Vallely Investments, L.P. v. Bacc

• Decision Date: 26 April 2001
• Docket Number: No. G026984.,G026984.
• Court: California Court of Appeals Court of Appeals
• Parties: VALLELY INVESTMENTS, L.P., Plaintiff and Appellant, v. BANCAMERICA COMMERCIAL CORPORATION, Defendant and Respondent.

106 Cal.Rptr.2d 689

88 Cal.App.4th 816

VALLELY INVESTMENTS, L.P., Plaintiff and Appellant, v. BANCAMERICA COMMERCIAL CORPORATION, Defendant and Respondent.

No. G026984.

Court of Appeal, Fourth District, Division 3.

April 26, 2001.

Review Denied July 18, 2001.^*

Law Office of Harry S. Carmack, Harry S. Carmack, Costa Mesa; Greines, Martin, Stein & Richland, Robin Meadow and Laura Boudreau, Beverly Hills, for Plaintiff and Appellant.

Sheppard, Mullin, Richter & Hampton, Alan H. Martin, Aaron J. Malo and Karin Dougan Vogel, for Defendant and Respondent.

OPINION

BEDSWORTH, J.

This case presents the question of whether a tenant who takes an assignment of a mortgaged ground lease, expressly assuming its obligations, remains liable to the lessor after foreclosure of the mortgage. Vallely Investments, L.P. (Vallely), the lessor, sued for a declaration that BancAmerica Commercial Corporation (BACC), the assignee, was bound by the lease. Vallely argues the trial court erred in granting summary judgment in favor of BACC, and it should have granted Vallely's own motion for summary judgment. We agree, and reverse with directions that judgment be entered in favor of Vallely.

* * *

The material facts are not in dispute. Vallely owns a parcel of property in Newport Beach. In 1978, Vallely entered into a long term ground lease with a developer. Following a series of assignments, the lease ended up in the hands of Balboa Landing, L.P. (Balboa). In 1986, Vallely and Balboa amended and restated the lease, providing, among other things, that its term would expire in 2051.

The lease permitted the lessee to transfer or assign its interest freely, or to encumber it with a mortgage. Any assignment had to be in writing, with notice to the lessor. The assignee was required to expressly accept and assume all of the terms and covenants of the lease, and any leasehold mortgage was subordinate to the lessor's rights. Article 13(e) stated no leasehold mortgagee or foreclosure sale purchaser would incur any liability for rent, or performance of leasehold covenants, unless it became owner of the leasehold by foreclosure or assignment in lieu of foreclosure. Then its liability was limited to that arising by operation of law or privity of estate.

In 1986, Balboa borrowed $7 million from BA Mortgage and International Realty Corp. (BA Mortgage) to develop the property. It secured the loan with a deed of trust on the ground lease. Balboa defaulted in 1988, and BA Mortgage commenced foreclosure. In 1989, Balboa filed for bankruptcy protection to stay the foreclosure.¹

The default presented risks for both Balboa and BA Mortgage. Balboa wanted to avoid personal liability for its partners, while the lender wanted to ensure the property was maintained (which Balboa was financially unable to do) and also sought a procedure that would wipe out junior mechanic's liens. A deed in lieu of foreclosure offered by Balboa (to preclude personal liability) was turned down, out of concern that merger of title in the lender would propel the mechanic's liens into a senior position.

The solution arrived at was an assignment of the lease to BACC, a whollyowned Bank of America subsidiary which would manage the property pending a nonjudicial foreclosure. Foreclosure would wipe out the junior liens and conducting it non-judicially precluded a deficiency judgment. A stipulation to this effect was entered into in the bankruptcy proceeding.

In April 1989, Balboa and BACC executed an instrument entitled Assignment of Leasehold Interest. In it, BACC "accepts the within assignment and, in addition, does hereby covenant and agree to and with [Balboa] to faithfully observe, perform and fulfill all of the terms, covenants and conditions and obligations required to be observed, performed and fulfilled by [Balboa] as lessee under the Ground Lease...." The assignment was recorded. It was never revealed to Vallely, which first learned of it several years later in connection with events that precipitated this lawsuit.

BA Mortgage was the successful bidder at the foreclosure sale held about two months later. As lessee, it managed the property until selling the lease to Edgewater Place, Inc. (Edgewater) in July 1994.

In November 1994, Vallely gave Edgewater an extension of time to pay the 1996 rent, which was due in one lump sum in November 1995. In return for Edgewater's promise to make certain repairs by the end of July 1995, Vallely agreed to allow it to pay the 1996 rent in equal monthly installments. This was reflected in a lease amendment signed by the parties, which provided that all other rent obligations under the lease remained unchanged.

Edgewater failed to pay the rent due for May 1996, and Vallely sued. Only then did Vallely learn of the 1989 assignment to BACC. In March 1997, Edgewater filed a Chapter 11 bankruptcy petition. It failed to assume or reject the lease, with the result that in June 1998, the bankruptcy court entered an order deeming the lease rejected. Vallely retook possession of the property in August 1998.

Meanwhile, in April 1998, Vallely commenced the instant action against BACC. It sought a declaratory judgment that BACC was liable, as assignee, for the rent due for the balance of the lease term. Both sides moved for summary judgment. Vallely's position was that BACC's express assumption of the lease obligations bound it as a matter of contract law, and that the obligation survived the later foreclosure. In the course of opposing Vallely's motion and presenting its own,² BACC raised numerous theories under which it escaped liability, all of which we will address in due course. At this point, suffice it to say the trial court denied Vallely's motion and granted summary judgment for BACC on the ground that BA Mortgage's foreclosure of its senior deed of trust terminated BACC's junior interest in the lease, and along with it any obligations that entity had to Vallely. Both rulings were mistaken. While BACC presents many able and inventive arguments to avoid liability, we conclude none carry the day.

I

We review the grant or denial of summary judgment de novo. (Environmental Protection Information Center v. Department of Forestry & Fire Protection (1996) 43 Cal.App.4th 1011, 1015-1016, 50 Cal.Rptr.2d 892.) The judgment may be affirmed on any correct legal theory, provided the opposing party had the opportunity to address it below. (Kramer v. State Farm Fire & Casualty Co. (1999) 76 Cal. App.4th 332, 335-336, 90 Cal.Rptr .2d 301.)

II

The first issue is the significance of BACC's assumption of the lease obligations. Under settled law, BACC was contractually liable to Vallely.

A lease of real property is both a conveyance of an estate in land (a leasehold) and a contract. It gives rise to two sets of rights and obligations—those arising by virtue of the transfer of an estate in land to the tenant (privity of estate), and those existing by virtue of the parties' express agreements in the lease (privity of contract). (See generally 6 Miller & Starr, Cal. Real Estate (2d ed.1989) § 18.17.)

When a tenant assigns a leasehold, both aspects come into play in determining the obligations of the assignor and the assignee to the landlord. Looking first at the assignor, the transfer terminates his privity of estate with the landlord, but it does not affect privity of contract. The assignor remains liable to the landlord absent an express release. (De Hart v. Allen (1945) 26 Cal.2d 829, 832, 161 P.2d 453.)

An assignee's liability to the landlord turns on the nature of the assignment. If the assignee takes possession of the premises but no more, privity of estate exists and he is bound by all lease covenants which run with the land. Upon a subsequent assignment, privity of estate ends and, with it, all obligation to the landlord. (Kelly v. Tri-Cities Broadcasting, Inc. (1983) 147 Cal.App.3d 666, 678, 195 Cal.Rptr. 303.) If, however, the assignee expressly agrees with the assignor to assume the obligations of the lease, far different consequences attend. The assumption agreement creates a new privity of contract between landlord and assignee, enforceable by the landlord as a third party beneficiary, regardless of whether the landlord was a party to the assumption agreement. As a consequence, the assuming assignee is required to perform all covenants of the lease for the remainder of its term, absent a release by the landlord. (Hartman Ranch Co. v. Associated Oil Co. (1937) 10 Cal.2d 232, 244-245, 73 P.2d 1163; Rest.2d Property, Landlord and Tenant, § 16.1(4), com. c, p. 121.) Such is the case before us.

Balboa assigned the leasehold to BACC, and the latter expressly assumed the obligations of the lease, as required of any assignee pursuant to the terms of the lease. The document of conveyance, as noted above, is entitled "Assignment of Leasehold Interests." It states Balboa transferred to BACC "all of Assignor's right, title and interest as lessee in and to the Ground Lease ... and all other right title or interest held by Assignor in and to the Property ... for and during the full respective unexpired terms of the Ground Lease." As the title indicated, this reflects an assignment, not a sublease.

BACC attempts to wiggle out of the assignment by suggesting it took a sublease, or alternatively, some other interest it calls a "temporally limited leasehold assignment" or "sub-set" of Balboa's rights. Both points are honed too fine.

In contrast to an assignment, a sublease is a transfer of only a portion of the tenant's estate, with the latter retaining a reversionary interest. (Kendall v. Ernest Pestana, Inc. (1985) 40 Cal.3d 488, 492, fn. 2, 220 Cal.Rptr. 818, 709 P.2d 837.) Presumably, BACC would like to be characterized as a subtenant to come within the rule that a subtenant is not directly liable to the landlord, there being neither privity of estate nor contract (the sublease creates a new estate, and is a contract between the tenant and...