The lender enters the non-responsible lease as a tenant without an express lease assumption

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A recent court case in California highlights the need for a landlord to insist that a tenant’s lender assume the lease after foreclosure, and simultaneously highlights the possibility for a lender to foreclose on a lease to limit its liability under of the lease.

In BRE DDR BR Whittwood CA LLC v. Farmers & Merchants Bank of Long Beach, a California appeals court considered a case involving a loan secured by a tenant’s interest in a lease. The lease stated that the lessee’s lender would be required to assume the lease after foreclosure, but the lender did not in fact sign any document assuming the lessee’s obligations under the lease, either at the time the loan was made. consented or later when seized under the rental mortgage. After taking title to the leasehold interest through the foreclosure sale, the lender transferred the lease to an affiliate LLC. The LLC subsequently stopped paying rent under the lease.

By suing both the lender and its affiliate LLC for breach of the lease, the landlord argued that both parties, by becoming assignees of the lease, had implicitly agreed to assume the obligations of the original tenant. The trial court agreed, but was overturned by the appeals court, which ruled that only an express assumption of the lease by an assignee would make the assignee liable for all of the tenant’s obligations under the lease. In the absence of such an express hypothesis, the assignee is only liable for the obligations of the tenant which accumulate during the possession of the premises by the assignee. If the assignee ceases his possession without having assumed the lease, the assignee therefore has no other obligation under the lease.

The court of appeal noted that the landlord could have protected himself by requiring the garnishee lender to assume the lease. It is quite common to have a tripartite agreement between the landlord, tenant, and tenant’s lender in a leasehold mortgage situation that includes assumption arrangements. However, these agreements generally provide that the lender has the right to be released from any further liability under the lease once they assign the lease to a third party (the typical lender’s goal following foreclosure) , and to provide increased rights to the lender to assign the lease. These provisions serve to limit the exposure of the lender to not much more than that of an assignee who does not assume the lease.

Lenders should keep these principles in mind when signing documents relating to their rights under a rental mortgage and the lease it covers. Of course, lenders should also consider using an affiliate for foreclosure – as lenders often do – as another convenient way to limit their liability in taking title to property (lease or otherwise).

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