Daily Development for
Monday, March 2, 1998

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law

MORTGAGES; ASSIGNMENTS: Where mortgagee asserts rents under an assignment of rents and does not assert its paramount title as mortgagee over the lessee, the tenant has not been "ousted" and the lease remains in effect.

HRPT Advisors, Inc. v. MacDonald, Levine, Jenkins & Co., P.C., 686 N.E.2d 203 (Mass. App. Ct. 1997).

Bank sold commercial property held under a defaulted mortgage to plaintiff landowner, HRPT Advisors, Inc. ("HRPT"), at a foreclosure sale, and HRPT sought recovery of rent due under lease of the property from defendant tenant. Apparently defendant's lease was junior to the mortgage under an "optional reverse subordination" clause, that subordinated the lease but gave the mortgagee the right to "flip" the lease so that it was not cut off at foreclosure.

Tenant argued that the bank had terminated the lease prior to foreclosure by asserting its rights to the rents as mortgagee, thereby terminating the lease and tenant's obligation to pay rent. Prior to the foreclosure, the bank had posted notices about the landlord's building stating that it had taken possession of the premises as a mortgagee in possession. The notice it sent to the tenant, however, claimed only that the mortgagee was claiming a right to rents as mortgagee assignee.

From the very moment that the lessee received the letter, it claimed that the bank had terminated the lease, and the parties continued to wrangle over the issue throughout the foreclosure. It insisted that throughout this wrangling the mortgagee asserted its rights as a mortgagee in possession. At one point it sent a letter "reminding" the tenant that as a mortgagee in possession it had The court does not indicate whether there was a judicial foreclosure (they're not common in Massachussets), but it does indicate that the bank asserted that a clause in the lease obligated the tenant to attorn to the foreclosure sale purchaser following any foreclosure - apparently an "optional reverse subordination clause.".

The Superior Court ruled that the lease terminated when the bank took possession of the premises of which the tenant's space was a part.

On appeal: held: Reversed: Appeals Court held that the bank articulated in its notice to the lessee that it was asserting its rights as assignee. Where mortgagee's demand for payment of rent is as an assignee under a collateral assignment of rent rather than as a mortgagee in possession, then the bank is asserting an interest in rent only, not in the landlord's reversin, and there is no breach of the tenant's rights to continued possession pursuant to the lease. Therefore, no ouster had occurred.

The court indicates that it is not enough that the mortgagee assert possessory rights under the mortgage. There must be some actual disturbance of the lessee's rights under the lease with the mortgagor. The mortgagee need not oust the lessee, apparently, but "to assert paramount title, a mortgagee must couple entry with demand for rent as mortgagee." Id. at 208 (citing Winnisimmet Trust, Inc. v. Libby, 247 Mass. 560, 564, 142 N.E. 772 (1924)). Here, the mortgagee made its demand for rents as rent assignee, therefore, implicitly, acknowledging the continued existence of the lease.

Comment: The court's interpretation of the mortagagee's apparent threats to evict is truly a masterpiece of lender oriented reasoning:

"Our holding here should not be construed to suggest that secured parties who are both assignee and mortgagee may act with impunity. A party's mere giving of notice as assignee does not preclude consideration of competent evidence of demands for rent ot threats to evict made pusuant to its authority as mortgagee. We note simply that demands for rent and threats of eviction for nonpayment are not inconsistent with the exercise of rights as assignee. Moreover, we perceive nothing impermissible in the secured party's recognition of the full panaoply of rights available to it under its dual status."

The editor's advice: don't try this at home, kids. Any time the lender threatens eviction, the lender runs a significant risk of being construed as asserting rights as a mortagee in possession. Although some lenders in some cases, might get the benefit of the doubt, here, where the mortgagee clearly has taken possession of the balance of the premises as mortgagee in possession, it was already dancing on a razor blade. The mortgagee's counsel was very fortunate to get the result it did in this case.

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