 1053, pp. 823-824.) The necessity for an attornment was abolished before the American Revolution by the Statute of Anne and, under the common law in effect at that time, the landowner could transfer the remainder or reversion without consent of the tenant. (51C C.J.S., Landlord & Tenant, § 22, p. 54.)
In California, the common law rule eliminating the requirement of attornment has been confirmed by statute. Civil Code section 1111 provides that “Grants of rents or of reversions or of remainders are good and effectual without attornments of the tenants; but no tenant who, before notice of the grant, shall have paid rent to the grantor, must suffer any damage thereby.” (See also Civ. Code, §§ 1948 [attornment to stranger void], 821 [grantee has same rights as grantor against tenant]; Evid. Code, § 624 [tenant estopped to deny title of landlord].)
Currently, the term “attornment” refers to the obligation of the tenant to acknowledge his or her obligations to a new landlord, “most often, the agreement of a tenant to pay rent to a new landlord, especially a mortgagee who has foreclosed.” (Black’s Law Diet. (6th ed. 1990) p. 130, col. 1.) The inclusion of an attornment clause in the lease therefore requires the tenant to acknowledge continuation of the existing lease under a new landlord under its previously existing terms and conditions. (51C C.J.S., Landlord & Tenant, § 22, pp. 55-56.) “Attornment contemplates the act or agreement by a *1336tenant accepting one person in place of another as his landlord.” (Krasner v. Transcontinental Equities, Inc. (1979) 170 A.D.2d 312 [420 N.Y.S.2d 872, 875]; see also Ripple’s of Clearview v. Le Havre Associates (1981) 111 Misc.2d 263 [443 N.Y.S.2d 824, 826].)
It should be apparent from the foregoing that the inclusion of the attornment clause in this lease provided a firm foundation for the lender, as a third party beneficiary of the attornment clause, to require the tenant to enter into a subordination agreement which would make the lease prior to the lien of the deed of trust, thus avoiding the automatic termination rule. However, the attornment clause is not itself a substitute for a subordination agreement.
The attornment clause was subject to the condition that its requirements only became applicable if the purchaser “acquires and accepts the Premises subject to this lease.” In my view, this condition refers to the preceding sentence, i.e., it applies to the holder of a security interest who elects to have the lease survive foreclosure. The majority disagrees. It argues that this clause does not refer back to the preceding sentence but rather is independent of the subordination clause. Read independently, the majority concludes that the condition was satisfied when the purchaser notified the lessee to pay rent to it.
As a result of this reading, the tenant is forced to continue its tenancy under the lease, without the protection afforded by the nondisturbance clause. The effect is that the tenant loses the protection afforded by the nondisturbance clause, and that clause is effectively read out of the lease. The majority’s strained interpretation thus violates the basic rule of contract interpretation stated in Civil Code section 1641: “The whole of a contract is to be taken together, so as to give effect to every part, if reasonably practicable, each clause helping to interpret the other.”
4. The Majority Opinion Finds a Subordination Agreement Where There Is None.
The majority agrees that there must be an agreement to alter priorities in order for plaintiff to prevail. Although there was no subordination agreement in this case, the majority finds that “[t]he tenant had contracted to alter the priorities otherwise established by law.” It thus finds an agreement to subordinate, and a concomitant avoidance of Dover’s automatic termination rule, in the lease and other documents. Specifically, the majority finds that the lease survives the foreclosure sale because (1) the tenant agreed to the attornment clause in the original lease with the former landlord and (2) the lender notified tenant to make rent payments to it after the foreclosure. *1337According to the majority, this alleged agreement had the effect of a formal subordination agreement.
I find this interpretation untenable for the following reasons.
First, the attornment clause is not a substitute for a subordination agreement. As discussed above, the attornment clause allowed the lender to require the tenant to enter into a subordination agreement which would make the deed of trust subordinate to the lease. The letters asking the tenant to pay rent to the lender after foreclosure, whether read with the attornment clause or independently, are not, in my view, a substitute for a subordination agreement.
Second, the majority’s contrary interpretation has the effect of depriving the subordination clause of any meaning. As discussed above, the subordination clause does not itself effect subordination. It only gives the holder of the security interest the right to require a subordination agreement in return for a nondisturbance agreement. By holding that the attornment clause and notification letters are themselves an agreement to subordinate, the majority eliminates the lender’s option under the subordination clause, eliminates the need for separate subordination agreements and eliminates the protection given by the nondisturbance clause. As discussed above, it is particularly unfortunate that the protection of the nondisturbance clause is effectively written out of the lease by the majority’s interpretation.
The majority justifies the ignoring of the subordination clause by remarking that “the subordination clause of the lease was of no value to Coast since its senior position was already fixed by law.” However, I think that the subordination clause of the lease was valuable to Coast because it was seeking to preserve the lease and enforce its terms. The third sentence of the subordination clause provided it with the means to do so. However, it did not invoke its rights under the clause, thus leading to the tenant’s reliance on the automatic termination rule. In any event, such an interpretation is contrary to the rules of statutory interpretation. (Civ. Code, §§ 1638, 1639, 1641, 1643-1645.) “In the construction of. . . [an] instrument, the office of the judge is simply to ascertain and declare what is in terms or in substance contained therein, not to insert what has been omitted, or to omit what has been inserted; and where there are several provisions or particulars, such a construction is, if possible to be adopted as will give effect to all.” (Code Civ. Proc., § 1858.)
Third, the majority’s strained interpretation of the attornment clause, together with its reliance on letters that only demand payment of rent to the *1338new owner, is an interpretation which introduces uncertainty into the otherwise well-settled law which requires written subordination agreements to adjust priorities between lenders and tenants. Such an interpretation will lead to other litigants claiming that subordination occurred because of documents and correspondence other than formal subordination agreements. For example, a tenant who wishes to preserve its lease, which includes an attornment clause, will claim that a routine written notice, given after foreclosure, that rent should be paid to the new landlord acted as a subordination agreement, thus making the lease superior to the lien of the trust deed. In such a situation, the lender would not be able to evict the tenant, even if it did not wish to be bound by the terms of the lease, considered the lease terminated, and only intended the rent to be payable under a month-to-month tenancy.
The majority’s interpretation also avoids the specificity required in certain subordination agreements. For example, a subordination agreement for loans under $25,000 must contain specific terms which expressly notify the parties that the statutory priorities are being modified. (Civ. Code, § 2953.3.)
Fourth, the majority’s interpretation contradicts the purpose and function of recording subordination agreements. Because the automatic termination rule is a result of application of priorities under the recording laws, subordination agreements are generally recorded to give constructive notice that the usual priority rules have been modified by agreement. (Civ. Code, § 2934; Protective Equity Trust #83, Ltd. v. Bybee (1991) 2 Cal.App.4th 139 [2 Cal.Rptr.2d 864].)
For example, a prospective purchaser from Coast who examined title would find a senior deed of trust which had been foreclosed and a junior lease. Relying on the recording law, the prospective purchaser would conclude that the automatic termination rule applied. If the purchaser bought the property thinking that the lease was terminated, the lessee could nevertheless contend that the lease was still valid because of the attornment provision in its original lease and an unrecorded letter from Coast requesting payment of rent to Coast. Thus, the majority’s interpretation would introduce uncertainty into a previously settled area of the law.
These actions by a tenant could burden the lender’s property without its prior knowledge. For this reason, the automatic termination rule eliminates all encumbrances subsequent to the deed of trust. There is a sound policy basis for such a rule: “The policy underlying the [automatic termination] rule is to protect lending institutions from fraudulent amendments to leases which would encumber the value of their acquired property. If the rule were different, lending institutions would be discouraged from making loans since *1339they would have no assurances that the borrower and senior leaseholder would not drastically reduce the value of the lease, thereby reducing the value of the property . . . .” (R-Ranch Markets #2, Inc. v. Old. Stone Bank (1993) 16 Cal.App.4th 1323, 1328 [21 Cal.Rptr.2d 21]; Homestead Savings v. Darmiento (1991) 230 Cal.App.3d 424, 437 [281 Cal.Rptr. 367].)
Fifth, the majority’s opinion undercuts the automatic termination rule by allowing a lease provision and postforeclosure documents to circumvent the rule, even though the lease itself was previously terminated. Since the lease, including the attornment clause, was previously terminated, the lender never became a successor landlord under the lease and had no right to enforce the lease against the tenant.
Sixth, the majority opinion finds that Dover is distinguishable “for the simple reason that the court in that case did not discuss whether the lease contained an attornment clause or what the effect of such a clause would be.” (Maj. opn., ante, at p. 1329.) I find this an insufficient basis for distinguishing Dover, since we do not know if the lease in that case contained an attornment clause or not. However, since it is common for attornment clauses to coexist with subordination and nondisturbance clauses (Chumash Hill Properties, Inc. v. Peram (1995) 39 Cal.App.4th 1226, 1230-1231, 1233 [46 Cal.Rptr.2d 366]), it is more likely that there was an attornment clause in the Dover lease, but the court did not discuss it because no one thought to give it the undue emphasis and strained construction given the attornment clause here. (Dover Mobile Estates v. Fiber Form Products, Inc., supra, 220 Cal.App.3d 1494, 1496, fin. 1, and 1499.) What is clear is that the subordination clause in Dover was, except for the nondisturbance clause, essentially identical to the subordination clause here.
Finally, I note that the majority does not follow its own rules. It states: “[W]e interpret the ‘acquires and accepts’ language [of the attornment clause] as providing merely that the new landlord acknowledges and agrees to be bound by the existing lease . . . .” (Maj. opn., ante, at p. 1331, italics omitted.) Thus, it finds a subordination agreement whenever the new landlord acknowledges the preexisting lease and agrees to be bound by it.
If this is the proper rule defendant should still prevail because the letters relied on by the majority do not contain any promise by the new landlord that it will be bound by the terms of any existing lease, nor do they evidence any intent that the lease become prior to the lien of the trust deed. The letters merely request that rental payments be made to the new property manager. Since Coast never agreed to be bound by the terms of the existing lease, the trial court’s decision should nevertheless be affirmed, even applying the majority’s rules.
*13405. Conclusion.
The majority distorts the meaning of the attornment clause of the lease to avoid the effect of the automatic termination rule. By construing the attornment clause and a letter directing rent to be paid to the new landlord as an unrecorded subordination agreement, the majority ignores the third sentence of the subordination clause. That sentence gives the lender the option to have the lease be prior to the security interest. The option was not exercised here.
The majority’s interpretation of the attornment clause is an unreasonable interpretation that vitiates the subordination clause. It is particularly troubling that the majority deprives the tenant of the protection afforded by the nondisturbance clause.
The majority’s interpretation thus undercuts the previously settled law of subordination. Under that law, it is clear that a junior lease is extinguished by a nonjudicial foreclosure unless it ceases to be a junior lease because its priority is changed by a subordination agreement. While the lender could have exercised its rights under the subordination clause to compel the tenant to enter into a subordination agreement, it did not do so.
I therefore agree with the trial court that Dover is factually indistinguishable and correctly determines the issue here by holding that “A lease which is subordinate to the deed of trust is extinguished by the foreclosure sale.” (Dover Mobile Estates v. Fiber Form Products, Inc., supra, 220 Cal.App.3d 1494, 1498.)
I would affirm the judgment.
A petition for a rehearing was denied March 17, 1997, and respondents’ petition for review by the Supreme Court was denied June 11, 1997. Kennard, J., was of the opinion that the petition should be granted.