Daily Development for Monday, March 20, 2006

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LANDLORD/TENANT; ASSIGNMENT; ASSIGNEE’S LIABILITY: Mortgagee acquiring tenant’s leasehold estate at foreclosure does NOT thereby become liable for rents unless there is a separate assumption agreement with the landlord. (?!!)

Hotel owner acquired by assignment a leasehold estate in a parcel adjacent to its hotel to provide additional parking. Later, hotel owner granted a mortgage on the hotel and on the leased parking area to Lender. Following hotel owner’s default, Lender foreclosed judicially, and the foreclosure order stated specifically that the property was sold "together with the rights of borrower [in the lease].’

The Lender later concluded it had no use for the parking lot and did not occupy it. It refused to pay the ongoing rent, and the landlord sued. The South Carolina appeals court here held that the mortgagee was not liable for the rents because it had not expressly agreed with landlord that it assumed the obligations of the lease. The court noted that the prior assignment to the hotel had included such a separate agreement with the landlord.

Comment 1:   This case could not be more wrong. The court seems to be completely befuddled by the special fact that the assignee of the lease here was a foreclosing mortgagee. It discusses the mortgagee as taking title "subject to" the lease. Of course, if a foreclosure purchaser takes "subject to" a senior mortgage, the purchaser does not become personally liable for the senior mortgage principle and interest. But the issues are entirely different. In the foreclosure case, the interest acquired is the fee, and the fee is subject to a lien. In the case of a foreclosure on a leasehold estate, the interest acquired is the estate created by the lease, and there is no encumbrance or lien - the lease assignment itself carries the obligation.

Comment 2:  There is, in fact, a distinction between an assuming lease assignee and a non-assuming assignee, but it does not have to do with liability for rent while the assignee holds the rights to the lease. If the assignee reassigns the lease, and is no longer in privity of estate, then the law is that the assignee is not liable for rents arising after the reassignment. But the original assignee will be liable for such rents if the original assignee had contractually assumed the obligations under the lease. But this rule has nothing to do with the question of the assignee’s liability where, as here, the assignee remains in privity of estate.

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