What is the impact of priorities between leasehold interests and deeds of trusts?
In a prior blog we discussed deeds of trusts and priorities. Lenders will almost always review a property’s chain of title for any prior recorded interests before lending. Again, this is because recorded interests that predate a lender’s lien in the subject property can affect the odds that the Lender will be able to recoup its loaned funds in the event of a default (the lender’s security). In this blog, and in the next series of blogs, we will discuss the impact of priorities between leasehold interests and deeds of trusts.
To begin, a lease becomes an estate in property if the term of the lease is over a year. (See Cal. Civ. Code Section 1214.) Thus, a lease for over a year is subject to the recording laws of this state. (Id.) For this reason, it is not uncommon for leasehold interests to appear in the property’s chain of title. Because of the laws of priorities, knowing whether the property is burdened by long term leases is important information for a lender.
Generally, when a lease is recorded prior to the recording of a lender’s deed of trust, or if the lender of the deed of trust has notice of a prior unrecorded lease at the time that its trust deed is recorded, then the lender’s lien of the trust deed is junior to (a) the estate of the lessee and (b) the lessee’s right to occupy the premises. (Dover Mobile Estates v. Fiber Form Products, Inc. (1990 220 Cal. App. 3d 1494, 1498.) A deed of trust with a junior position to a recorded lease means that, upon foreclosure, the lender can only provide a purchaser with title to the property that is subject to the senior lease. (Principal Mut. Life Ins. Co. v. Vars, Pave, McCord & Freedman (1998) 65 Cal. App. 4th 1469, 1478.) Stated differently, the purchaser does not receive title free of the lease and the tenant’s right to possession. This is not necessarily bad. This all depends on the value of the lease as determined by market forces.
The reverse is also true. A deed of trust recorded before any future recorded leasehold interest takes priority over the lease. (Miscione v. Barton Development Co. (1997) 52 Cal. App. 4th 1320, 1326.) This is significant because, under these facts, a lender would be able to foreclose on the property and provide any subsequent purchaser with title free and clear of the leasehold interest. (Aviel v. Ng (2008) 161 Cal. App. 4th 809, 820; Hohn v. Riverside County Flood Control and Water Conservation Dist. (1964) 228 Cal. App. 2d 605, 613 [“The purchaser at the trustee’s sale and the grantee in the trustee’s deed acquires title free of all rights of the trustor or anyone claiming under or through him, and his title is free of all claims subordinate to the encumbrance pursuant to which this sale was made”].) The foreclosure extinguishes the lease and gives the purchaser the immediate right to demand possession. A tenant/lessee who remains in possession after the foreclosure sale is merely a hold-over tenant (tenant at sufferance) or a mere trespasser. (Aviel v. Ng (2008) 161 Cal. App. 4th 809, 820.) We will explore this more in our next blog.
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