Daily Development for
Wednesday, September 16, 1998

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

MORTGAGES; LEASES; ATTORNMENT AGREEMENTS: Notwithstanding termination of a lease through foreclosure by a senior mortgagee, the mortgagee can enforce an attornment agreement in the lease requiring tenant to execute with any foreclosure sale purchaser, upon request, a new lease on the same terms and conditions.

Principal Mutual Life Ins. Co. V. Vars, Pave, McCord & Freedman, 77 Cal. Rptr. 2d 479 (Cal. App. 1998).

Law firm Tenant entered into a lease that contained an agreement that the lease would be subordinate to any mortgage, whether arising before or after the lease, and an attornment clause by which the tenant agreed to execute a new lease with a purchaser at foreclosure of any mortgage, whether or not in existence at the time of the lease. Tenant sought, but failed to get, a non disturbance promise.

Later, the landlord mortgaged the property to Mortgagee and Mortgagee ultimately foreclosed on the property while the lease still had three years to run. Mortgagee, anticipating problems created under prior California cases, first filed a unilateral subordination of its mortgage to all existing leases. The trial court held that the mortgagee's subordination was valid and thus the lease was preserved but that, in any event, the attornment agreement bound the tenant to execute a new lease with the mortgagee even if the original lease had been terminated by the foreclosure.

On appeal: Held: affirmed: Although the appeals court did not agree that the unilateral subordination was valid, it upheld the trial court's conclusion because it viewed the attornment binding in any event.

Comment: The two precedent cases giving rise to the issues in this case are becoming well known to mortgage mavens nationwide. The principle case is Dover Mobile Estates v. Fiber Form Products, Inc., 270 Cal. Rptr. 183 (Cal. App. 1990). Dover involved a lease that had been rendered subordinate to a mortgage by a subordination clause. The clause provided that the mortgagee had the right to reverse the subordination at its election and make the lease senior. The purpose of such a clause, of course, was to give the mortgagee the right to elect to preserve the lease at time of foreclosure. The mortgagee foreclosed without notifying the lessee in advance that it intended to treat the lessee as senior to the mortgage. Thereafter, when the mortgagee, having bought at the sale, attempted to enforce the lease, the lessee argued that the lease had been terminated and refused to perform. The court agreed with the tenant, holding that the mortgagee had an obligation to notify the lessee prior to foreclosure of the mortgagee's intent to foreclose.

Dover has been criticized by many mortgagee supporters as denying the mortgagee the right to carry out a scheme that was the probable intent of the documentation. The editor has favored the result in Dover because the editor is symphathetic to the plight of a tenant that has no idea how to respond to a forthcoming foreclosure because it does not know what the consequences will be to its rights. To permit the mortgagee to "leave the tenant hanging" until after the foreclosure takes away any ability for the tenant to prepare to leave or prepare to stay. The editor would not support such a result unless the documentation is crystal clear that this is the parties' intent. Dover was reinterpreted and, to a certain degree, limited, in Miscione v. Barton Dev. Co., 61 Cal. Rptr. 2d 280 (Cal. App. 1997). Miscione limited Dover somewhat by holding that an attornment clause in a lease can be enforced by a foreclosure senior mortgagee after foreclosure. But (at least as interpreted by the instant court) Miscione viewed the attornment clause before it as essentially functioning as a nondisturbance clause. Therefore, the outcome in Miscione would not violate the concern addressed in Dover that the tenant is left in the dark until after foreclosure, since the attornment clause effectively reversed the subordinate status of the tenant all along it acted as a non disturbance clause.

As so interpreted, Miscione caused perhaps more problems than it solved, since mortgagees are not keen to have attornment clauses read as nondisturbance guarantees, and in fact very much want to have the choice to keep or terminate leases at their option.

The instant case gives the mortgagees all they could ever want it enforces a properly drafted attornment clause to give the mortgagee free rein, both before and after foreclosure, regardless of the subordinate status of the lease, to keep or terminate the tenant.

The editor agrees with the result here, notwithstanding the editor's concerns about fairness to the tenant. Although the editor does not support overinterpreting vague documents to benefit the lender's position here, the tenant, at bottom, needs to look out for itself. If the tenant in a commercial context signs a clause that unequivocally commits it to an option subordination situation, there is no principle of public policy or contract interpretation that warrants setting aside the clear agreement of the parties.

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