Miscione v. Barton Development Co.

52 Cal. App. 4th 1320, 61 Cal. Rptr. 2d 280, 97 Cal. Daily Op. Serv. 1315, 97 Daily Journal DAR 1897, 1997 Cal. App. LEXIS 124

• Court: California Court of Appeal
• Decided: February 24, 1997
• Docket: E015549
• Status: Published

Opinions

Opinion

WARD, J.

Plaintiff John J. Miscione (Miscione), as a successor landlord, filed an action for breach of an office lease and fraud. Defendant Barton Development Company (Barton Development) was the tenant under the lease and defendant James E. Barton (Barton) was alleged to be liable as an alter ego of the tenant. Defendants filed a motion for summary judgment contending the lease was subordinate to a prior trust deed on the property, and the foreclosure of the trust deed had extinguished the lease. The trial court granted summary judgment. Plaintiff appeals and contends that: (1) the general rule that foreclosure of a trust deed extinguishes a subordinate lease does not apply in this case; and (2) the defendants attorned to the new landlord by contractually agreeing to be bound by the lease. We agree and reverse.

Factual and Procedural Background

Defendant Barton, as general partner, formed Rancho Cucamonga Business Park Equities I (Equities I) to develop real property. Equities I constructed an office building known as Barton Plaza and thereafter borrowed $7.6 million from Coast Federal Savings (Coast). Equities I gave, as security for the loan, a trust deed to Coast. The trust deed was recorded January 31, 1986.

The deed of trust provided that Equities I could “not execute or enter into any lease ... of the Mortgaged Property or any portion thereof without the advance written consent of [Coast] as to the form and substance thereof and the acceptability of the tenant. . .

On September 19, 1988, Equities I, as landlord, and Barton Development, as tenant, entered into a five-year lease of space in the office building. The lease was signed by Barton for Equities I and by a vice-president of Barton Development for the corporation. Barton was the president of Barton Development.

Paragraph 23 of the lease contained an attornment clause that provided: “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 same paragraph also contained a subordination and nondisturbance clause that provided: “Upon written request of Landlord, or any first mortgagee, first deed of trust beneficiary of Landlord, or ground lessor of Landlord, Tenant shall, in writing, subordinate its rights hereunder to the lien of any first mortgage, first deed of trust, or the interest of any lease in which Landlord is lessee, and to all advances made or hereafter to be made thereunder. However, before signing any subordination agreement, Tenant shall have the right to obtain from any lender or lessor of Landlord requesting that subordination, an agreement in writing providing that, as long as Tenant is not in default hereunder, this Lease shall remain in effect for the full Term. 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.”

On August 21, 1991, Westinghouse Credit Corporation (Westinghouse) became the owner of the property through foreclosure of its second trust deed on the property. The Westinghouse second trust deed had been recorded on September 30, 1988. On January 30, 1992, Coast became the owner of the property through foreclosure on its first trust deed. Through letters dated January 30, 1992, and March 3, 1992, Coast notified the tenants of the building, including defendants, that it was the new landlord. Coast also requested in writing that defendants execute an estoppel certificate confirming the terms of the lease. Barton admitted receiving the estoppel certificate from Coast, but never executed or returned it. On June 16, 1992, Coast sold the building to Miscione. On July 31, 1992, defendants vacated the premises and have not paid the rent on the premises. This litigation followed.

Miscione sued Barton and Barton Development on the lease and for fraud. Prior to the trial defendants moved for summary judgment contending that the lease had been extinguished when Coast foreclosed on the property. Relying on Dover Mobile Estates v. Fiber Form Products, Inc. (1990) 220 Cal.App.3d 1494, 1498-1500 [270 Cal.Rptr. 183], defendants contended that Coast had an obligation under the lease to elect to have the lease senior to the deed of trust and that it had failed to do so. Defendants further contended that the fraud cause of action failed with the contract action since it was based upon the contract. The court below agreed with defendants’ position and granted the motion for summary judgment. Judgment was entered. This appeal followed.

Discussion

I. Standard of Review

On appeal from the trial court’s grant of defendants’ motion for summary judgment, . . we review the trial court’s decision de novo, applying the rule that ‘[a] defendant is entitled to summary judgment if the record establishes as a matter of law that none of the plaintiff’s asserted causes of action can prevail. [Citation.] To succeed, the defendant must. . . demonstrate that under no hypothesis is there a material issue of fact that requires the process of a trial.’ [Citation.]” (Flatt v. Superior Court (1994) 9 Cal.4th 275, 279 [36 Cal.Rptr.2d 537, 885 P.2d 950].)

The first step of the review begins with an analysis of the pleadings, because “[t]he pleadings define the issues to be considered on a motion for summary judgment.” (Ferrari v. Grand Canyon Dories (1995) 32 Cal.App.4th 248, 252 [38 Cal.Rptr.2d 65].) We next evaluate the moving defendant’s effort to meet its burden of showing that plaintiff’s cause of action has no merit or that there is a complete defense to it. Once the defendant has met that burden, the burden shifts to the plaintiff to show that a triable issue of material fact exists as to its complaint. If the filings in opposition raise triable issues of material fact the motion must be denied; if they do not, the motion must be granted (Code Civ. Proc., § 437c, subd. (c); River Bank America v. Diller (1995) 38 Cal.App.4th 1400, 1410-1411 [45 Cal.Rptr.2d 790].)

The pertinent pleading here is the second amended complaint which contains causes of action for: (1) breach of written lease, (2) fraud— intentional misrepresentation, and (3) fraud—suppression of fact. Defendants answered with a general denial, and using the popular pleading technique of today, alleged 21 affirmative defenses including, inter alia, the defense that the lease was terminated as a matter of law by Coast’s foreclosure.

Defendants relied upon this affirmative defense in their motion for summary judgment. The lower court accepted their argument that Dover applied and that the foreclosure terminated the lease. Plaintiff opposed the motion on the ground that the attornment provision of the lease preserved the landlord-tenant relationship even after foreclosures of the prior trust deed. Resolution of this issue depends upon the meaning of a contractual provision.

Thus, in addition to the standard of review for summary judgment, we must apply the standard of review for the interpretation of a written contract. “The interpretation of a written instrument presents a question of law for this court to determine anew.” (Klingele v. Engelman (1987) 192 Cal.App.3d 1482, 1485 [238 Cal.Rptr. 199].) This court must interpret the lease entered into by the original landlord and tenant in order to determine the rights and liabilities of the parties.

Under Civil Code section 1636, “A contract must be so interpreted as to give effect to the mutual intention of the parties as it existed at the time of contracting, so far as the same is ascertainable and lawful.” Generally speaking, “the rules of interpretation of written contracts are for the purpose of ascertaining the meaning of the words used therein: evidence cannot be admitted to show intention independent of the instrument. [Citations.]” (1 Witkin, Summary of Cal. Law (9th ed. 1987) Contracts, § 684, p. 617.)

II. Obligations Under a Lease Are Not Extinguished by Foreclosure Proceedings on a Prior Encumbrance When the Parties to the Lease Contract to the Contrary.

A. Priorities of the parties without an agreement.

There is no dispute that the lease in these proceedings was junior to the Coast trust deed which was foreclosed. The trust deed was recorded over two years before the execution of the lease; a lease executed after a trust deed is recorded is subordinate to the trust deed. (Goldstein v. Ray (1981) 118 Cal.App.3d 571, 575 [173 Cal.Rptr. 550].) Also, there is no dispute that the general rule is that foreclosure of a senior encumbrance terminates subordinate liens, including leases. (Hohn v. Riverside County Flood Control etc. Dist. (1964) 228 Cal.App.2d 605, 613 [39 Cal.Rptr. 647].)

Without an agreement to alter the priorities, neither Coast nor the defendants would have had obligations under the lease after the foreclosure of the prior trust deed; the foreclosure would have terminated, “wiped out,” the lease and all rights and obligations under it. The lender could consider the tenant as a trespasser, and the tenant would have no obligation to perform under the lease.

B. Effect of the agreement to rearrange priorities.

Parties to real estate transactions can contractually agree to alter the priorities otherwise fixed by law so as to avoid the termination ©f rights under the general rule that foreclosure terminates the rights under a junior lease. (Dover Mobile Estates v. Fiber Form Products, Inc., supra, 220 Cal.App.3d 1494, 1498; Bank of America v. Hirsch Merc. Co. (1944) 64 Cal.App.2d 175, 183 [148 P.2d 110].) We therefore analyze the contract to determine whether the parties to the lease did so in this case.

1. Parties to Lease.

The landlord was Equities I, with Barton signing as general partner. The tenant was Barton Development, with a vice-president signing for the corporation. Barton was the president of Barton Development and the developer of Barton Plaza. Thus, in a sense, Barton was acting as both landlord and tenant. We are therefore dealing here with presumably knowledgeable parties who executed a lease containing provisions acceptable to them, not with contracting parties of unequal power or circumstances of adhesion.

2. SNDA Provisions.

The lease contains provisions for subordination, nondisturbance and attornment, sometimes known as SNDA. “Although it might seem a cobweb-filled comer of real estate law, the realm of subordination, non-disturbance and attornment has drawn the attention of mortgagees over the last few years as the level of foreclosures has increased.” (Feinstein & Keyles, Foreclosure: Subordination, Non-Disturbance and Attornment Agreements (Aug. 1989) 3 Prob. & Prop. 38 (hereafter, Foreclosure).) “Although SNDAs are common to virtually every commercial real estate transaction, there has been very little analysis of the basic concepts of SNDAs, and surprisingly few cases have interpreted SNDAs or the rights and obligations of the parties to SNDAs.” (Fisher & Goldman, The Ritual Dance Between Lessee and Lender—Subordination, Nondisturbance, and Attornment (Fall 1995) 30 Real Prop., Prob. and Trust J. 355, 357 (hereafter, Ritual Dance).)

Subordination is “[t]he act or process by which a person’s rights or claims are ranked below those of others: e.g. a second mortgagee’s rights are subordinate to those of the first mortgagee.” (Black’s Law Diet. (6th ed. 1990) p. 1426, col. 1.) A subordination agreement is “An agreement by which one holding an otherwise senior lien or other real estate interest consents to a reduction in priority vis-a-vis another person holding an interest in the same real estate. An agreement by which the subordinating party agrees that its interest in real property should have a lower priority than the interest to which it is being subordinated.” (Black’s Law Diet., supra, p. 1426, col. 2.)

Under a nondisturbance agreement, a “mortgagee covenants that, in the event of a foreclosure, the tenant will remain on the leased premises so long as the tenant continues to comply with the terms of the lease and the lease is not in default.” (Foreclosure, supra, at p. 39.) “Nondisturbance is a modem concept. In fact, Black’s Law Dictionary does not even define the term.” (Ritual Dance, supra, at p. 360.) “Realistically, the concept of nondisturbance is frequently intended to refer not only to nondisturbance of the tenant’s right of possession, but also to full recognition of all of the tenant’s rights under its lease.” (Ritual Dance, supra, at p. 361.)

“Attornment, in its present day form is very much a corollary agreement addressing foreclosure.” (Foreclosure, supra, at p. 39.) Attornment is “. . . the act of a person who holds a leasehold interest in land, or estate for life or years, by which he agrees to become the tenant of a stranger who has acquired the fee in the land, or the remainder or reversion, or the right to rent or services by which the tenant holds. It is an act by which a tenant acknowledges his obligation to a new landlord.” (Black’s Law Diet., supra, p. 130, col. 1.) Under an attornment clause, a “tenant covenants with the mortgagee that, in the event of foreclosure, the lease will not be extinguished but will continue as a lease between the mortgagee (or any successor to it) and the tenant. The tenant, in other words, agrees to recognize that another party who would not otherwise have privity may enforce the lease agreement as though the third party were originally a beneficiary of the agreement.” (Foreclosure, supra, at p. 39.)

It should be noted that SNDA provisions may alter the rights of the parties not only with respect to foreclosure actions, but also in connection with distribution of insurance proceeds, condemnation awards, and promises made outside the lease. (Foreclosure, supra, at p. 40.)

3. The SNDA Clauses in the Present Lease.

The subordination and nondisturbance clause in the lease has essentially three parts, the first two of which are linked to one another. Under paragraph 23, the landlord, first trust deed holder, or ground lessor could: (1) ask, in writing, that the tenant subordinate its interest and then (2) the tenant had the right to obtain from the requesting party an agreement that the lease remain in effect for the full term. This is the classic subordination and nondisturbance formula of SNDA clauses. The paragraph also provides that (3) the holder of a security interest could elect to have the lease prior to its security “regardless of the time of the granting or recording of that security interest.” When the lease was executed, Coast was not a party to the lease, and the lease was subordinate to the trust deed held by Coast. Coast had the power to foreclose and eliminate the rights of the parties under the lease; nothing in the contract between the landlord and the tenant could change that without Coast’s consent. Thus, the subordination clause of the lease was of no value to Coast since its senior position was already fixed by law.

Coast had no need to ask that the tenant subordinate since Coast’s position was already fixed by law. The tenant’s right to an agreement of nondisturbance did not exist without a subordination request. Thus, the nondisturbance clause of the lease was of no value to the tenant. Coast did not, prior to its foreclosure, elect to have the lease prior to its interest. The positions of the parties were, so far as the subordination and nondisturbance clause was concerned, fixed by law. The only potential effect of the clause was to allow the lender to elect that the lease become senior, and this did not happen.

The third of the SNDA provisions, an attornment clause, is also present in paragraph 23. The tenant agreed to recognize, or attorn to, a new landlord who could be the purchaser in a foreclosure sale or the transferee in a transfer in lieu of foreclosure. The successful bidder at a foreclosure sale or any transferee in a deed in lieu of foreclosure conceivably could be a new player on the scene. Thus, the tenant attorned either to the existing lender or potentially to a new party not previously involved in any way.

4. Effect of the Attornment Clause.

Under the attornment clause of the lease, Barton Development agreed with its original landlord that it would accept a substituted landlord under prescribed conditions, one of which occurred in the instant case. This is the expected result of the attornment clause in the lease.

However, defendants argue that the case of Dover Mobile Estates v. Fiber Form Products, Inc., supra, 220 Cal.App.3d 1494, supports their position that the lease was extinguished following the foreclosure. The lower court based its decision granting summary judgment upon that case.

In Dover the tenant entered into a lease which contained a subordination clause which provided that the lease was subordinate to any deeds of trust unless the trust deed holder elected to have the lease be superior. (This is commonly known as an automatic subordination. Since the instant case does not have this type of subordination agreement, the distinction between types of agreements is unimportant.) A second trust deed, recorded after the lease, was foreclosed upon. The purchaser at the sale sought to enforce the lease. The court held that the foreclosure terminated the lease, and the plaintiff could not enforce the terms of it. (Dover Mobile Estates v. Fiber Form Products, Inc., supra, 220 Cal.App.3d at p. 1501.)

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. Reliance on Dover is inappropriate because that case does not discuss or rule upon attornment clauses and the present case is determined by a decision upon the application of such a clause. It is fundamental that cases are not authority for propositions that are not considered therein. (Roberts v. City of Palmdale (1993) 5 Cal.4th 363, 372 [20 Cal.Rptr.2d 330, 853 P.2d 496].) The tenant’s position was clearly subordinate, and the case properly held that the lease was extinguished. Here, in contrast, the attornment clause fixed the rights of the parties after the foreclosure. Defendants’ position to the contrary requires a ruling that there is no meaning whatsoever to the language of the attornment clause. This position violates the rule of contractual interpretation that requires meaning to be given to every part of a contract “if reasonably practicable.” (Civ. Code, § 1641.)

5. The “Condition Precedent” to Attornment.

Defendants contend the language of the attornment clause created a condition precedent: that the party seeking to enforce the attornment clause has “acquire[d] and accepted] the property subject to the lease.” Defendants contend that these words required Coast to give the notice called for under the subordination clause when the holder of the security interest elects to subordinate its interest to that of the tenant. We disagree.

The subordination clause (with concomitant nondisturbance clause) must be considered as separate from the attornment clause. Although those clauses could impact upon the same parties, their provisions potentially apply to different parties. A clause applicable to one set of parties does not logically provide a notice requirement for a condition precedent to another clause applying to different parties unless such a result is clearly indicated. There is no such clear indication of relationship between the clauses here.

The subordination clause establishes a right of the lender to subordinate its position to that of the tenant. Under certain circumstances, a lender may seek such a result. (See, e.g., West & Keyles, Does the A in Your SNDA Work? (Sept. 1993) 7 Prob. & Prop. 54, 55.) For instance, a subordination agreement may, as noted above, alter the priorities of the parties with respect to insurance proceeds or condemnation awards, among other things. However, the creation of an obligation for the tenant to attorn to a new landlord is quite different. The tenant presumably negotiated the lease with the landlord, and, for consideration, contracted to attorn to a new landlord under the described conditions. A landlord could want such a provision in the lease for a number of reasons, not the least of which is that the landlord could show the lease to others with whom it deals to demonstrate that its tenants are bound to new landlords. Such a provision could be a persuasive argument to a lender who was considering the financial condition of the landlord or the landlord’s position vis-á-vis other parties involved with the real property. Thus, an attornment clause is not just gratuitously given in a vacuum, but has a meaning that can impact upon the rights and obligations of parties other than the immediate parties to the lease.

We conclude that interpretation of the plain language in the attornment clause does not support defendant’s contention. The clause contains two parts (eliminating nonapplicable circumstances); (1) the tenant shall attorn to the purchaser at a foreclosure sale (2) provided that the purchaser acquires and accepts the property subject to the lease. The second part, (2), contains two subparts; (2a) the purchaser “acquires” the premises and (2b) “accepts” the premises subject to the lease. The purchaser, Coast, acquired the property at the foreclosure sale. It could not know that it was going to acquire the property until the completion of the foreclosure. The purchaser, Coast, then was in a position to “accept” the premises subject to the lease or not.

Defendants argue that to determine what acceptance means in this context, we must look to the subordination clause, and that Coast “failed to elect to have the lease senior to the First Deed of Trust prior to the trustee’s sale.” Defendants then refer to “Coast’s failure to exercise its option” as if the two things were the same. Defendants have their timing confused. As noted above, prior to the trustee’s sale, Coast could not know whether it would be the successful bidder. It is illogical to expect Coast, as a prospective purchaser at the foreclosure sale, to exercise some option provided in a separate clause of the lease. It is common to have all three parts of SNDA clauses included in leases. If we were to support the rule proposed by defendant, all lenders similarly situated to Coast would have to “exercise their option” to subordinate their position to that of the tenant before they bid in at a foreclosure sale. There is neither logic nor fairness in such a rule, and we will not promulgate it here.

Further, we disagree with defendants’ position that the “acquires and accepts” language necessitates any notice to the tenant prior to the foreclosure, let alone the alleged notice provided in the subordination clause. Rather, we interpret the “acquires and accepts” language as providing merely that the new landlord acknowledges and agrees to be bound by the existing lease—simply a reciprocal promise, akin to a nondisturbance clause—in exchange for the tenant’s attornment. Under our interpretation of the language of this clause, the new landlord seeking to enforce the attornment clause acquires the duties and responsibilities of the prior landlord as well as the privilege of collecting rent under the lease.

The question therefore arises whether Coast “accepted” the property subject to the lease. According to the evidence in this case, Coast immediately, on the day of acquisition, gave notice to the tenant that it was the new owner and that thereafter all rent payments should be made payable to Coast. In two other instances, it acknowledged that it expected the tenant to abide by the lease. It thus accepted the premises subject to the lease. It is illogical to assume that it would make any pronouncement as to payment of rent or give notice of its acceptance of the lease before it acquired the property.

To phrase it another way, the tenant attorned to the new landlord, whoever that may be, when the tenant entered into the lease. The only condition precedent to that attornment was that the new landlord had to acquire the premises and accept the premises subject to the lease. Coast did that here, and the condition precedent was satisfied. The preexisting obligation to attorn to the new landlord was implemented when Coast acknowledged that it was, indeed, the new landlord.

We conclude that Coast’s foreclosure did not terminate the obligations of the tenant under the lease. The tenant had contracted to alter the priorities otherwise established by law. Defendants, in the clear language of the lease, had agreed to attorn to the purchaser at a foreclosure sale, and Coast was such a purchaser. The attornment clause obligated defendants to accept Coast, and hence its assignee, the plaintiff, as a new landlord. Further, Coast’s actions, as found in the record before us, satisfied any requirements imposed upon it to accept the premises subject to the lease. As a matter of law, plaintiff is entitled to the status of a landlord, and defendants are obligated under the lease. Similarly, plaintiff is bound to perform the duties and responsibilities assigned to the landlord under the lease.

Thus, the trial court erred in granting summary judgment on the ground the lease had terminated.

Disposition

The judgment is reversed. The appellant shall recover costs on appeal.

McDaniel, J.,

* concurred.

Retired Associate Justice of the Court of Appeal, Fourth District, assigned by the Chief Justice pursuant to article VI, section 6 of the California Constitution.