First Interstate Bank v. Tanktech, Inc.

• Decision Date: 13 December 1993
• Docket Number: No. 92SC738,92SC738
• Parties: FIRST INTERSTATE BANK, Petitioner, v. TANKTECH, INC., a Colorado corporation, Respondent.
• Court: Colorado Supreme Court

Page 116

864 P.2d 116

FIRST INTERSTATE BANK, Petitioner, v. TANKTECH, INC., a Colorado corporation, Respondent.

No. 92SC738.

Supreme Court of Colorado En Banc.

Dec. 13, 1993.

Burg & Eldredge, David P. Hersh, Jack D. Robinson, Denver, for petitioner.

Krendl Horowitz & Krendl, Jay S. Horowitz, Kim E. Ikeler, Denver, for respondent.

Chief Justice ROVIRA delivered the Opinion of the Court.

We granted certiorari to review the decision of the court of appeals in Tanktech, Inc. v. First Interstate Bank, 851 P.2d 174 (Colo.App.1992), which reversed a directed verdict in favor of First Interstate Bank of Denver ("First Interstate"). Applying the landlord/tenant holdover doctrine, the court of appeals remanded the case for a jury determination of whether an implied lease existed between Tanktech, Inc., ("Tanktech") and First Interstate. In so holding, the court adopted the rule that an implied lease based upon the terms of a prior pre-foreclosure lease may be created if the property owner continues to accept monthly payments from the occupant and fails to renounce the earlier lease. For the reasons set forth below, we reverse.

I

In May, 1987, Tanktech entered into a three-year lease agreement with D & E Investment Company ("D & E") in which Tanktech agreed to lease commercial space in a building owned by D & E. The lease was a standard commercial lease, but also contained a separately negotiated addendum. ¹ Two years prior to the above transaction, First Interstate obtained a security interest in the D & E property in the form of a deed of trust to secure a promissory note for money lent to D & E. Subsequently, D & E filed for bankruptcy. The bankruptcy court granted First Interstate relief from the automatic stay to foreclose its security interest in the property. First Interstate commenced foreclosure proceedings and obtained title to the property by a public trustee deed. After obtaining title to the property, First Interstate did not enter into a new lease agreement with Tanktech, but allowed Tanktech to remain on the property in exchange for monthly payments in the same amount that Tanktech paid under its prior lease with D & E. In 1989, a ruptured water pipe caused a flood which damaged Tanktech's personal property.

Tanktech filed suit alleging that (1) First Interstate breached the lease contract because it failed to comply with provisions in the lease requiring the lessor to maintain the building's plumbing in good order and to restore the premises damaged as a result of any casualty, and (2) First Interstate was negligent because it breached its duty of reasonable care in maintaining the structural, mechanical, electrical and plumbing systems in good order and repair. The trial court granted First Interstate's motion for a directed verdict on the contract claims, finding that the foreclosure extinguished the D & E-Tanktech lease and that there was no evidence from which a reasonable juror could find either an implied-in-law or an implied-in-fact contract between Tanktech and First Interstate. The trial court submitted the negligence claim to the jury which returned a verdict in favor of First Interstate.

The court of appeals, applying the landlord/tenant holdover doctrine, found there was enough evidence of an implied lease between Tanktech and First Interstate to submit the issue to the jury. Thus, it reversed the trial court's order granting a directed verdict in favor of First Interstate and remanded with directions.

II

We granted certiorari to consider two issues. First, whether the court of appeals ruling nullified the clear legislative intent of section 38-39-110, 16A C.R.S. (1982), ² and second, whether the court of appeals incorrectly adopted as the majority rule in Colorado the proposition that "[a]n implied lease based on the terms of an earlier pre-foreclosure lease may be created if ... the property owner/landlord accepts monthly payments from the tenant and does not renounce the prior agreement."

A

First Interstate argues that the court of appeals holding that an implied lease may exist under the landlord/tenant holdover doctrine nullifies the legislative intent of section 38-39-110, because the decision can be interpreted to give effect to the terms of a lease which should have been extinguished under the statute. ³

Section 38-39-110, provides that a purchaser of property at a foreclosure sale obtains a deed to the property after the redemption period expires and that

[u]pon the issuance and delivery of such deed ... title shall vest in the grantee and such title shall be free and clear of all liens and encumbrances recorded or filed subsequent to the recording or filing of the lien on which the sale referred to in this section was based.

§ 38-39-110.

The phrase "free and clear" under section 38-39-110, means that title to property "is not incumbered by any liens." Black's Law Dictionary 663 (6th ed. 1990); see also Sant v. Stephens, 753 P.2d 752, 759 (Colo.1988). Consequently, as a property lessee is considered a lienor under Colorado law, section 38-39-106, 16A C.R.S. (1982), ⁴ we conclude that upon foreclosure of a senior security interest, any subordinate leases, liens or encumbrances are extinguished once the redemption period has expired under section 38-39-110. ⁵

While the plain intent of section 38-39-110 is to extinguish all subordinate liens upon foreclosure, see Fleet Real Estate Funding Corp. v. Koch, 805 P.2d 1206 (Colo.App.1991), the purpose of this section is to allow a transferee to rely on the state of record title. See Page v. Fees-Krey, Inc., 617 P.2d 1188, 1199 (Colo.1980) (Rovira, J., dissenting) (recording statutes should be liberally construed to promote the underlying purpose of allowing a transferee to rely on the state of record title); see also § 38-34-101, 16A C.R.S. (1993 Supp.) (purpose of recording statute is to render titles to real property secure and marketable). Thus, upon foreclosure of the property, pursuant to section 38-39-110, First Interstate received title "free and clear" of the prior lease. However, First Interstate was free to enter into a new lease agreement or new tenancy with Tanktech with identical terms to the pre-foreclosure lease; nonetheless, the prior lease was extinguished and without legal effect.

It is unclear whether the court of appeals considered the D & E-Tanktech lease extinguished. A number of statements in the court of appeals opinion lend credence to First Interstate's argument that the court of appeals did not view the prior lease as automatically extinguished upon foreclosure. For instance, the court of appeals stated that an implied lease may exist based on the terms of the prior lease if Tanktech paid and First Interstate accepted rent and First Interstate failed to renounce the prior lease. Additionally, the court remanded the case for a jury determination of whether First Interstate was aware of the prior lease. Tanktech, Inc. v. First Interstate Bank, 851 P.2d 174, 176-77 (Colo.App.1992). If the court of appeals viewed the prior lease as extinguished, it should make no difference whether First Interstate had knowledge of the prior lease; likewise, First Interstate would not have to renounce the prior lease because that lease was extinguished upon foreclosure, and thus, no longer existed. This uncertainty regarding whether the court considered the prior lease terminated upon the foreclosure supports First Interstate's contention that the court of appeals decision would give effect to the pre-foreclosure lease between D & E and Tanktech, and thus, bind First Interstate to a lease that had been extinguished by statute. Likewise, if the court of appeals opinion is construed to extend the D & E-Tanktech lease, the purpose of providing a foreclosure-sale purchaser title free and clear of all encumbrances will be frustrated.

Accordingly, because it is unclear whether the court of appeals decision extended and gave effect to the pre-foreclosure D & E-Tanktech lease, or merely found a new lease, we reverse the court of appeals to the extent that it held the pre-foreclosure lease was extended.

B

Whether the landlord/tenant doctrine of holdover tenancy applies to a situation in which a subordinate lease has been extinguished through proper foreclosure proceedings is an issue of first impression for this court.

The operation of the holdover tenancy doctrine in Colorado is well established. A holdover tenant is one who continues in possession of the premises beyond the term of the lease. Fibreglas Fabricators, Inc. v. Kylberg, 799 P.2d 371, 378 (Colo.1990). Once a lease expires and the tenant remains in possession of the premises, the landlord may elect to treat the tenant as a trespasser, Hallett v. Barnett, 51 Colo. 434, 436, 118 P. 972, 973 (1911), or may waive the wrong of holding over and continue the tenancy. Ochsner v. Langendorf, 115 Colo. 453, 456, 175 P.2d 392, 394 (1946); Mattas Motors, Inc. v. Heritage Homes of Nebraska, Inc., 749 P.2d 458, 460 (Colo.App.1987). In the latter case, and in the absence of a new agreement, the law implies a new contract between the parties based upon the same terms and conditions as the expired lease. Sinclair Refining Co. v. Shakespeare, 115 Colo. 520, 525, 175 P.2d 389, 392 (1946); Sears v. Smith, 3 Colo. 287, 288 (1877). It is also true that the acceptance of rent by a landlord upon expiration of the lease is sufficient to create a holdover tenancy. See Wells v. Blystad, 91 Colo. 346, 348, 14 P.2d 1078, 1078-79 (1932) (terms of expired lease were extended where tenant continued to pay and landlord continued to accept rent).

Relying on these general principles, Tanktech argues that the law should imply a lease based upon the terms and conditions of the D & E-Tanktech lease because: (1) First Interstate allowed Tanktech to remain in possession of the premises; (2) Tanktech paid First Interstate the same amount of rent that it paid D & E under the prior lease; and (3)...