Republic Nat. Life Ins. v. Lorraine Realty

• Court: Minnesota Supreme Court
• Writing for the Court: YETKA, Justice
• Citation: Republic Nat. Life Ins. v. Lorraine Realty, 279 N.W.2d 349 (Minn. 1979)
• Decision Date: 31 May 1979
• Docket Number: No. 48198,48793.,48198
• Parties: REPUBLIC NATIONAL LIFE INSURANCE COMPANY, Respondent, v. LORRAINE REALTY CORP., et al., Defendants, Angeline P. Stoppel, et al., Appellants.

279 N.W.2d 349 (1979)

REPUBLIC NATIONAL LIFE INSURANCE COMPANY, Respondent, v. LORRAINE REALTY CORP., et al., Defendants Angeline P. Stoppel, et al., Appellants.

Nos. 48198, 48793.

Supreme Court of Minnesota.

March 30, 1979.

Rehearing Denied May 31, 1979.

Dolores C. Orey, St. Paul, for appellants.

Dorsey, Windhorst, Hannaford, Whitney & Halladay, Craig A. Beck, and Carol B. Bonebrake, Rochester, for respondents.

Heard before ROGOSHESKE, YETKA, and WAHL, JJ., and considered and decided by the court en banc.

YETKA, Justice.

This is an appeal by ground lessors from a judgment of the Olmsted County District Court, filed March 7, 1978, denying ground lessors' motion for an order entitling them to rents for their parcel after the period of redemption, granting the purchaser at the foreclosure sale the right to receive rents from the parcel for the duration of the lease, and finding that the lease in question is unambiguous. We affirm in part and modify in part.

The parties to this action became engaged in a commercial real estate project that began in 1963. Ground lessors owned the fee interest in property in downtown Rochester, Minnesota. That land was necessary to complete a commercial development being assembled by Lorraine Realty Corporation (Lorraine). The ground lessors refused to sell the premises because they wished to keep the property in their family, so Lorraine secured a ground lease from the ground lessors on August 8, 1963, and purchased four other pieces of property nearby.

Under the terms of the lease, Lorraine agreed to construct a new building on the leased premises. The ground lease also included a provision subordinating the "interest of the Lessors in the leased premises" to mortgagees of Lorraine.

Prior to the commencement of the actual construction on the project, Lorraine and ground lessors executed an amendment to the August 8, 1963, ground lease. This July 14, 1964, amendment did not, however, affect the priorities set forth in the August 8, 1963, lease.

By a mortgage deed and note dated May 12, 1964, Lorraine borrowed $1,900,000 from the First National Bank of St. Paul (First Bank), the interim construction lender (first mortgage). First Bank subsequently took three additional mortgages from Lorraine to secure notes in the original principal amounts of $125,000, $300,000, and $125,000, respectively. On October 15, 1968, Lorraine executed and delivered to Republic National Life Insurance Company, permanent lender, a mortgage deed to secure a promissory note in the original principal amount of $60,000 (second mortgage).

On January 3, 1969, First Bank executed and delivered to Republic an assignment of the May 12, 1964, mortgage; at that same time, First Bank executed and delivered a subordination agreement wherein it agreed to subordinate its three additional mortgages, in the total principal amount of $550,000, to the Republic first and second mortgages. On or about September 16, 1975, Lorraine defaulted under the terms of the Republic mortgages. On November 20, 1975, Republic commenced a foreclosure action against all persons possessing an interest in the property that provided security for its loans.

Republic subsequently moved for an order granting a default judgment in its favor and against Lorraine and the remaining defendants. The ground lessors filed a cross motion for summary judgment, resisting Republic's claim that Republic's mortgages were prior and superior to ground lessors' interests and asserting that their interests were prior and superior to Republic's, on the ground that the subordination clause was vague, indefinite, and lacked the essential elements to make it enforceable.

The trial court issued an order granting judgment in favor of Republic and against Lorraine, First Bank, and ground lessors, holding that Republic could foreclose its mortgages on the leasehold interest, but not against the fee interests of the ground lessors. The trial court further held that Republic was entitled to future rentals during the period of the lease as against the claim of ground lessors.

Republic appeals from that portion of the judgment barring it from foreclosing against ground lessors' fee interests, and ground lessors appeal from the judgment awarding future rentals to Republic.

The issues presented on this appeal are:

1. Is the subordination provision unenforceable as a matter of law because it is vague and unconscionable?

2. Should the ground lessors be allowed to introduce evidence to show that the intent behind paragraph 36 was to preserve Lorraine's leasehold estate as security for Lorraine's mortgagees by having them assume the position of lessee?

3. Does the subordination provision require Republic to step into the shoes of lessee and assume the lessee's obligations?

1. The subordination provision of the ground lease, paragraph 36, reads:

"The interest of the Lessors in the leased premises, and the interests of any mortgagee or mortgagees of the fee thereof shall be junior and subordinate to the interest of any mortgagee or mortgagees of the Lessee\'s interest in the leased premises and the building or buildings thereon."

Ground lessors argue that the subordination clause is unenforceable as a matter of law because it is vague and uncertain.¹

This court has not determined the terms necessary to effectuate an enforceable subordination of one's fee or leasehold interest. The reason for specificity, at least in part, is to protect the seller's (lessor's) security interest. Otherwise he must rely on the good faith and ability of the developer to keep down the maximum amount of the loan, rate of interest, and other terms, so that the sellers (lessors) will have a reasonable chance to bid in the event of a foreclosure sale. The mortgagee and mortgagor also benefit because they have a definite framework within which to work.

Consistent with this rationale, ground lessors assert that the open-endedness of the subordination clause makes it unconscionable because it affords them no protection against additional mortgages. They contend the provision does not require or even permit ground lessors to approve the subordinating loans.

It is noteworthy that the attorney for the ground lessors did not reserve the right of the ground lessors to approve or reject prospective mortgages, yet such a reservation was retained concerning assignments or transfers by the lessee. Provision 19, Assignments, states:

"Lessee further covenants that Lessee will not, except by way of mortgage of the leasehold estate to secure some actual indebtedness or construction loan, assign or transfer this Lease without the written consent of the majority in interest of the Lessors * * *."

The ground lessors undoubtedly felt that the power to assign the lease should be reviewed and restricted and, accordingly, included this provision. It may be inferred that since a similar requirement was not made with respect to lessee's mortgaging its interest, ground lessors intentionally did not reserve the right to grant approval. Thus, having excluded a consent requirement from the subordination clause, the ground lessors may not now be heard to complain that its absence makes the provision unconscionable. They may not rely on their own omission or exclusion in order to have the clause declared unenforceable.

Ground lessors also argue that the subordination provision is unconscionable because it gives Lorraine 100 years to enter into any number of mortgages, without limitations as to terms, rates of interest, and so forth. Ignoring the impact of the bankruptcy, ground lessors assume Lorraine could freely mortgage the property. At the time of the bankruptcy, over $1 million was tied up in outstanding mortgage debts. Prospective mortgagees would not be likely to approve additional mortgages because they would realize that they might not be able to recover in case of bankruptcy, especially in this situation where other mortgagees have priority. In light of the present bankruptcy, it is even more doubtful that a lender would approve an additional mortgage on the property. Consequently, ground lessors' fears may be more hypothetical than real.

Ground lessors cite several cases in which subordination clauses were found unenforceable because various essential terms were uncertain or omitted. See, Lahaina-Maui Corp. v. Tau Tet Hew, 362 F.2d 419 (9 Cir. 1966); Magna Development Co. v. Reed, 228 Cal.App.2d 230, 39 Cal.Rptr. 284 (1964); Roven v. Miller, 168 Cal.App.2d 391, 335 P.2d 1035 (1959). We feel that such cases are distinguishable from the instant suit, which involves an executed contract upon which the parties have already relied. The courts in the cited cases were not confronted with parties who had acted under the agreements and would have thereby suffered losses.

The parties also cite cases dealing with executed subordination provisions. Those cases similarly are not particularly enlightening because they deal with the lenders' noncompliance with loan terms of the agreements or with noncompliance with the use requirements. They do not address the question whether an executed subordination contract is valid despite the absence of provisions limiting the right of a lessee to mortgage the leased property.

Even though the provision in the instant case may lack specificity, we hold that nevertheless it is enforceable. Equity dictates that where a contract has been in existence for 15 years, where the subordination clause has been used and relied upon by the parties for 14 years, where large sums have been lent in good faith, the provision should not be voided. Our holding is not intended to mean that indefinite or vague contracts will always survive on equitable grounds. A subordination agreement, like any contract, should be as complete and definite as possible and should include within its terms such specifications as the maximum amount of principal, rate of interest, and mode of payment. Under ...